Change to tax during liquidation process

Menzies has reported on changes to the cost of dissolving small companies that it argues will increase the costs for business owners.

The accountantancy group reported that from 1 March 2012, companies that are wound up without going through a formal liquidation will be taxed more severely as a long-standing government tax concession is removed.

Solvent companies can choose to be wound up in either of two ways: through formal liquidation or by simply asking to be struck off the Companies House register. The formal process involves appointing a liquidator to settle the company’s debts and return the share capital to its shareholders. Although this incurs some professional fees, the funds returned to shareholders are taxed as capital, not income, and so often attract a far lower rate of tax.

The informal process involves reducing the company’s share capital to a nominal value and distributing the surplus funds to shareholders. Although legally such distributions should be taxed as income, since 1985 a concession from HM Revenue and Customs (ESC C16) has allowed them to be taxed as capital.

The government now believes this concession is being used for tax avoidance purposes, so is replacing this concession with legislation that puts a £25,000 limit on the amount that can be treated as capital. Any distributions in excess of this will be taxed as income.

Companies with reserves of less than £25,000 are unlikely to be affected, but those with reserves above £25,000 will now have to weigh up the tax benefits against the cost of a Members’ Voluntary Liquidation.

By Menzies