SEPA Okay but Not for Contractors

Sole Enterprise with Protected Asset (SEPA)

In July of this year, the Office of Tax Simplification (OTS) published a discussion paper on the concept of a new business vehicle dubbed SEPA.  The concept stems from findings that one of the main reasons for forming a limited company is to obtain limited liability protection. That then seems to lead many people into forming a limited company and then struggling to deal with the tax, accounting and reporting requirements. So, the OTS wanted to further examine whether a new form of trading vehicle or status offer what sole traders really want from liability protection while retaining the simplicity of a sole trader and, if so, would it be used and encourage enterprise?

What is a SEPA?

At its core, the principle of SEPA status is to provide protection against claims being made on the owner’s private assets arising from the business. Assets covered by SEPA would therefore be ring-fenced but this would mainly be the owner’s primary residence, as it was the fear of losing their home that drove people to wanting protection.

As its main principle, SEPA will allow an individual to continue to trade as a sole trader whilst offering protection for their primary residence against claims arising from the business. However, the primary residence will not be protected from personal claims nor will any other asset be protected.

Would it be used?

The critical question is whether enough people would use SEPA to justify its introduction. Responses to the OTS discussion document suggest that the business model would be adopted on a reasonable scale.

From the results of a survey conducted by Screwfix, designed jointly with the OTS in September, amongst sole traders and small companies, it was revealed that:

• Current sole traders have an appetite for an asset protection scheme like SEPA, with asset protection being a leading advantage of becoming limited.
• The main hurdle to overcome in becoming a limited company is the perceived volume of paperwork or added costs in hiring an accountant.
• Current limited company owners say they registered on advice from their accountant although they tend to be happy with their choice.

Those who would opt for SEPA broadly fall into two camps:

• Traditional trades, such as plumbers, painters etc, rather than ‘knowledge workers’. Lack of interest by the latter is that they mostly work with businesses or agencies who demand they work through companies as insulation against possible PAYE issues and employment rights concerns. Without that factor, they would be good candidates for SEPA.
• Those in their 40s and 50s who are starting up a new venture, either diversifying or enforced through redundancy. They will, of course, be far more likely to have property that they wish to protect.

Whilst the OTS accept that the case for introducing SEPA is not cast iron, they do believe it has potential to be a useful simplification for those that would otherwise consider incorporation and it could provide a boost to enterprise. As such, the OTS recommend that it should be developed into a formal proposal.

The OTS’s final report on SEPA can be found here