Winding up a solvent company just got a little more complicated. Before 1st March 2012, if a company wanted to wind up operations and distribute surplus funds to shareholders as capital payments, it was a simple case of writing to HMRC for a concession (ESC C16). Once all the assets are distributed (cash returned to the owners) then a letter can be sent to Companies House, requesting that the business be struck off the register.
Under the new legislation the maximum amount that can be treated as a pre-liquidation capital distribution is £25,000. If the amount goes over this figure, the entire amount (including the original capital) will be treated as income.
Of course there is a clear advantage in distributing surplus funds as capital payments rather than revenue is that they attract capital gains tax rather than income tax. In many circumstances Entrepreneurs’ Relief could be applied, with an effective tax liability of just 10 per cent over and above the free allowance of £10,600. Paying the funds as a dividend is not a problem for basic rate taxpayers (20 per cent) as there is no further tax to pay personally. But for those higher rate taxpayers (40 per cent or 50per cent), there will be additional personal tax liabilities of 25 per cent and 36.11 per cent respectively.
So unless capital reserves can be reduced to under £25,000, the only real option for business owners is to appoint a liquidator. The liquidation process will ensure that all distributions are treated as capital. But there is a considerable cost involved which can vary from around £5000 to £10,000. For many owners of small to medium companies, this is just another hefty outlay, and has been described by some as a ‘hidden cost of retirement’ and by others as a ‘tax on success’.