At BRI we always encourage solvent clients who are thinking about winding down their business to take
early advice, as there are significant benefits to planning ahead. In our professional experience, directors
seldom consider the implications of issues such as a property lease, hire purchase agreements, employee
contracts and other contingent claims. Furthermore, a Members’ Voluntary Liquidation (MVL) is not the
only option available. There are other cheaper ways.
The Other Way - ESC 16
BRI often advise clients to consider the cheaper option of Extra Statutory Concession 16 (ESC 16). This
allows for assets and income to be distributed to shareholders by a company which will then be dissolved
under section 652 Companies Act 1985.
ESC 16 is treated as an income distribution as long as the following Inland Revenue requirements are met
by the company:
- Does not intend to trade or carry out business in the future.
- Intends to collect debts, pay off its creditors and distribute any balance to its shareholders.
- Intends to seek or accept striking off and dissolution.
- Will supply information to determine, and pay, any corporate tax liability on income or capital gains.
- Shareholders will pay any capital gains tax liability in respect of any amount distributed to them in
cash or in specie as if the distribution had been made during a winding-up.
Another Thought!
S110 Scheme of Reconstruction
Over the last three years these have become increasingly popular, due in part to the significant tax savings
available.
When a director/shareholder considers his/her exit from a company, this may include a proposed sale of
the business. With recent property value increases, it is not uncommon for interested parties to have the
ability to acquire the trade of the company but have insufficient funding to acquire both the trade and the
freehold property. Indeed the directors/shareholders may also wish to retain the property as an investment
for their own future.
This may be the answer, but how is it done?
The original company (ABC) becomes a subsidiary of Newco 1. The freehold property is transferred to
Newco 1. Two further companies, Newco 2 and 3 are set up. Newco 1 is then liquidated and the liquidator
transfers the property to Newco 2 and the shares in ABC to Newco 3.
Strictly this leaves one more company than may actually be required, but it enables either a sale of the
business assets or for the company’s shares to be used as the means of disposal in the future.
With an S110 reconstruction, it is essential to bear in mind the following important points:
- Shareholdings in Newco 1, 2 and 3 should be in the same proportions as they were in ABC, prior
to the reconstruction.
- Advance clearance is obtained from the Inland Revenue.
- Assistance from the company’s accountants, a corporate lawyer and an insolvency practitioner is
essential and therefore the exact costs of the process need to be weighed against any future tax
savings.
What can you do now?
Whilst BRI are not tax specialists, we are happy to discuss the reconstruction process with you and we
would advise all our clients to fully discuss their tax position with their accountant.
If you have any queries on the above information
or on any insolvency related matters, please contact a Member of
the BRI Management Team.
BRI can be contacted here Important Note: The above is background information for the general professional adviser and is not a comprehensive statement of the law - we recommend that expert advice be taken on specific issues arising in practice |
