The ATT have recently responded to an Office of Tax Simplification (OTS) focus paper on the future of Disincorporation Relief. The purpose of the paper was to stimulate debate over whether or not the relief is achieving its purpose in light of the fact that, under current legislation, it is due to expire on 31 March 2018.
This article looks at what disincorporation relief does and why the ATT consider that it still has a place beyond 2018.
What is Disincorporation Relief?
Disincorporation Relief reduces the corporation tax cost for a company that wishes to transfer certain types of assets to its shareholders who will then continue to operate in an unincorporated form such as a sole-trade or partnership. The relief allows companies with land, buildings, and goodwill, which are together worth less than £100,000, to transfer those assets to the shareholders without creating a corporation tax charge in the company.
The idea behind the relief is that tax charges should not act as a barrier to proposed changes in the structure of a business. While there are various favourable reliefs for unincorporated businesses who wish to incorporate, there are few concessions available to companies who wish to go the other way.
The OTS focus paper highlights that up to 31 March 2016 the relief has not been widely used, with fewer than 50 claims made. This could be because the qualifying £100,000 limit for the market value of land, property and goodwill is so low. Or, it may be because the relief does not eliminate all the potential tax costs of a disincorporation. For example, shareholders may still have personal Capital Gains liabilities or Stamp Duty Land Tax to pay as a result of disincorporation.
Why should Disincorporation Relief be retained?
The ATT considers that the relief should be retained (and improved) as a number of recent tax changes will mean that more small companies may wish to disincorporate in the future. Such changes include:
- The increase in dividend taxation from 6 April 2016, the effect of which shareholders may only fully appreciate when they come to pay their tax bills for 2016-17 in January 2018.
- The further reduction in the dividend allowance from £5,000 to £2,000 in April 2018.
- The stricter rules around personal service companies – where individuals provide their services through a company – in the public sector.
- Administrative simplification. Company accounts are more costly to prepare and the cash basis – the ability to account for receipts and expenses as the cash is received or paid out – is not currently available to companies. In contrast the number of sole traders and partnerships eligible for the cash basis has been increased by provisions in the latest Finance Bill.
What changes should be made?
In order to enable the relief to benefit more companies in the future, the ATT considers that either the £100,000 limit should be increased or that it should be recast. Instead of looking at the value of assets the company has, the limit could instead be set by reference to the gain made on the assets transferred. This would still allow the cost of the relief to be controlled, while making it more useful in the future.