The Association of Taxation Technicians (ATT) is encouraging the Government to reform an underused relief for companies looking to disincorporate, rather than allow it to expire next year.
Disincorporation relief was introduced in 2013 to remove the tax barriers that previously arose when business assets were transferred by a company to its shareholders who then wished to continue the business as a going concern in an unincorporated form.1
Since its introduction in 2013 there has been very limited use of the relief, with fewer than 50 claims made by March 2016.
The Office of Tax Simplification (OTS) has published a discussion paper to stimulate debate as to whether Disincorporation Relief is achieving its purpose and draw attention to the fact that, under the current legislation, the relief is due to expire from 1 April 2018.2
Michael Steed, Co-chair of ATT’s Technical Steering Group, said:
“The original policy rationale behind Disincorporation Relief that tax charges should not act as a barrier to proposed changes in the structure of a business is still valid. If anything, recent and upcoming tax changes for companies and their shareholders may mean there will be more small companies looking to disincorporate in the future, not less.3 A Disincorporation Relief in some form should be retained beyond 1 April 2018 as a relief whose time has not yet come.
“The very low take up of Disincorporation Relief to date indicates that changes are needed if it is to achieve its purpose. A key reason for this low take up is the relatively low £100,000 cap on the value of land, buildings and goodwill that a company can hold. This focus on the gross value of assets rather than the gains which would arise on them, leads to a cliff edge whereby a company with assets valued under the limit will receive full relief on its gains, but one with asset values just one pound above the limit but with a potentially much lower gain would not qualify for any relief. We recommend that the current rules be modified to focus on gains, and not asset values alone.”
Notes for editors
- The distinguishing feature of unincorporated businesses is that they have no separate legal personality. The two main unincorporated business forms are sole traders and partnerships . Disincorporation Relief is only available to those companies with land and buildings and goodwill valued at less than £100,000. Where it applies it exempts the gains that would otherwise apply on the transfer of those assets to the company’s shareholders from corporation tax. The legislation for the relief incorporates a sunset clause meaning it is time limited and only applies to business transfers made between 1 April 2013 and 31 March 2018.
- See https://www.gov.uk/government/publications/disincorporation-relief-what-of-the-future
- Recent and proposed tax changes may reduce the perceived tax advantages of acting through a company rather than an unincorporated business. These include the proposed reduction in the tax-free dividend allowance from £5,000 to £2,000 from April 2018 and stricter rules concerning the taxation of personal service companies (where an individual provides their personal services through a company they own rather than directly). In addition, administrative simplifications such as the extension to larger unincorporated businesses and landlords from April 2017 of the cash basis (which allows tax to be calculated based on when money comes in and out of the business without the need for complicated accounting adjustments), which are not available to companies, could encourage more businesses to disincorporate.