Reply to: ESC C16 - Company Closure

[malvolio]

For how long though? That's the real question. If I decide to give up contracting and settle into a permie job, which then goes t1ts up after 3 months, can I become director of a new Ltd again or not?

Another situation that HMRC have left very much ambiguous.

No they haven't. That is an entirely defensible commercial decision and one you are unlikely to have predicted. That's a long way away from stopping trading a successful company, taking a big lump of tax free money out and then immediately restarting the same trade doing the same thing and possibly funded by some of the same money, when clearly the sole intent is to defraud the taxman.

[ChimpMaster]

<snip>

Once the concession is granted, the HMRC's letter back to you usually states something along the lines that you can use ESC C16 so long as you don't then transfer any of the existing company assets into a new company, or become a shareholder of a new company that essentially does what the old company did. Basically just a reminder to act lawfully.

For how long though? That's the real question. If I decide to give up contracting and settle into a permie job, which then goes t1ts up after 3 months, can I become director of a new Ltd again or not?

Another situation that HMRC have left very much ambiguous.

[Greg@CapitalCity]

Thanks Greg although if that truly is a definitive list of the assurances required, then it rather implies that it would be legit to set up a new company the following day. Hence I presume that there must be more assurances than this?

Assurances (or lack thereof) do not offer you any protection. The phoenixing of companies is legislated in S.703 ICTA 1988 'Cancellation of a tax advantage from certain transactions in securities' - while the HMRC require the above assurances to award ESC C16, they would also expect you to act lawfully.

The assurances above are pretty much it. You can add the additional ones Clare has mentioned, but the HMRC shouldn't approve the ESC C16 if they apply anyway - good for completeness though.

Once the concession is granted, the HMRC's letter back to you usually states something along the lines that you can use ESC C16 so long as you don't then transfer any of the existing company assets into a new company, or become a shareholder of a new company that essentially does what the old company did. Basically just a reminder to act lawfully.

[Clare@InTouch]

Thanks Claire, I hadn't read about the "additional assurances" before.

We've never had to give them, but then we've never had HMRC question the original assurances. It depends on the tax office I suppose, some are more pedantic than others!

[Lewis]

Thanks Claire, I hadn't read about the "additional assurances" before.

[Clare@InTouch]

There's some good background here:

To obtain clearance, the wording of ESC C16 requires the directors and shareholders of the company to submit signed assurances that:

“The company:

• Does not intend to trade or carry on business in future; and
• Intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so; and
• Intends to seek or accept striking off and dissolution.

The company and shareholders also agree that:

•They will supply such information as is necessary to determine, and will pay, any corporation tax liability on income or capital gains; and
•The shareholders will pay any capital gains tax liability (or corporation tax in the case of a corporate shareholder) in respect of any amount distributed to them in cash or otherwise as if the distributions had been made in a winding up.”

In practice we are increasingly seeing HMRC asking for two additional assurances to be made.

1) That the company is not the subject of an investigation; and

2) That the company is not one which, if the distributions were made in a winding up, would be reported to the Anti-Avoidance Group, Clearance and Counteraction Team in respect of Transactions in Securities [ITA 2007, S684] in respect of the following:

• Transfers or sales of the company’s assets or business to another company with some or all of the same shareholders followed by the winding up of the former company or sale of its shares.
• Capital receipts by the company’s shareholders following a demerger or reconstruction from the sale or liquidation of one demerged company where the same shareholders return an interest via another company party to the transaction.

This second additional assurance attempts to overcome the mischief known as ‘Phoenix companies’ and is most likely the reason why the current draft legislation has the £4,000 distribution limit imposed. To make the application as efficient as possible, it is recommended that the additional assurances are included in the initial application.

ESC C16

CTM36875 - Particular topics: Transactions in securities: Identification of cases and submission to AAG Clearance & Counteraction Team

[Clare@InTouch]

So do you make your clients write something along the lines of "I don't intend to continue the same trade under a new company."? When I looked into this, I was told the assurance (that relates to this point) you have to give is that the company will cease to trade.

