Winding-up companies: changes from 1 March 2012

Winding-up companies: changes from 1 March 2012


Author: Niall Murphy

Under current Revenue practices it is possible for a company to be dissolved and return its funds to its shareholders as capital, potentially saving shareholders significant amounts of tax

The Finance Bill 2012 proposes that this informal practice, contained in extra-statutory concession ESC 16, be placed on a statutory basis. Unfortunately, the proposed statutory enactment incorporates some changes from the current extra statutory concession which would place shareholders at a disadvantage.


Normally, where a company returns funds to shareholders that are greater than the original capital subscribed, the excess amount is treated as the receipt of a dividend for the shareholder, which is subject to income tax.

Where the shareholder is a basic rate taxpayer (i.e. pays tax at 20%) there is no further tax liability. However, higher rate tax payers (being 40% and 50% taxpayers) are liable to additional tax liabilities of 25% and 36.11% respectively on the dividend received.

The benefit of ESC C16 is that a shareholder who has sought permission and provided certain assurances to the Revenue can treat the dividend as a capital receipt. This gives rise to a capital gain, and if Entrepreneur's Relief is available the tax charge is at 10%, rather than being taxed at higher income tax rates.

New statutory provision

The proposed legislation is to apply from 1 March 2012. Under the legislation the amount that can be treated as a capital distribution will be limited to £25,000. If the distribution exceeds this figure the whole sum (excluding the original capital subscribed) will be taxed as income. Where a company has undistributed reserves of more than £25,000, it will first have to reduce the reserves to £25,000 before it distributes the balance as a capital distribution. The reason for the change appears to be a concern on the Revenue's part that ESC C16 can be used to avoid tax by changing income into capital and in turn, paying tax at a lower rate. However, the use of ESC C16 is already governed by a clearance procedure, so clearly the Revenue is already able to identify avoidance opportunities and refuse clearance in appropriate cases.

The alternative to doing a pre-liquidation distribution is to appoint a liquidator to wind-up the company, ensuring that all distributions are treated as capital. The disadvantage of this route is the costs associated with appointing a liquidator.

In its paper on the subject the Revenue estimate that the cost of appointing a liquidator is about £7,500 for a small business with straightforward affairs. Accepting the Revenue's figure for the cost of liquidators as being accurate means that companies with distributable reserves over £25,000 are going to have to carefully consider whether to take a pre-liquidation dividend rather than appointing a liquidator. This will be largely determined by the shareholders' marginal rate of taxation. Of course, liquidators' costs vary, so it is worthwhile looking at this in more detail.

Share capital on liquidation

A separate but related issue is that of share capital.

Under the Companies Act 2006 shareholders can convert share capital into a distributable reserve by passing a declaration of solvency. This means that prior to a dissolution the shareholders can convert all the share capital except for £1 into distributable reserves, which can then be returned to them as capital using the above described method. If share capital is not reduced in this way and the company is dissolved the Treasury can claim any assets representing the share capital as bona vacantia.


Given that the new legislation is due to come in by 1 March 2012 shareholders who are intending to dissolve their company under the extra-statutory procedure have a limited window in which to avail themselves of the current Revenue practice.