Don’t let the sun set on Disincorporation Relief - CIOT

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 response to a recent OTS focus paper 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.”