'Disincorporation relief shouldn't disappear from April'

A raft of existing and future measures that take the gloss off limited company usage is cause to keep Disincorporation Relief, not let it “fall by the wayside,” tax bodies are appealing.

Or, as one of the bodies -- the ATT -- puts it, DR is a relief “whose time has not yet come,” because tax changes that reduce the perks of incorporating look set to bring DR into its own.

Chair Michael Steed said: “If anything, re cent and upcoming tax changes for companies and their shareholders may mean there will be more small companies looking to disincorporate in the future, not less.”

The assessment is necessary because not only is the relief largely unused (fewer than 50 claims since it was introduced in 2013), but also because it is set to expire from April 1st 2018.

Ironically though, argue the bodies, this expiry date is about the time that conditions for limited companies are set to toughen, notably due to the £3,000 cut in the tax-free dividend allowance.

Rules on status for limited company freelancers in the public sector have also tightened, and last year saw the removal of the NI Employment Allowance for single-director companies.

So letting a relief that helps small businesses who have been a limited company but now want to return to a simpler legal form, such as a sole trader, simply “fall by the wayside,” as the OTS said this month, is bad timing.

Reform not removal is therefore the answer. “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,” said the Chartered Institute of Taxation.

Mr Steed, of the Association of Taxation Technicians (ATT) agrees, on the basis that the founding policy rationale of DR (that tax charges should not act as a disincentive to a change in business structure), is still “valid.”

Making the relief more generous is one suggestion, albeit alongside a new anti-avoidance provision, as is modifying the relief so it focuses on the gains which would arise on a company’s assets, not their value as it does currently.

The well-timed recommendations -- Autumn Budget 2017 is yet to be written -- coincide with an Office of Tax Simplification (OTS) discussion paper on DR, to stimulate debate about whether the relief is achieving its purpose.

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21st September 2017

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