Comments from ACCA to HM Revenue and Customs (HMRC), March 2011.
ACCA is pleased to respond to the above consultation relating to the proposed codification of ESC C16. Many of our members work in the fields of tax and insolvency, and have a particular interest in the operation of ESC C-16. Advisers to small business from all communities have made considerable use of the concession over the last 25 years, and it is universally acknowledged to be a useful and pragmatic device to avoid unnecessary administrative burdens, both in time and cost.
ESC C16 extends a non-binding offer to taxpayers from HMRC to deal, for tax purposes, with the consequences of a striking off as though it were a formal winding up. The concession applies purely in relation to the operation of s209 ICTA 1988. It allows for the assets of a company which is 'struck off' under s652 or 652A CA 1985 or equivalent (ie s1003 CA2006) to be taxed in the hands of shareholders as a capital receipt, rather than income. There is no specific monetary limit on the value of assets returned to investors, nor any conditions as to the split of distributable and non-distributable reserves returned to the shareholders.
The proposed codification of the Concession however refers to an upper limit of £4,000 on the value of assets which can be returned to shareholders as capital for tax purposes. This value is taken from the Treasury Guidelines BVC 17, published in 2008, dealing with the Bona Vacantia implications of the return of share capital to investors in the absence of a formal winding up. The wording of the guidelines is not entirely clear, but it is our understanding that in the event of dissolution of a company with a value of non-distributable reserves greater than £4,000 HMT would seek to claim the entire value of the distribution as Bona Vacantia (although the guidance is not specific we do not believe that distributable reserves returned to shareholders could ever fall within the bona vacantia provisions). While this would clearly have the effect of displacing the deemed transfer of assets subject to the chargeable gains rules (and hence any tax charge arising thereon) it would not affect the tax treatment of the transaction; rather, it would change the character of the transaction itself. There would no longer be any transfer of value from the company to the investor (whether capital or income) but the value in the company would pass direct to the crown.
ACCA does not believe that it is appropriate for the codification of the HMRC concession to incorporate elements of the current concessionary treatment by HMT. The Wilkinson case does not bind government departments other than HMRC so there is no need to incorporate the terms of the HMT concession into the new statute. Indeed, doing so could be seen as a fetter on the discretion of the Treasury, committing them to the £4,000 limit until such time as the statute is revised. As far as ACCA is aware, the Treasury Solicitor has never in fact sought to enforce the terms of the Bona Vacantia guidance, whether by reference to a £4,000 de minimis or not.
Notwithstanding ACCA's reservations about the implementation of terms which have never been a part of the concession, significant concerns are raised by the suggestion that because the concession is of particular value to small and micro companies, it should be codified in such a way that it could only ever be of relevance to the most marginally successful of businesses.
By forcing companies with more than £4,000 of assets to engage the services of an insolvency practitioner and undertake a formal winding up, whatever the balance of share capital to distributable reserves, HMRC is imposing an unnecessary and in the current economic environment wholly unjustifiable administrative burden on the business community. Anecdotal evidence from our members suggests that typical costs of a winding up currently run at around £6,000. The estimates on which HMT's original figures were based are already out of date. To enshrine these in legislation now would signal the survival of the mentality which treated cars costing more than £12,000 as 'expensive' in an era when the most modest of family hatchbacks cost that amount, and continues to apply the tax rules for 'higher paid employees' on anyone earning £8,500 or more – which is less than the full time National Minimum Wage. ACCA hopes that this is not HMRC's intention.
HMRC have produced no evidence of abuse of the current Concession. It is our understanding and experience is that where significant sums are concerned or there is a risk of creditors seeking to have the struck off company restored to the register, advisers will invariably recommend to shareholders that the fees be paid and the formalities observed to provide the certainty given by a formal dissolution.
Where distributable reserves exist significantly in excess of the £4,000 limit, the proposed new rules will simply force companies to pay for the services of an insolvency practitioner to wind the company up whether there is any other commercial justification for the administrative burden or not. There will be no increase in taxation. Where the share capital of the company exceeds £4,000, the first stage would be to reduce the issued share capital to £4,000. Again, the only community to benefit are insolvency practitioners and other professional advisers. The direct benefit to the Exchequer will be nil. In practice, the tax take may well be reduced, as it will only be in the marginal cases, where the difference between the income and chargeable gains treatment is less than £4,000, that shareholders will opt to pay the income tax rather than the insolvency practitioner's fees. Where the difference is greater than the cost of a formal winding up, the shareholders will go down that route, and pay tax on chargeable gains of a commensurately smaller amount than would otherwise have been the case.
In any event, the indications from our membership are that there is no appetite to take on this new field of work. Insolvency practitioners do not see any value in carrying out formal liquidations in every case where the company is worth more than £4,000. Indeed, they have highlighted a risk that the Members' Voluntary Liquidation will become a commoditised product, rather than a professional service. Historically many firms of Insolvency Practitioners have been wary of the MVL arena. The combination of hope over reality on the part of Directors and Shareholders, combined with their acute awareness in a solvent liquidation that every pound paid in fees is a pound less in their pocket, means that the risks of this market place outweigh the benefits. The pressures on insolvency practitioners are bad enough when the shareholders have chosen to go down the route of a formal liquidation voluntarily. The situation is likely to be even worse where the advisers' fees are being imposed as a result of what will be perceived as an unnecessary change of position by HMRC.
In summary, ACCA welcomes the decision on the part of HMRC to preserve the benefit of this simple and hugely beneficial concession. However, we are concerned that by seeking to incorporate into the terms of the concession a monetary limit that has never previously been enforced, HMRC will destroy the value of the concession to a large part of the business community. This will have a knock on effect on the perception of HMRC. ACCA does not believe that it is wise in the current climate for HMRC to risk the loss of goodwill that the proposed imposition of cost and administrative burdens on shareholders and advisers would cause, particularly as the net amount of extra tax raised is likely to be so small.