THE COST of winding-up a small business is set to increase significantly in March because of new legislation restricting restrict tax concessions for voluntarily winding-up a company, the Chartered Institute of Taxation (CIOT) has said.
A current tax concession, Extra-Statutory Concession 16, allows company directors to wind-up a solvent company without appointing a liquidator.
Directors can pass the surplus funds to the shareholders as capital receipts rather than dividends. This will usually mean that shareholders pay less tax because the money directors distribute is subject to capital gains tax, which is lower than the income tax on dividends.
However, under the Enactment of Extra-Statutory Concessions Order 2012, passed last week in the House of Commons, the favourable tax treatment for winding up companies will only apply to whose total distributions are no more than £25,000.
The change will take effect on 1 March.
Andrew Gotch, chairman of the CIOT's owner managed business sub-committee, said that the change to tax rules would place significant additional financial and administrative burdens on small and medium-sized businesses.
HM Revenue and Customs said it made the change to counter tax avoidance.
The term "winding up" should not have been used in this article. The tax concession relates to companies struck off the Register of Companies at their own request. A company cannot be said to be "wound up" except under the Insolvency Act (whether it is solvent or insolvent).
The tax concession was introduced so as to apply the companies struck off at their own request the same tax treatment as applies to distributions in a Members' Voluntary Winding Up under the Insolvency Act. But it was probably intended to promote tidying up of the register, and arguably should never have been used for companies with substantial amounts to distribute to members, where a Members' Voluntary Winding Up remains the more appropriate course.
Posted by: James Robertson, 09 Feb 2012 | 11:14
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