Winding up a Small Company

In the case of small companies, it is often the case that without any family succession in place and with no prospect of sale to someone, the only thing left is for the shareholders to stop trading, collect in any debts, pay off all creditors and end up with money in the bank account.  Of course, the shareholders then need to extract this cash in a tax efficient manner.  Historically HMRC have provided a route for taking any cash as a capital distribution rather than a dividend thereby providing, by an Extra Statutory Concession ESC-C16, an opportunity to extract cash tax free up to £10,600 this year and then at 10% rather than taking a dividend subject to tax, probably at 40%.

Revisions in tax law to remove the ESC's, of which there were many, and embody them into tax law, led HMRC to consider the potential tax loss to the Treasury of C16 concession and it was argued that because very small companies could be dissolved rather than appointing a liquidator costing say £4,000, that the capital distribution should be restricted to this sum.

After much debate on the topic HMRC have announced that a limit of £25,000 in total will apply from 1 March 2012.  Any excess over £25,000 will be treated as dividends in the hands of the recipients.

Walker Thompson's view:  In managing a wind down of a small company try to keep the final cash sum left below the £25,000 level.  Consider lump sum payments to say a small pension scheme for the benefit of Director Shareholders especially where they may be 40% tax payers.  For further advice call us on 024 7663 5522.