In my article in last month’s Tax Insider, I explained why it may now be fiscally attractive for some owner-managed businesses to disincorporate. Here are some further considerations.
No ‘Disincorporation Relief’
Unlike with an incorporation (where, for example, TCGA 1992, s 162 allows gains on qualifying business assets to be rolled over into the cost of the shares being issued), there are no special tax reliefs available on a disincorporation.
George Osborne did introduce such a relief in April 2013, which allowed land and buildings and goodwill to be transferred to the shareholders at the company’s capital gains base cost, thus avoiding a corporation tax charge on any gain made by the company. However, the relief was limited in scope (the total market value of the qualifying assets could not be more than £100,000), got little takeup, and was abolished in March 2018.
Getting Rid of the Company
The easiest and cheapest way of doing this will be a striking-off if the company can satisfy all the relevant conditions (e.g., it has not traded for three months). Once approved by the directors, form DS01 (striking-off application by a company) must be completed and submitted to Companies House, along with a fee of £33 for an online application.
As this is not a formal winding-up, any amounts received are treated as an income distribution unless the total amounts distributed are up to £25,000, in which case it can generally be treated as a capital distribution.
Companies with larger distributable reserves will probably want to incur the much more substantial fees of a member’s voluntary liquidation, as this will automatically be treated as a capital distribution (potentially with business asset disposal relief available), unless caught by anti-avoidance.
‘Anti-phoenixing’ rules Four key conditions must be met for ‘antiphoenixing’ tax rules to apply:
- The individual (S) has at least a 5% interest in the company.
- The company is a close company.
- Within two years of that distribution, S (or their connected persons) continues to be, or becomes, involved in a similar trade or activity. Crucially, for a disincorporation, this can include as a sole trader.
- It is reasonable to assume, having regard to all the circumstances, that the main purpose (or one of the main purposes) of the windingup is the avoidance or reduction of a charge to income tax.
Where the conditions are met, amounts received in the liquidation will be treated as income distributions. Unfortunately, HMRC will not give clearance on this anti-avoidance legislation.
On a disincorporation, the main reason for the liquidation is to change business structure to a simpler form. However, HMRC may seek to argue, where there are significant distributable reserves, that condition D is met (i.e., one of the main purposes of the winding-up is a reduction in income tax that would otherwise be paid on distributions).
In its guidance published on 25 July 2018, HMRC states that:
- ‘A decision not to make an income distribution prior to the company’s winding up does not, of itself, mean that Condition D has been met.’
- ‘If the recipient of the distribution believes that Condition D was not met, they should self-assess on that basis. HMRC can only displace this where the individual’s decision was not a reasonable one.’
Transfer of VAT registration Many businesses seem to have incurred long delays in transferring a VAT registration recently, so it may be simpler to just de-register your company and seek a new VAT registration as a sole trader.
Practical Tip
Seek clearance under the transactions in securities rules (ITA 2007, s 701) before winding up the company. If given, this should give some comfort that the TAAR is unlikely to apply.