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Legislation is being introduced in The Enactment of Extra-statutory Concessions Order 2012 to give effect to extra-statutory concession (ESC) C16: Dissolution of companies, under Companies Act 2006, s 1000 and s 1003.
A distribution is income in the hands of the shareholders, but those made by a company in a winding-up are excluded, and have to be treated as capital payments to be taken into account in calculating any chargeable gains of the shareholders.
A company that has ceased business altogether may not wish to undertake the administration and expense involved in the formal winding-up procedures, preferring to distribute its remaining assets to shareholders and then seek to be struck off the joint stock companies register and dissolved under Companies Act 2006, s 1000 or s 1003.
A dissolution is not a winding up and so the distribution of its surplus assets to the shareholders is, as a matter of law, an income distribution.
ESC C16 allows a distribution in such circumstances to be treated as the equivalent of a distribution in a winding up: as a capital payment, which normally results in the shareholder paying less tax.
For anti-avoidance reasons, the legislation enacting ESC C16 imposes a limit of £25,000 on distributions that can be treated as capital payments.
Subject to parliamentary approval the measure will have effect for distributions on or after 1 March 2012.
The government’s plans still need to be modified to be good news for owners of and investors in small businesses, said the Chartered Institute of Taxation, which claimed the proposal is too restrictive and noted that, under the concession, there is no limit on distributions.
Andrew Gotch, chairman of the professional body's owner-managed business sub-committee, said £25,000 was an improvement on the £4,000 initially suggested, but that a higher limit calculated per shareholder, or none at all would be better.
He hoped the government would consider increasing or removing the ceiling before the proposal comes into law.
