This is the view set out the Association of Taxation Technicians (ATT) in their response to HMRC on the draft Finance Bill provisions for a new Disincorporation Relief. (See: OTS recommends disincorporation relief and more flat rates, Shout99, March 2012)
ATT President, Yvette Nunn said: “The Treasury consulted on the relief last summer and asked for views on a range of matters but gave no indication that there was any idea of restricting relief by reference to the value of the company’s qualifying assets. We now find that the relief will only apply where the qualifying assets are worth no more than £100,000.
“In practice, this limit will mean that only companies with qualifying assets worth safely less than £100,000 will even consider using the new relief. Otherwise, a company risks transferring its business to its shareholders and then finding out later that HMRC’s idea of the value means that the £100,000 limit has been breached. This could very easily happen in relation to goodwill. Many small companies will not have given any thought to the real value of their goodwill and, even with proper advice, it will be impossible for the shareholders to know in advance what valuation will be acceptable to HMRC. If the limit is breached, no relief is due and suddenly the company has a completely unexpected Corporation Tax bill.
“It’s difficult to see why the Treasury thinks that there is so much greater risk of a loss of tax when the transfer is going to the individual(s) than when a sole trader or a partnership transfers its business into a limited company. There is no limit at all in that case.”
Existing tax law means that a sole trader or a partnership can transfer their business into a limited company on a tax-neutral basis. This enables any capital gains that have built up on the business assets prior to the incorporation to be held-over into the deemed acquisition cost of the shares received by the individuals in exchange for the transfer of the business.
By contrast, no relief currently exists where a business is being transferred from a limited company to its shareholders. Corporation Tax is payable on any gains made by the company, even where it receives no proceeds from the disposal.
Last year, the Office of Tax Simplification (OTS) recommended that a new relief should be introduced to enable the tax-neutral transfer of a business from a limited company to its shareholders. At the time, the OTS identified that a number of the smallest companies would like to ‘disincorporate’ and move to an unincorporated status. It said that 'the current tax system mitigates against this, so the OTS has proposed the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief. This would have the dual benefit of reducing admin burdens whist facilitating business reorganisations allowing businesses to trade in their correct form'.
The Treasury then consulted on the subject and concluded in favour of a relief, initially for a five-year period starting in April 2013.
Yvette Nunn said: “A disincorporation relief was seen as one way of simplifying tax for smaller business. Many small firms incorporated in the early 2000s when Government incentivised them to do so.
"However some of them have found the limited company structure to be burdensome and inappropriate, their business could be run more simply as a sole trader or a partnership. The thinking behind the £100,000 cap, which includes the usually unrecognised value of goodwill, seems to be that companies with qualifying assets over that limit would all want to remain incorporated for commercial reasons. But that seems a very arbitrary view.
“Separately, the £100,000 asset cap will have the bizarre effect that a company that has created its goodwill from nothing could get relief on gains of up to £100,000 whereas another might have made gains of only £10,000 but be ineligible for the relief because its qualifying assets were worth £105,000.
“We are urging the Government to scrap the cap or at least to explain why one is needed and consult on its structure.”
Qualifying assets for the purpose of the proposed relief are goodwill and interests in property. In this context, goodwill is the difference between what someone might pay for the whole of a business and the lesser value of its definable assets.
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Susie Hughes © Shout99 2013