‘Improve rather than lose’ disincorporation relief, tax body urges

‘Improve rather than lose’ disincorporation relief, tax body urges

Introduced in April 2013, fewer than 50 claims had been made by March 2016 for this little used tax

The government is being encouraged to reform an underused relief for companies looking to disincorporate, rather than letting it expire next year.

Disincorporation relief was introduced in April 2013 to remove the tax barriers that previously arose when small business assets were transferred by a company to its shareholders who then wished to continue the business as a going concern in a simpler legal form such as a sole trader, partnership or limited liability partnership. The little used tax – fewer than 50 claims had been made by March 2016 – applied to disincorporations made between its launch date and the end of March 2018.

However, ahead of this “sunset date” and following the publication of an OTS focus paper on the future of the relief, the Chartered Institute of Taxation (CIOT) is proposing that improvements be made to increase the uptake, rather than allowing it to fall by the wayside.

As well as suggesting that the generosity of the relief is boosted beyond the current £100,000 limit, CIOT says more must be done to extend the relief further. For example, while company incorporations can be undertaken with no tax burden, tax charges remain on disincorporation in respect of the individual shareholders.

“We would not wish to see the current relief lapse in six months’ time without the government considering how it could be improved and made more effective,” commented John Cullinane, CIOT tax policy director.

“One of the reasons the current relief is not being taken up is because it is not seen as generous enough by taxpayers and their advisers. We recognise that there will be revenue and avoidance issues in determining how generous a relief it should be, but it may be that a more generous relief with some anti-avoidance provisions might play a sensible part in a more rational overall system which tries to reverse the current tax incentive for businesses to incorporate.

“The government could consider the option of a deferral of tax liabilities as opposed to full relief, which would minimise any eventual revenue loss to the Exchequer.”

Cullinane added that a solution should be sought that fits in with an “overarching small business taxation strategy that addresses the differences between the taxation of different types of income, and between incorporated and unincorporated businesses”. This, he says, could recognise wider benefits for the Exchequer if the tax benefits of being incorporated diminished, when (or if) the government decides to achieve a more balanced tax burden between incorporated and unincorporated businesses.

“In that scenario, many smaller companies might look to disincorporate and return to sole trader status in order to simplify their affairs,” he concluded.

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