Clause 57 - Disincorporation relief

Finance Bill – in a Public Bill Committee am 10:45 am ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss clauses 58 to 60 stand part.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Clauses 57 to 60 introduce provisions for disincorporation relief following the Office for Tax Simplification report, published in February 2012 as part of a series of reports into the small business tax. As Committee members know, it is a simple matter for an unincorporated business to change from being a sole trader to a partnership, or vice versa. It is also relatively simple to incorporate an unincorporated business, although tax planning is required to minimise disadvantages. However, the Office of Tax Simplification report highlighted that a small number of incorporated businesses operating as limited companies would prefer to operate in an unincorporated form and that various tax charges and administrative issues could be the factor discouraging them from doing so. The purpose of clauses 57 to 60 collectively is therefore to provide a disincorporation relief and so remove those disincentives. I am sure the Minister will give us some more detail on the clauses.

A number of issues have been raised that it will be helpful to put to the Minister before he makes his remarks so that he can address them. The tax information and impact note indicates that around 610,000 businesses will be eligible for the relief. Has there been an assessment of how many businesses will actually take up the measure?  It seems to be a step about which businesses may require significant advice; what guidance will HMRC—or BIS, for that matter—be issuing for potential users of the scheme?

It has been suggested that the £100,000 asset limit could substantially restrict the number of businesses that will be able to take up the relief; indeed, the Chartered Institute of Taxation has suggested that most businesses owning land and buildings will comfortably exceed the £100,000 threshold and therefore recommends that the threshold be reconsidered or, at the very least, be kept under regular and compulsory review during the five-year period the relief is intended to run for. Will the Minister confirm whether that suggestion has been considered, and whether it will be implemented?

Will the Minister also outline what will happen to those businesses that take steps to disincorporate but then find that HMRC values their assets at more than £100,000—what will be the impact on their tax bill in those circumstances? The impact note suggests that HMRC may require additional resources to administer the relief; will the Minister clarify what assessment has been made of the resource requirements within HMRC? We are very conscious of the staffing reductions at HMRC; has appropriate consideration been given to resources before placing additional burdens on HMRC?

Both the Chartered Institute of Taxation and the Association of Taxation Technicians have expressed concerns that the relief is not to be extended to tax charges that might arise on shareholders as a result of disincorporation. As a consequence, it is thought that the restrictions will very substantially limit the take-up of the relief, and that many small businesses will continue to be operated through limited companies despite the fact that they do not need the commercial protection of limited liability. If that occurs, an opportunity for simplification of the tax system for small businesses will have been missed. Given that many members of the Committee, particularly on the Government Benches, would not like to see that happen, will the Minister explain the rationale behind the Government’s decision in light of the concerns that have been raised?

Photo of David Gauke David Gauke The Exchequer Secretary

Clauses 57 to 60 introduce a new disincorporation relief, which has effect from 1 April 2013 and is available for five years. The relief will make it easier for business owners to move their business to a sole trader or a partnership by removing some of the tax charges.

I will begin with a little background to the measures. Disincorporation is the term we use to describe a transfer of a limited company’s business to one or more of its shareholders; the business is then operated by either a sole trader or a partnership. As hon. Members may recall from earlier debates, the independent Office of Tax Simplification, also known as the OTS, published its final reports into small business tax in February 2012. The reports identified some business owners who would prefer to operate their limited company in unincorporated form. For some individuals, that would be less burdensome, as they would not have to submit annual returns to Companies House or to operate a pay-as-you-earn system for directors’ pay. There would also be no need to distinguish between cash held by the company and personally, or to worry about directors’ overdrawn loan accounts.

Many of the businesses referenced in the reports were incorporated in the mid-2000s under the 0% corporation tax rate introduced by the previous Government, which I think Members on both sides of the Committee, on reflection, would probably agree was not the cleverest policy in incentivising businesses that are more naturally happy to be unincorporated to become incorporated. Despite the benefits of operating as a sole trader or partnership, many of those businesses have been discouraged from disincorporation by a number of tax charges.

Clauses 57 to 60 provide a relief for shareholders who choose to continue their business in an unincorporated form. The changes made by the clauses will allow business owners to transfer qualifying assets from a company to one or more of its shareholders, with no immediate corporation tax charge on the company. Relief will be available to about 610,000 companies with total qualifying assets of goodwill and interest in land not exceeding £100,000, covering about 40% of UK companies and the majority of very small businesses that may want to disincorporate.

The hon. Member for Newcastle upon Tyne North asked how many are likely to make use of it, as opposed to likely to be eligible for it. OTS research suggests that 14% of small companies would like to operate as unincorporated businesses. I think 14% of 610,000 companies is around 90,000; we shall see. Disincorporation relief will remove a key barrier to disincorporation and therefore allow a business greater flexibility to choose the most appropriate legal structure in which to operate. Unincorporated businesses may also be eligible to use the new cash basis for unincorporated businesses, simplifying their tax calculations still further.

HMRC and BIS are working together to provide simple guidance on their websites. That should be available from around September. I was asked about the impact on HMRC resources. HMRC is working through the details, but I understand that it expects minimal impact on its resources.

I was also asked about the impact on those who sign up but then have assets valued above £100,000. Those businesses will not receive disincorporation relief, but they are able to agree the valuation with HMRC beforehand, so it may be possible to avoid working extensively through the process. It will be available to them to agree the valuation before a claim is made, and HMRC allows businesses to check post-transaction valuations using form CG 34, in case anyone wanted to know.

Disincorporation relief will reduce the tax charges on eligible businesses that wish to disincorporate. It will encourage individuals to select a legal form based on their business needs, rather than continue with the form in which they found themselves a few years ago that is not to their liking, and it is a useful addition to our tax regime.

Question put and agreed to.

Clause 57 accordingly ordered to stand part of the Bill.

Clauses 58 to 60 ordered to stand part of the Bill.