Disincorporation relief: an update
Disincorporation relief for small companies?
The latest news
The Office of Tax Simplification (OTS) finished its 10-week consultation into disincorporation relief for small companies earlier this month. The final report will be published before the Budget in 2012 when the chancellor will decide whether or not to take forward any of the advisory body's recommendations. If he does take forward the proposals then there is likely to be a period of more detailed consultation and subsequently the publication of draft legislation.
What is disincorporation?
In short: to remove or become removed from the legal status of a corporation (or limited company).
Disincorporation is the process of transferring a business and its assets to the shareholders where the shareholders may then use the business assets to trade as a sole trader or partnership.
Why is it a potential issue?
Relief applies to individuals on incorporating their business, so that no capital gains tax is charged on the transfer of assets into the company, but there are currently no reciprocal reliefs on disincorporation.
A large percentage of small businesses chose to incorporate to take advantage of the 0% corporation tax rate introduced in 2002 under Gordon Brown. Now this is no longer in place (it ceased in 2006), many would arguably be better returning to unincorporated status to save administrative burdens and professional fees.
The asymmetry of the tax position has led the OTS to evaluate the benefits of introducing a small company disincorporation relief.
What are the current tax disadvantages of disincorporation?
• The transfer of chargeable assets, such as property, may be subject to corporation tax at the company's marginal rate.
• The transfer of goodwill may create additional tax liabilities for the company.
• The transfer of stock and work in progress will be deemed to have occurred at market value because the shareholders are connected to the company.
• Trading is deemed to have ceased on the transfer to the new unincorporated business, so any accumulated trading losses that are not utilised in the final chargeable period are lost.
• On the cessation of trading, all plant and machinery is deemed to have been sold at market value, resulting in balancing allowances and charges. It is possible to jointly elect to transfer plant and machinery at tax written down value (known as a succession election), although if the company has trading losses to absorb balancing charges, it may be better not to make the election.
• The transfer of a business as a going concern is outside the scope of VAT provided the new unincorporated business registers for VAT but a charge to Stamp Duty Land Tax could arise on the transfer of property at up to 5% of the proceeds.
These disadvantages may be offset if a favourable disincorporation relief is introduced. In the meantime, businesses considering a change from limited-liability status to self-employed status may be wise to wait until the outcome of the consultation. Please contact us for more advice.
Submitted by MSB Accounting on Wednesday 26th October 2011