The Chartered Institute of Taxation (CIOT) has suggested improvements to increase the uptake of a little used tax relief that was created to address the problems faced by some small businesses that have chosen to be a limited company in the past and want to return to a simpler legal form, be it a sole trader or a partnership or a limited liability partnership.1
Disincorporation Relief was introduced after a public consultation that was derived largely from work done by the Office of Tax Simplification (OTS). The relief applies to disincorporations within the period of five years beginning on 1 April 2013 and ending on the ‘sunset date’ of 31 March 2018.
There has been a very low take up of Disincorporation Relief since it was introduced in 2013, with fewer than 50 claims made as of March 2016.
In its response2 to a recent OTS focus paper3 seeking views on whether the relief should be allowed to lapse or not on 1 April 2018, the CIOT said that it agreed the time is right to address whether the relief is achieving its purpose.
The Institute suggested that the current relief has not proved popular because it is not generous enough, with just a £100,000 limit. The Institute added that another reason that the relief has not been widely used is because it does not go far enough in relieving tax charges. Company incorporations can be undertaken with no tax burden, but tax charges remain on disincorporation in respect of the individual shareholders.
John Cullinane, CIOT Tax Policy Director, said:
“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.
“One of the reasons that 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.
“Rather than letting the relief lapse, we should search for a solution that fits into an overall government strategy for the taxation of small businesses – and one that addresses the differences between the taxation of different types of income, and between incorporated and unincorporated businesses. There would be wider benefits for the Exchequer if the tax benefits of being incorporated diminished.4 In that scenario, many smaller companies might look to disincorporate and return to sole trader status in order to simplify their affairs."
Notes for editors
1. The process by which a business is transferred out of a limited company and carried on subsequently by a sole trader, a partnership or a limited liability partnership is commonly referred to as disincorporation. Disincorporation Relief allows a company to transfer certain types of assets (company assets such as land and buildings, goodwill and other intangible assets) to its shareholders (who continue to operate the business in an unincorporated form) without the company incurring a corporation tax charge on the disposal of the assets. However, the tax charges on the individual shareholders are unrelieved (normally capital gains tax when the company’s assets are distributed to them on liquidation). The relief is limited to businesses with qualifying assets valued at less than £100,000 at the time of the transfer.
2. See CIOT submission here.
3. See link here.
4. The timescale of this is largely dependent on when (or if) the Government decides to achieve a more balanced tax burden between incorporated and unincorporated businesses.
5. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)More Articles by Chartered Institute of Taxation (CIOT) ...