Winding Up Your Company - Warning

There are hundreds – possibly thousands – of companies listed as ‘dormant’ at Companies House and often these are retained rather than wound up because although they do not trade, they do contain assets.

For more than a quarter of a century it has been possible to wind up a company informally and distribute the assets amongst the shareholders by using a procedure described in HM Revenue and Customs (HMRC) extra-statutory concession C16. The concession allows dividends paid as part of a scheme to wind up a company to be treated as returns of capital, and thus subject to Capital Gains Tax (CGT), rather than dividends, which are subject to Income Tax (IT).

However, the term ‘informally’ is one which should not cause complacency, as more recently it has been noted that the return to shareholders of the share capital of the company without a formal winding-up is strictly unlawful.

This position was dealt with by a further concession, which regularised the position if the distribution to the shareholders was £4,000 or less. In practice, HMRC have ignored the issue, but it is widely rumoured that proposed new legislation will make distributions exceeding £4,000 subject to IT, which will bring many such distributions into the IT net.

In many cases, a straightforward solution will be found in the ‘purchase of own shares’ legislation, which allows a company to purchase its shares from the shareholders, paying them out of its reserves. Such distributions are subject to CGT, not IT.