ESCs after ‘Wilkinson’
HMRC are considering withdrawing many of their Extra Statutory Concessions (ESCs). This follows the House of Lords’ decision in R v HM Commissioners of Inland Revenue ex p Wilkinson [2005] UKHL 30, which indicated that HMRC’s administrative discretion to make and apply ESCs that depart from the strict legal position is more limited than originally thought.
The good news is that those existing ESCs being withdrawn may become law instead. This is likely to apply to ESCs which are considered to exceed the scope of HMRC’s discretion following the Wilkinson judgement, where appropriate.
HMRC recently issued a consultation document (‘ESCs – Technical Consultation on draft Legislation’) on the subject. HMRC propose that a number of ESCs are legislated, but consider that some other ESCs can stay as they are.
Concession C16
A further category is ‘ESCs where clarification is needed before legislation is drafted’. Included on that list is Concession C16. This is a relatively well-known and often used concession that allows distributions on the informal winding up of a company to be treated as capital distributions, as opposed to taxable income. Thus it seems that Concession C16 will be withdrawn, albeit seemingly to be put on a legal footing.
Companies Act 2006
Since 1 October 2006, private limited companies have been able to reduce their share capital, using a new solvency statement procedure in Companies Act 2006.
A problem with Concession C16 in the past has been that share capital could not be distributed, although in practice the Bona Vacantia division of the Treasury Solicitor’s department would allow up to £4,000 to be repaid without seeking to recover unlawful excess distributions.
However, by virtue of Companies Act 2006, Part 23 and supporting Regulations, reserves resulting from a reduction of capital are generally treated as distributable ‘realised profits’ for the purposes of an informal winding up, subject to certain exceptions. Reductions in share capital under the Companies Act 2006 solvency statement procedure generally fall to be treated as capital distributions (within TCGA 1992, s 122).
It will be interesting to see how HMRC deal with Concession C16 following the consultation process in the light of those changes. The consultation document on ESCs can be downloaded from the HMRC website (www.hmrc.gov.uk).
The above article is taken from ‘Practice Update’, a bi-monthly Newsletter from Mark McLaughlin Associates Ltd. See the Newsletters section.