There has historically been a fairly relaxed attitude implemented by the Treasury Solicitor when a limited company has finished its useful life.
Provided that the extra-statutory concession C16 requirements are complied with, the Revenue has been prepared to regard a distribution of assets to the shareholders as a return on capital made on winding-up triggering the proviso to section 209(1) ICTA 1988, even though the company in question is simply being dissolved without the expense and complexity of its being wound up.
In order to take this advantage, the company and its shareholders have to agree that they will supply such information as is necessary to determine, and will pay, any Corporation Tax liability on income or capital gains tax. And that the shareholders will pay any capital gains tax liability (or corporation tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distribution had been made in a winding-up. The company will have to provide assurances that striking-off and dissolution is the intended consequence and that it does not intend to carry on in business or trade in the future. Further, the company will have to provide assurances that all its creditors will be paid off, its debts collected and any balance of its assets will be distributed to its shareholders.
The Treasury Solicitor has now flagged that, as a general rule, these distributions must be made out of profits and that a company can only make a return of capital to shareholders where the distribution takes place in a winding-up, or where the company redeems or purchases its own shares, or otherwise has the approval of the court. The Treasury Solicitor has highlighted that capital distributions outside of winding-up remain unlawful. This is notwithstanding the tax treatment of the capital distributions in a striking off under the C16 concession applied by the Revenue as set out above.
As any such distribution of capital is unauthorised, it is within the power of the Crown to recover those assets. This is because the proprietary of the distribution is open to challenge and a claim to recover the assets will devolve to the Crown as bona vacantia.
The Treasury Solicitor has, however, agreed that where a company has been struck-off under either sections 652 or 652A of the Company Act 1985 and the C16 concession has been triggered, distribution of assets of less than £4,000 in value will not be challenged.
It is important to directors, members and company advisors to ensure that “casual distributions and dissolutions” are addressed in the light of the re-stated position. The bottom line is that where assets to the value of £4,000 or more are involved, formal winding-up procedures must be followed. If this is not done, there is clearly a risk, not only that the assets (or their value) will be reclaimed by the State (as bona vacantia), but that company advisers may face exposure as a result of the advice provided (or not) as the case may be.
For more information, contact Andrew Harris
