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In response to query T15,823 in Taxation, 14 June 2001 at pages 276 and 277, there are references to Extra-statutory Concession C16 which, as the published answers show, is a means of having a distribution treated so that the receipts obtained by a shareholder, by concession, are treated as being within capital gains tax.
In response to query T15,823 in Taxation, 14 June 2001 at pages 276 and 277, there are references to Extra-statutory Concession C16 which, as the published answers show, is a means of having a distribution treated so that the receipts obtained by a shareholder, by concession, are treated as being within capital gains tax. If we assume that a company has as its sole asset £500,000 cash at bank, which is represented by share capital of £10,000 and distributable reserves on the profit and loss account of £490,000, it would seem that the concession could be applied to the £490,000. The board would declare a dividend of that amount and it would be recognised as a capital received.
It would be convenient to treat the £10,000 similarly, but by what means, without recourse to the courts, can the directors pass the share capital to members? This has always seemed to me to be an obstacle to the general application of the concession, but I would be pleased to be shown to be wrong.
Clearly the share capital need not prevent the use of the concession in the example, because the company could be struck off with the result that £10,000 becomes bona vacantia, but in many instances this would not be an acceptable conclusion.
(Query T15,858) – Greyclerk.
In cases where I have advised taxpayers wishing to take advantage of Extra-statutory Concession C16, the Revenue has never taken the point, nor does Companies House raise objections. The company could distribute £500,000 under the concession and the shareholder could treat this as a receipt in connection with the extinction of capital under section 24, Taxation of Chargeable Gains Act 1992. Alternatively, it could repay share capital of £10,000 and treat the balance as a distribution under the concession. From the shareholder's point of view, the final result is the same.
The fourth edition of Tolley's Taxation in Corporate Insolvency discusses this matter at 12.21. The author, Anthony Davis, states that technically the distribution of assets without a winding-up is likely to be an illegal reduction in capital, but that many advisers regard this as academic, given that an aggrieved creditor has the right to have the company restored to the register under section 653, Companies Act 1985. Alternatively, the company could be re-registered as an unlimited company, so that a capital reduction can be made without further formalities. – Shebeen.
As 'Greyclerk' points out, striking off a company creates a problem over what to do with the share capital.
The concession from one Government department, the Inland Revenue, would seem to allow the repayment of the share capital but the concession does not say so in so many words. It does say that the Revenue 'is prepared for tax purposes to regard the distribution as being made under a formal winding up so that the proviso to section 209(1) applies'. It should be noted that the concession does not stop at the part I have put in quotes. If it did we need go no further since one way of reducing share capital is to repay it during a formal winding up.
However, when you look at section 209(1), Taxes Act 1988 it states that reference to 'distributions shall not apply to distributions made in respect of share capital in a winding up'. Therefore, repaying share capital in a striking off where the Revenue applies the concession can never be a distribution for tax purposes. Since it can never be a distribution it can never be an unlawful distribution and must, therefore, be a repayment of share capital but is it a lawful repayment of share capital? Could the concession refer only to the amount that is in excess of the amount originally subscribed?
The concession does then go on to say that the capital receipts shall be treated as capital receipts for calculating the capital gains 'arising to them on the disposal of their shares'. The words that I have put in italics show that the Revenue must accept that Extra-statutory Concession C16 envisages repayment of the share capital, otherwise the capital receipt would only be a part disposal.
We then need to look at the other Government department, the Treasury Solicitor. In my article, 'Death of a Company' in Taxation, 31 May 2001 at pages 209 to 212, I touched on this point. The Treasury Solicitor could agree to disclaim property that becomes bona vacantia but no general concession or statement is in force. If the amount is significant, perhaps the company being struck off could write to the Treasury Solicitor to ask for the disclaimer. Most advisers would not do this because they would expect the response that the Treasury Solicitor has a duty to recover assets becoming bona vacantia.
In other words, we have legislation that allows a striking off. We have one Government department that allows the legislation to work. We have another Government department that has not commented on this point. I wonder if it is time for someone to raise this point with the Treasury Solicitor? – White Rose.
