'Drop £100,000 cap on disincorporation relief'

A new tax relief, created to enable businesses to change their legal form from a limited company to self-employed without suffering a tax disadvantage, will be less effective if it is limited to firms with assets worth £100,000 or less.

Issuing the alert, the Association of Taxation Technicians told HM Revenue & Customs that only limited companies with qualifying assets worth safely less than £100,000 will even consider using the new relief.

Underlining its disappointment, the association added that while they welcome the idea of a ‘disincorporation relief,’ there was no indication in the Treasury’s consultation last summer that the value of the company’s qualifying assets would be a criterion for its use.

Finding fault with the current proposal, the ATT explained: “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.

“If the limit is breached, no relief is due and suddenly the company has a completely unexpected Corporation Tax bill.”

In principle, though, a disincorporation relief is seen as a helpful way of simplifying tax for smaller business because, although many small traders incorporated in the early 2000s when the state incentivised them to, some find the limited company structure too onerous.

“Their business could be run more simply as a sole trader or a partnership,” reflected ATT president Yvette Nunn. “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.”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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