The problem seemed to me not to do with getting the ESC 16 concession and the assurances you have to make, but more to some vagueness that you cannot close a company and open a new one for a tax advantage, but I don't have any references to where this is stated (it was posted on this forum somewhere).

The declaration is pretty much what Greg posted above.

The problem is not with closing a company and starting again, but that HMRC could withdraw the concession and challenge the CGT treatment unless there is a genuine commercial reason for closure.

[Lewis]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance.

So do you make your clients write something along the lines of "I don't intend to continue the same trade under a new company."? When I looked into this, I was told the assurance (that relates to this point) you have to give is that the company will cease to trade.

The problem seemed to me not to do with getting the ESC 16 concession and the assurances you have to make, but more to some vagueness that you cannot close a company and open a new one for a tax advantage, but I don't have any references to where this is stated (it was posted on this forum somewhere).

[Wary]

The assurances you would typically make are that the company:
• Does not intend to trade or carry on business in the future;
• Intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
• Intends to seek or accept striking off and dissolution.

Thanks Greg although if that truly is a definitive list of the assurances required, then it rather implies that it would be legit to set up a new company the following day. Hence I presume that there must be more assurances than this?

[Greg@CapitalCity]

I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

The assurances you would typically make are that the company:
• Does not intend to trade or carry on business in the future;
• Intends to collect its debts, pay off its creditors and distribute any balance of its assets to its shareholders (or has already done so); and
• Intends to seek or accept striking off and dissolution.

There is no problem if you intend to keep working on the same contract through a brolly.

[Wanderer]

I'm an IT contractor and am about to start a new contract. There are reasons why I'd like to close down my old company & start a new one, the most obvious being to take advantage of the ESC C16 concession.

Think about it - if you could legitimately do this then everyone would do it all the time. An accountant once told me that I could do whatever I liked but if I got investigated then I would have to pay the tax, plus interest and penalties....

Check out the sticky in welcome-faqs and you will see what the trick is for searching for these terms.

[malvolio]

Thanks Clare. I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

You mention going brolly for 6 months. Can one legitimately close their company using ESC C16 but carry on doing the same work (maybe the same contract) through an umbrella company? Or is it more a case of HMRC being less likely to find out?

You might like to do the sums first. The tax losses you will incur through an umbrella may exceed the savings from ESC16.

Plus have a Google on the Ramsay principle. Hector may well think this applies.

[Wary]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance. You could of course always lie, and they'd only find out if they actually checked, but you'd run the risk of the income being reallocated as a dividend and end up with a big tax bill plus penalties and interest.

If you really want to do it, why not close and go brolly for 6 months, or take a long extended holiday. The ESC declaration doesn't mean you can never trade again, you just need to be able to demonstrate a commercial reason for closing.

Thanks Clare. I had heard that you only have to justify that it is your current intent not to set up another company, so it is still possible to legitimately trade in the future but obviously not straight away.

You mention going brolly for 6 months. Can one legitimately close their company using ESC C16 but carry on doing the same work (maybe the same contract) through an umbrella company? Or is it more a case of HMRC being less likely to find out?

[Wary]

Could you not? Google says about 130 pages...

Google ESC C16 Contractor UK

Thanks for the Google link. I was attempting to search via the internal forum search engine, but ESC & C16 were words that were deemed to be too short/common. I've had a delve through some old posts, and the consensus is that this is not legit.

[Clare@InTouch]

In my experience HMRC will only grant the ESC if you supply a statutory declaration giving such assurance. You could of course always lie, and they'd only find out if they actually checked, but you'd run the risk of the income being reallocated as a dividend and end up with a big tax bill plus penalties and interest.

If you really want to do it, why not close and go brolly for 6 months, or take a long extended holiday. The ESC declaration doesn't mean you can never trade again, you just need to be able to demonstrate a commercial reason for closing.