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Limited liability for sole traders

OTS examine merits of the Sole Enterprise with Protected Assets

The Financial Secretary to the Treasury has given the Office of Tax Simplification (OTS) the green light to further explore a Sole Enterprise with Protected Assets (SEPA) model, which would provide protection for one or more assets of a self-employed individual.

The SEPA was discussed in the OTS’s ‘Small company taxation review’ earlier this year in which it stated that the smallest companies struggle with the tax compliance burdens of being a company and that the most common reason for incorporation was limited liability rather than tax motivation. SEPA would be a way of providing a degree of asset protection to sole traders, potentially eliminating the need to incorporate solely for limited liability and a discussion document has been published to explore the merits of this model in more detail.

SEPA Discussion Paper


Currently, there are 3.5 million self-employed sole traders in the UK, of which 274,000 are employers, and all with unlimited liability. There are some 723,000 non-employing companies. These two groups represent the potential target population for SEPA, together with some small companies with only one or two employees.

The OTS do not believe SEPA to be a suitable alternative to incorporation for those individuals who work either through an agency or direct with large private or public sector organisations, where the engager requires the contractor to have a separate legal identity.

In addition to asset protection, the OTS considers that there are other potential simplifications; the ability to continue to use the cash basis to draw up accounts (not available to companies) and a freedom from the complications of corporation tax. SEPA owners would also retain the financial protections that are offered to sole traders, e.g companies lose the right to access the Financial Ombudsman. Sole proprietors are treated as consumers when taking loans of less than £25K and can take financial services companies to court if they are in breach of FCA rules.

Asset protection

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.

Employment status

Employment status considerations would not be affected by SEPA and the same employment law considerations would apply. A SEPA user would therefore not be immune from being reclassified as an employee of their client/customer.


Allowing sole traders to benefit from private asset protection would shift the balance of risk in business to consumer interactions. Customers seeking redress would no longer be able to place a charging order on a house under the Charging Order Act 1986 unless the trader was found criminally negligent.

Becoming a SEPA

To apply for SEPA status individuals would simply have to have a national insurance number and the right to work in the UK. There would also be some modest restrictions around the entitlement to SEPA status, broadly mirroring restrictions on becoming a director. Individuals who are currently under an individual voluntary arrangement (IVA), bankrupt, disqualified from holding directorships, insolvent, or serving bankruptcy restrictions or debt relief restriction orders would not be able to register for SEPA status.

There would be a simple registration process which would only take a few minutes and require a minimum amount of information.

Sole proprietors would be given one unique SEPA number which would cover multiple businesses owned by the trader.

As SEPA is for individuals, it would not be possible for two or more people to share a SEPA status but people with their own SEPA status would be able to get involved in joint enterprises just like multiple sole traders are able to do now.

There would be no requirement for a separate business bank account or public trading records that are normally associated with more formal business structures.

Any losses incurred in relation to contracts agreed before registration would not be protected by SEPA.

Creditors may still be able to ask any business for any business loan to be secured against a residence, i.e. a re-mortgage.

Key risks

The OTS have identified a number of key risks which they will need to show how they can be managed, which include:

  • The potential for confusion within the micro-business sector by introducing a different business vehicle
  • Would the fact that creditors who would have fewer assets with which to make a claim against, make them less willing to do business with a SEPA?
  • Whether the risks that SEPA protects, could equally well be met by developing suitable insurance policies
  • Potential impact on the availability of credit. Lenders may be less willing to lend to sole traders if they know that their house is protected
  • Risk of abuse from ‘phoenixing’ behaviour or using SEPA to protect against other losses, e.g gambling debts, possibly through ‘managing’ cash flows to pay off mortgage debt rather than trade debt and so end up with a full-protected house whilst leaving ordinary creditors exposed; and
  • Having sufficient take up from the target audience so that simplification outweighs the complexity of introducing another business model.

The OTS aim to publish their conclusions in October and are therefore asking the following strategic questions:

  • Would the new status be easily understood or would it cause confusion?
  • Would traders want to use it as an alternative to incorporation?
  • Would traders that were never considering incorporation use it?
  • Would it be accepted as a valid business form by other traders and, crucially, banks and other potential creditors?
  • Would legal protection against personal assets work in practice under the law of insolvency and other areas?
  • Would it result in a simpler route for carrying on business? and
  • What type of behaviour could this encourage by removing worries about losing personal assets, e.g greater entrepreneurism, growth or innovation?

Ultimate deadline for comments is 30th September.

By Qdos Contractor


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