A good idea but which precludes freelancers
One of the Office of Tax Simplification’s (OTS) recommendations, Disincorporation Relief, came into effect on 1st April 2013 and will last for 5 years. The relief allows the shareholders of a company to continue the company’s business in an unincorporated form without incurring an immediate corporation tax charge.
Whilst the business can be transferred to individuals who are in partnership it does not extend to members of a limited liability partnership.
Research by the OTS indicated that around 91,000 of the 610,000 companies potentially eligible to use this relief might take it up.
How it works
Transfers of assets between a company and its shareholders are normally transfers between connected persons or related parties and, as such, take place at a market value basis, i.e. the transfer is taxed on the market value of the asset regardless of what is paid for it. This can result in the company having to pay corporation tax where the asset is worth more than its original cost or its tax written down value.
A claim to Disincorporation Relief allows qualifying assets to be transferred below their market value so that no corporation tax becomes payable. However the tax charge is deferred as the shareholders accept the reduced transfer value as being the cost to be set against any future sale proceeds thereby increasing their gain for capital gains tax purposes.
Who can claim Disincorporation Relief?
A company and its shareholders can claim the relief if:
- the company transfers its business to some or all of its shareholders
- the transfer is a ‘qualifying transfer’
- the transfer takes place between 1st April 2013 – 31st March 2018.
What is a qualifying transfer?
All the following conditions must be present for a business transfer by the company to be a ‘qualifying transfer’:
- the business must be transferred as a going concern
- the business must be transferred together will all its assets or with all the assets of the business apart from cash
- the total market value of the qualifying assets at the time of the transfer must not be more than £100,000
- the shareholders to whom the business is transferred to must be individuals
- those shareholders must have held shares in the company throughout the 12 months before the transfer
This is where Disincorporation Relief becomes ineffective for the majority of freelancers because qualifying assets are interest in land (other than land held as trading stock) and goodwill. It would be fair to suggest that for most personal service companies their balance sheets will consist of assets other than land and goodwill thereby making this relief a non-starter for contractors.
Making a claim
For those contractors whose companies do possess qualifying assets then a claim for Disincorporation Relief must be made jointly by the company and all the shareholders to whom the business is being transferred within 2 years of the business transfer date.
Once a claim is made it cannot be revoked.
Why is this important?
Surely it’s a good thing that people can’t take company funds tax-free into their own coffers?
Otherwise you’d simply see a lot of people start up a business, disincorporate, pocket the money and then start up another.
In fact, you may see a lot of people doing that anyway as a tax dodge simply buying land (there seems to be no requirement for the land to be in some way necessary for the running of the business).
For a contractor any such claim would have HMRC look closely at the company’s affairs, which would effectively involve an IR35 investigation. They certainly wouldn’t want people walking away with the money in their company tax-free and I don’t blame them.
The sensible thing to do is to run the company down over as many years as it takes to draw down as salary/dividend. You pay CT in the year the money is earned, keep it on deposit and draw down to suit.
When there’s no money left, apply for a winding up order.