An Extra-Statutory Concession (ESC) is a relaxation that may give the taxpayers a reduction in their tax liability, which they would not be entitled to under the strict application of the law. Most of these concessions are made to meet cases of hardship at the margins of the law where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter. A concession is not given where an attempt is made to use it for tax avoidance purposes.
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ESC C16
A distribution by a company is income in the hands of the shareholders. But distributions of share capital made by a company in a winding up are specifically treated as capital payments in the hands of the shareholders and are subject to capital gains tax under the Taxation of Chargeable Gains Act 1992 (TCGA). A formal winding up procedure under the Companies Act 2006 incurs costs. So a company that has ceased business may simply distribute its remaining assets to shareholders and seek to be struck off by the Companies House under s.1000 or 1003 of the Companies Act 2006. A strike off under s.1000 or 1003 is not a wind up, and so, the distribution of the company’s surplus assets to the shareholders is, strictly speaking, an income distribution subject to income tax liability in the hands of the recipient at the applicable rates. Income tax liability at higher or additional rates mean 40% or even up to 50% where as capital gains tax rates are capped at 28%.
ESC C16 allows a distribution of this nature to be treated a capital payment equivalent to a distribution in a winding up so as to be taken into account in determining the capital gains tax liabilities of the shareholders. This might result in a shareholder receiving such distributions paying less tax. ESC C16 was aimed at small businesses with straightforward affairs so originally distributions made up to £ 4,000 were allowed to be treated as capital distributions under this concession.
TCGA 1992 and CTA 2010
Following the House of Lords’ decision in R v HM Commissioners of Inland Revenue ex parte Wilkinson [2005] UKHL 30, HMRC has decided to legislate this in to law to be effective on or after 1 March 2012, with the monetary limit now being raised to £ 25,000. Legislating an ESC is intended to give statutory effect to an existing ESC that exceeds the scope of the discretion. Legislating ESC C16 will mean amending Part 23 of the Corporation Tax Act 2010 and s.122(5) of the TCGA. The Enactment of Extra-statutory Concessions Order 2012 will amend Part 23 (Ch.3) of CTA 2010 to provide that a distribution made by a company prior to its wind up is not treated as a distribution for the purposes of the Corporation Taxes Acts provided that the total distributions made do not exceed £25,000. The Order will also amend s122(5) of TCGA to make a distribution of this type a capital distribution effective on or after 1 March 2012.
