CIOT: Disappointment as Government restrict small business concession

Thursday, 2 February 2012 8:53 AM

The Chartered Institute of Taxation (CIOT) have expressed disappointment at the approval by Parliament of a measure which will impose significant additional burdens on some small firms.

The Enactment of Extra-Statutory Concessions Order 2012, passed on Monday afternoon by the House of Commons First Delegated Legislation Committee, gives legislative effect to six extra-statutory concessions (ESCs), including ESC C16, which deals with the tax treatment of distributions to shareholders when a small company is dissolved.

The CIOT and the Institute of Chartered Accountants of England and Wales had written jointly to Exchequer Secretary David Gauke, the Labour Treasury team and other members of the committee considering the legislation asking them to withdraw or reject the legislation to allow it to be amended. Although some of the concerns of the two bodies were referred to during debate, the committee passed the proposal without a vote after just 20 minutes of discussion.

Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Sub-Committee, said:

“It is extremely disappointing that the Government have chosen not to listen to the concerns of the tax profession and small business and have pushed this measure through.

“Currently ESC C16 provides a simple, straightforward and inexpensive way for a company to be wound up at the end of its life without the need for a formal liquidation, but with the same tax consequences as if it had been liquidated. However, the Government have brought this concession into law in a way that is far more restrictive, limiting it to companies whose total distributions come to no more than £25,000.

“The effect of this will be to impose significant additional financial and administrative burdens on small and medium-sized businesses, directly contrary to the Government’s stated policy in this area.

“It is claimed that the £25,000 limit is necessary to limit the scope for evasion and avoidance by taxpayers. However, HMRC have not been able to show us any evidence of abuse of the current concession, and the Minister conceded that there were ‘no figures’ showing whether there was any abuse. The example given to the House of Commons Committee by the minister of an ‘avoidance opportunity’ was something that would fall squarely within existing anti-avoidance legislation; and for which HMRC clearance is customarily required.

“It is particularly disappointing to see the new legislation passed even though there is anti-avoidance legislation addressing the same area. The implication that restrictive tax legislation is justified simply because HMRC do not have the resources to administer the anti-avoidance legislation currently in place is a matter for great concern and does not bode well for future anti-avoidance legislation.

“If there is evasion or abuse then HMRC should tackle it as such, rather than implementing further restrictive legislation that effectively imposes financial and administrative penalties on an innocent majority while leaving evaders and abusers unaffected”.

Notes to Editors

1) The existing ESC C16 concession equalises the tax treatment of a distribution made when a company is dissolved without going through a formal winding up (which can be costly and drawn out) with that of a distribution made when a formal winding up does take place. This will normally mean the shareholders pay less tax, as the money received will be treated as a capital payment (liable for capital gains tax and potentially eligible for entrepreneurs’ relief) rather than as a dividend. Shareholders do not have to incur the considerable costs of a formal liquidation; and the terms of the concession ensure that all creditors, including HMRC, are protected.

2) The House of Lords' decision in R v HM Commissioners of Inland Revenue ex parte Wilkinson [2005] UKHL 30 challenged the scope of HMRC's administrative discretion to make concessions not set out in statute. Putting ESC C16 into legislation is part of HMRC’s programme intended to give statutory effect to existing ESCs where these may exceed the scope of that discretion.

3) The Delegated Legislation Committee debate can be read at http://tinyurl.com/6urbdnu

The Order can be read at http://tinyurl.com/79ev627
HMRC’s announcement on ESC C16 can be viewed at http://tinyurl.com/77sfl5p
The CIOT’s response to the ESC C16 consultation can be viewed at http://tinyurl.com/bw5rqbx

4) The Chartered Institute of Taxation (CIOT) is a charity and the leading professional body in the United Kingdom concerned solely with taxation. The CIOT’s primary purpose is to promote education and study of the administration and practice of taxation. One of the key aims is to achieve a better, more efficient, tax system for all affected by it – taxpayers, advisers and the authorities.

The CIOT’s comments and recommendations on tax issues are made solely in order to achieve its primary purpose: it is politically neutral in its work. The CIOT will seek to draw on its members’ experience in private practice, government, commerce and industry and academia to argue and explain how public policy objectives (to the extent that these are clearly stated or can be discerned) can most effectively be achieved.

The CIOT’s 15,600 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’.

George Crozier
External Relations Manager

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The Chartered Institute of Taxation
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www.tax.org.uk

The Association of Taxation Technicians
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www.att.org.uk

Low Incomes Tax Reform Group - an initiative of the Chartered Institute of Taxation
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• small businesses
,
• treasury