It is the fate of most companies that they will be closed at some point. This could be for a wide range of reasons, from lack of profitability to the directors wanting a new project or to retire. For such companies, a voluntary liquidation or a voluntary strike-off will be the two main options for winding down operations. Directors should acquaint themselves with the regulations and legislation surrounding closing a company before taking action.
In this article, Clarke Bell will discuss the ESC C16 legislation, what it does, and how it affects the closing of a company.
What is ESC C16?
Before March 2012, ESC C16 was an extra-statutory concession used during the closing of a company. It provided excellent benefits to company directors, which saw ESC C16 essentially become a de facto part of the process, despite it not being required. The main draw to using ESC C16 was that it effectively bridged the key advantages of using a Members’ Voluntary Liquidation (MVL) and a voluntary strike-off at Companies House. ESC C16 let directors enjoy the simplicity of a company strike-off, while also enjoying the outstanding tax benefits afforded by the MVL process.
ESC C16 even allowed directors to apply for Business Asset Disposal Relief, a tax relief previously known as Entrepreneurs’ Relief. Upon a successful application, this relief would enable directors to achieve unparalleled tax savings on their Capital Gains from liquidated company assets. With Business Asset Disposal Relief, assets could be taxed at as little as 10%. Considering these benefits, it is no surprise that ESC C16 saw such wide use.
However, ESC C16 was not always available. While almost every director closing their company would apply for ESC C16, it was not always approved. HMRC would only approve ESC C16 applications from directors who had a history of being orderly and up-to-date on their taxes. This ensured that unscrupulous directors could not benefit from the financial advantages of this concession. Since March 2012, ESC C16 has become much more difficult to obtain, and much less beneficial to those who manage to get it.
ESC C16 as legislation
Whereas before March 2012 ESC C16 was treated as a concession made to certain companies, it is now a permanent fixture in legislation. While this may sound good, it bears little resemblance to what it once was. Now, ESC C16 is available to any company that has reserves of £25,000 or less, which completely rules out larger companies with higher retained profits. For such companies, they will have to use other methods to reduce costs when closing.
Companies that fall under the £25,000 threshold will automatically benefit from ESC C16 legislation. This will mean that any realised assets will be treated as Capital Gains, and be taxed accordingly. Even a penny over this threshold will see all your profits taxed as income, which has significantly higher rates than Capital Gains. Moreover, ESC C16 does not allow directors to apply for Business Asset Disposal Relief, even if they fall under the threshold. As such, the benefits of using ESC C16 are significantly less compared to its past as a concession.
Closing a company using alternative means
As the reasons for using ESC C16 are now few, and non-existent for companies with reserves in excess of £25,000. So, directors may want to look elsewhere for efficient methods of closing their company. As we mentioned earlier, the two main methods for closing a company are a Members’ Voluntary Liquidation and a company strike-off. They are widely used for good reason, as both provide significant benefits during the closing of a company.
Members’ Voluntary Liquidation
The MVL process is available to any solvent company, though it is best suited to companies with assets typically worth more than £25,000. While it is not as swift and simple as a company strike-off, it does provide the tax benefits present in the old version of ESC C16.
You will have to appoint a licensed insolvency practitioner, as no one else can liquidate a company with the MVL process. Their job is to handle much of the process, assisting with documentation, communication, and the liquidation of your company. Your chosen insolvency practitioner will ensure the liquidation follows the law, while still being as efficient as possible.
A Members’ Voluntary Liquidation affords directors and shareholders significant tax savings, akin to those present in the older ESC C16. Under this process, all distributions are treated as capital, meaning they are taxed under Capital Gains rates. This is considerably cheaper than Income Tax rates, as we have mentioned. Additionally, the process allows directors to apply for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief), which will further decrease tax rates on realised profits. This is why an MVL is such a popular choice.
On the other hand, smaller companies with little in the way of retained profits may prefer to close through company strike-off. This procedure is incredibly simple and straightforward, costing directors very little, too. It can be set into motion by submitting a DS01 form, which can be done via the Companies House online portal or a paper document. This will cost directors £8 and £10 respectively. Assuming your DS01 form is approved, the strike-off process will begin, which essentially amounts to a few checks on your company and the publication of your intentions in the Gazette. After 3 months of your strike-off being public, your company will be struck off from the register and cease to exist.
Keep in mind that this method requires you to have disposed of assets and emptied accounts before your company is struck off. Failing to do so will mean these assets and accounts will be considered Bona Vacantia, or without an owner. This will result in these assets and accounts being transferred to the Crown, which can make the otherwise cheap strike-off process exceedingly expensive. To avoid this, simply dispose of or transfer anything you do not want to donate to the public purse.
Clarke Bell can help you
If you are considering closing down your company, whatever the reason, let Clarke Bell be there to help you.
We have more than 28 years of experience in helping both solvent and insolvent companies close, and we can do the same for you.
Whether you need a Members’ Voluntary Liquidation to close down your solvent company, or a Creditors’ Voluntary Liquidation to deal with the company’s debts, our experts can help you find an efficient solution.
Contact us today for your free, no-obligation consultation and find out exactly what we can do for you.