Gabelle Tax Analysis: New disincorporation relief
Consultation on disincorporation relief
Following an earlier recommendation from the Office of Tax Simplification (OTS), on 7 June 2012 the Treasury published a consultation document in relation to the introduction of a relief against the tax charges that arise when a company disincorporates.
The proposals recognise that many small businesses do not need to be run through a company, but that the tax costs of reorganising the business into an unincorporated form can be prohibitive. The consultation looks at the process when a business changes its legal form from a limited company to one run by a sole trader or by a partnership, and considers the transfer of a business as a going concern together with its assets and liabilities.
The OTS suggested that the businesses most likely to be interested in disincorporation would have a turnover of £20,000 to £30,000 and this has been broadly supported by the feedback received by the Treasury so far.
Reasons for disincorporating that have been highlighted are:
“many small businesses may have incorporated to save tax following the introduction of the 0 per cent rate of Corporation Tax in 2002-03. It highlighted that they may now no longer find this legal form suitable for their business;
a key reason for wanting to disincorporate may be to avoid the additional administrative and regulatory requirements of being a limited company. It also highlighted the generally higher fees from agents for handling incorporated businesses; and
a number of small businesses may find it difficult to understand the notion of a legal entity separate from the shareholders/directors and consequently fail to keep personal cash separate from the business, resulting in errors or underpayment in their tax returns.”
The main tax charges that are seen as a barrier to disincorporation, and which would be addressed by any disincorporation relief include
“Charges on the company on the disposal of the assets liable to Corporation Tax. This includes gains or profits on disposal of goodwill, plant and machinery, stock or land. Goodwill refers to the additional value of a business over the sum of its assets and liabilities, and must be accounted for on the transfer of the business; and
Charges on the shareholdersin relation to their shares. This includes tax charges on any dividends/distribution of the company’s assets (including cash). The nature of the charge on distributed assets will depend on whether the assets are treated as an income distribution (liable to an Income Tax charge) or a capital distribution as part of a formal winding up (liable to a Capital Gains Tax charge).”
The consultation proposes two approaches to a disincorporation relief, a simple relief and a more comprehensive relief. A simple disincorporation relief might remove the corporation tax charges arising on the disposal of goodwill, plant and machinery and land.
A more comprehensive relief would cover charges arising on shareholders in respect of distributed assets. There would be targeted anti-avoidance rules to deal with any abuse from shareholders.
In order to streamline the administration of disincorporation, the OTS has recommended setting up a simplified process to carry out the disincorporation and the dissolution of the company, and the formation of a Companies House and HMRC working group. It is recognised that simplification is as important as introducing appropriate tax reliefs to enable small businesses to disincorporate.
The fact that there are no reliefs specific to disincorporation has long been seen as an anomaly for tax planning, as there are a number of tax efficient routes that can be used to incorporate a business. These proposals are, therefore, welcome, although it is unfortunate that any new rules are likely to apply only to very small businesses.