Originally posted on: 2 February 2023
Updated on: 30 November 2025
We wrote this blog post about closing your company on 11 Jan 2012. As part of our blast from past series, have a read of what we were talking about 10 years ago!
Originally posted on 11 Jan 2012
On the 6th of December 2011, the HMRC announced their intention to legislate the existing concession, ESC C16. This will come into force from 01 March 2012, and ESC C16 as we know it will no longer exist. This change will affect clients who decide to close down their company, AND who have more than £25,000 in surplus funds held in the company bank account.
The change will affect your personal tax position when closing down your company.
A Quick Background
When you close down your company, any final dividend payments you make to yourself get taxed as dividend income in the normal way within your personal tax return. You can however apply to have these dividend payments taxed as a capital gain, by applying for the concession ESC C16 with the HMRC. This carries significant tax advantages if you are a higher rate taxpayer (earn over £42,475 in gross salary/dividend income in this current tax year), AND have traded through the company for more than one year.
What is ESC C16?
Once you have ceased trading, ESC C16 allows for any final dividend payments you make to yourself to be taxed personally on you as a capital gain, rather than as normal dividend income. This is useful if you have a substantial amount of retained earnings, and want to extract it in the most tax efficient means.
Under the current rules, there is no limit to the size of the final dividend payments you can make that get treated in this way, and so long as your company has traded for more than one year, you will pay a maximum of 10% tax on the final dividend payments (taxed as a capital gain and using Entrepreneurs Relief). Without this concession, and if you are a higher rate tax payer, any final dividend payments would get taxed at 25% – so it’s a worthwhile concession for our clients who have a significant amount of retained earnings in their company.
The New Rules
With effect from 01 March 2012, ESC C16 will disappear, and it will be replaced with legislation that will treat the first £25,000 of all final dividends payments made once striking off action has commenced, to be taxed as a capital gain. Any distributions made in excess of this threshold, will be taxed as normal dividend income.
As an approximate guide, we suggest that clients who anticipate having UP TO £50,000 in surplus funds when they close down, take this route.
The alternative is to engage the services of a Licensed Insolvency Practitioner, and take your company through a Members Voluntary Liquidation. When closing down via a liquidation, ALL final distributions are treated as a capital gain for personal tax purposes, and there is no upper limit. In terms of tax, this solution is on par with the current ESC C16 regime. The only differences being a Members Voluntary Liquidation is a different process, and engaging a Licensed Insolvency Practitioner will cost in the region of £3,500 + VAT.
We suggest any clients who anticipate having MORE THAN £50,000 in surplus funds when they close down take the formal liquidation route. We have established a relationship with a very good Licensed Insolvency Practitioner firm experienced with small contractor companies.
What can you do right now?
Very little. This tax change will be implemented on 01 March 2012. If you have ceased trading AND are currently closing down your company AND have more than £25,000 that you intend to extract as a capital gain using ESC C16, we will do our best to ensure the concession is approved before 01 March 2012. Remember however, that it’s a CONCESSION – the HMRC do not have to agree to it, and notification of agreement from the HMRC usually takes between 4 to 12 weeks, so for most clients it is too late to commence ESC C16 proceedings. Keep in mind the HMRC will be aware of these things – the timing of their announcement is no coincidence.
If you want to close down your company right away to take advantage of ESC C16, AND resume trading through a new company, then unless you have a good commercial reason for changing the company, you will be caught by the new Transactions in Securities rules. Ignoring these rules amounts to tax evasion – we will always advise you against doing this.
However, even with this change, working through your own limited company is still by far the most beneficial form of working in the UK for contractors. And for those clients fortunate enough to have over £50,000 in surplus company funds, any additional liquidation fees paid are still minor in relation to the significant capital gains tax benefits when winding up your company.
Example 1: Old Rules
Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £15,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.
Example 2: Old Rules
Pete has finished trading on 30 Nov 2011 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. During the close down process, he decides he wants us to apply to the HMRC for ESC C16. Once the concession is approved by the HMRC, Pete pays his final dividend payment of £65,000 on 01 Feb 2012. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. If this had been taxed as dividend income, he would have faced a personal tax liability of £16,250.
Example 3: New Rules (assuming 2011/12 tax rates for a fair comparison)
Pete has finished trading on 30 July 2012 after three years of contracting, and has £15,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. After Pete commences striking off action for his company, he pays himself his final dividend payment of £15,000. As this is below the £25,000 threshold, the entire amount is treated as a capital gain and Pete will face an overall personal tax liability on the £15,000 payment of just £440. If this had been taxed as dividend income, he would have faced a personal tax liability of £3,750.
