Contractors planning to take cash out of their contractor limited company as capital using Extra Statuary Concession (ESC) C16 should ensure they do so before the rules change in March 2012, or make other plans for the tax-efficient extraction of cash reserves. ESC C16 allows contractors to take cash out of their company as capital when winding up the business, thereby incurring a lower capital gains tax charge.
HMRC is proposing that from 1 March 2012, under ESC C16 any payouts to contractors before they dissolve their company will be treated as capital. This means contractors will pay tax at the lower capital gains rates if closing their company because of retirement, or a move into permanent employment.
When first proposed, the move was considered broadly positive, until HMRC’s small print revealed a sting in the tail: payouts in excess of £25,000 will either be treated as dividends, or the company can be formally liquidated, which, according to accountant Paul Soper on AccountingWeb, could cost contractors up to £7,500.
Either way, for many contractors, particularly those close to retirement with a large cash balance in their contracting business, the change in the law could result in significantly higher tax bills or hefty liquidation costs. So contractors considering using ESC C16 as it currently stands should consider accelerating their plans in case the new rules come into force in March 2012, as proposed by HMRC.
However, the legislation is not yet a done deal, and Soper has plans to start a government e-petition. Contractors will be able to lend their support to the campaign to amend HMRC’s proposals, which if not for the £25,000 cap, would be a positive step for limited company contractors and small business owners. Details of the e-petition, and any other measures to change the cap, will be published as soon as they are known, and tweeted to @ContractorCalc followers.