Tax body says relief will be of limited use
Twelve months ago the Office of Tax Simplification (OTS) published its final reports into small business tax. One of those reports suggested that there were some limited companies that would prefer to trade as an unincorporated business but were discouraged from doing so because of, amongst other things, the corporation tax implications.
Following the Budget of last year the Government held a consultation on the OTS proposals for a disincorporation relief. These proposals recommended that a relief be introduced to lift the tax obstacles that currently exist when business assets are transferred by a company to its shareholders who wish to continue the business as a going concern but not within the limited company wrapper.
Once the consultation process was concluded the Government proposed to introduce legislation from 1st April 2013 to allow a company to transfer qualifying assets, those being land and goodwill, to shareholders as individuals who wished to continue the business but not as a limited company. This will only apply however to those companies with qualifying assets not exceeding £100,000.
Disincorporation relief will run for 5 years from 1st April 2013 but will not cover tax charges that might arise to the shareholders when assets are distributed to them.
The Chartered Institute of Taxation (CIOT) believes that, in its current form, disincorporation relief will be of 'little use' to many small businesses and has suggested that further consideration should be given to the scope and nature of the relief before placing it firmly on the statute book.
The professional body is both surprised and concerned that there is no corresponding tax relief for shareholders. Furthermore, they would like to see a provision to enable company losses to be carried forward into the new unincorporated business.
Although the CIOT welcomes a disincorporation relief, as it stands the legislation is 'an opportunity missed for real simplification and is unnecessarily minimalist' and 'runs counter to the intention of the OTS proposals is supposed to reflect' according to the institute.
HMRC are of the opinion that some 610,000 companies may be eligible for the relief but the CIOT believe that this is based on data extracted from companies' balance sheets and those balance sheets will not reflect the current market value of assets and goodwill may not even feature at all! Consequently, 610,000 may well be overly optimistic.
The relief will restrict the number and type of businesses that will be able to take advantage of it because it is limited to companies whose assets include goodwill and land and buildings used in the business and of no more than £100,000. There is still time however for one of Mr Osborne's famous U-turns!
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