Example 4: New Rules (assuming 2011/12 tax rates for a fair comparison)
Pete has finished trading on 30 July 2012 after three years of contracting, and has £65,000 of surplus funds in his company. He has taken on a new permanent role, and his total earnings from the new role plus the salary and dividend he drew from his company for 2011/12 will exceed £42,475. Pete has two options;
(a) Liquidate his company. Although costing (say) £4,500 incl VAT, Pete’s his final dividend payment of £65,000 is taxed completely as a capital gain. After allowing for entrepreneurs relief, and also the annual exempt amount for capital gains, Pete will face an overall personal tax liability on the £65,000 payment of just £5,440. Adding the Insolvency Practitioner’s fee, the overall ‘cost’ of this transaction is £9,940;
(b) Strike off the company. There is no Insolvency Practitioner’s fee with this option, but Pete’s final dividend payment of £65,000 will be taxed as £25,000 capital gain, and the rest as dividend income. Pete will face an overall personal tax liability on the £65,000 payment of £11,440.
Liquidating the company using an Insolvency Practitioner is the best option in this case.
Questions
(1) I already have the ESC C16 concession from the HMRC. What happens to any dividend payments I make after 01 March 2012?
Any dividends payment made before 01 March 2012 will be treated under the old rules, and any dividend payments made after 01 March 2012 will be treated under the new rules. We suggest you make all your final dividend payments before 01 March 2012 to ensure they are treated under the ESC C16 rules.
(2) Do I need to apply to the HMRC under the new system to treat my final dividend payments as capital distributions for tax purposes?
No. Any dividend payments made after an application to strike off the company has been sent to Companies House, will be treated as capital gains under this new regime up to £25,000. Any dividends paid over this threshold will be treated as dividend income.
(3) Can dividends paid after striking off action has commenced be treated as dividend income for personal tax purposes?
No. Once striking off action has commenced, all dividends paid will be treated as capital gains up to the £25,000 threshold. If it suits your personal tax circumstances to have some of these final dividend payments treated as dividend income, then we suggest you make these dividend payments before you cease to trade.
(4) I have a very large amount of surplus funds in my business. Can I close down my company now under the old rules, and start up a new one? It will save me a lot of tax.
No. HMRC may seek to counteract any tax advantage if they consider that the process if being undertaken to avoid tax in an abusive way. They can do this using the Transactions in Securities rules. In practice, HMRC will use counteraction when particularly large sums are at stake and there is evidence of “phoenixing” – that is setting up new companies to do exactly the same activities as the previous one with no apparent trade motive. We suggest this action only be taken when you have a genuine commercial reason for doing so.
(5) I think I will have about £10,000 in surplus funds when I close down my company. Will these changes affect me?
No. This change will only affect clients who expect to have £25,000 or more in surplus funds when they close down their business. In fact, if you have less than £25,000 in surplus funds, this change will give you greater flexibility with regards to your options for optimising your personal tax position due to the ease with which final dividend payments can be treated as capital gains.
(6) I will have about £20,000 in surplus funds when I close down my company. Can I pay myself out two dividend payments of £10,000 each over a two year period, and so avoid capital gains tax altogether? (each year all individuals get an allowance for tax free capital gains. In 2011/12 for example, capital gains tax only arises on gains exceeding £10,600).
We don’t think so – we suspect this will be viewed as too aggressive, and the HMRC may look to counteract the tax advantage using the Transactions in Securities rules mentioned in (5) above.
(7) I intend to close down my company shortly, and take on a permanent role in the UK. What is my best option?
In nearly all cases the best option will be to have as much of your final dividend payments as possible treated as a capital gain. Ask your account manager to explain this option to you as individual circumstances means the one-size fits all approach does not usually work.
(8) I intend to close down my company shortly, and permanently leave the UK. What is my best option?
Usually your best option is to pay all surplus funds out to yourself before you leave the UK. This will help avoid these payments being taxable in your new country of residence. Each country has differing rules however on taxation of dividends and capital gains, so please contact your account manager for advice regarding this.
(9) When I close down my company I will only just have enough money to pay all my company taxes. I will also have a £4,000 director’s loan – what happens to that?
On closing the company, the director’s loan will be settled as a final dividend payment of £4,000. This is a bookkeeping exercise – no actual funds change hands. So long as this is done after the application to strike off your company has been filed, this £4,000 dividend payment will be treated as a capital gain.