ESC C16? What is it and what does it mean?

ESC C16 formerly provided tax relief during company strike off process

ESC C16 was an extra-statutory concession widely used by company directors when closing down their business. Prior to legislative changes in 2012, ESC C16 allowed directors to follow a closure process that was both straightforward and tax-efficient.

Limited companies are closed down by either voluntarily striking them off the register at Companies House, or by using the Members’ Voluntary Liquidation process (MVL). Each method has specific advantages for directors:

• Voluntary strike off is cost-efficient and relatively straightforward, but distributions to shareholders are treated as dividend income rather than capital gains.
• Members’ Voluntary Liquidation offers significant tax benefits to shareholders, but is a more costly process and involves the input of a liquidator.

ESC C16 allowed company directors to have the ‘best of both worlds.’ They could take advantage of the simple striking-off procedure, but also distribute funds as capital rather than income (also potentially gaining access to Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief prior to April 2020,) as long as certain criteria were met.

HMRC granted the concession if a company’s tax affairs were in order, and the intention was not to gain an unfair tax advantage. Distributions leading up to strike-off could also receive treatment under ESC C16 in most cases.

On 1st March 2012, however, everything changed with regard to ESC C16. It was no longer an extra-statutory concession, but became part of legislation.

New legislation and a £25,000 threshold

From March 2012, distributions made on closure were only eligible to receive capital treatment if the company had £25,000 or less of reserves. In these instances, an application was no longer needed, as distributions were automatically treated as capital. One of the issues is that the £25,000 threshold is ‘all or nothing.’ If a company holds assets worth more than £25,000 the total is treated as income on distribution, rather than just the amount over the threshold. Further problems have been introduced by the withdrawal of Business Asset Disposal Relief, which previously reduced an eligible shareholder’s tax liability to a rate of 10% on qualifying assets. Rules introduced in April 2016 mean that Business Asset Disposal Relief is no longer available on such capital distributions, however.

How does this affect limited companies on closure?

Directors wishing to close down their company, and that have more than £25,000 of reserves, now have to accept that distributions will be treated as dividend income following dissolution, or that they will have to pay the professional fees of a liquidator. Choosing the Members’ Voluntary Liquidation route will enable distributions to be treated as capital, but any savings made will need to be weighed against the additional liquidation cost. Begbies Traynor offers one-to-one advice on company closure and dissolution, and can identify the best options for you as an individual. We will take into account your tax position, ensuring the most cost-effective route is taken to close down your company.