Tax unit to explore 'disincorporation relief'

Individuals who wish to stop operating though a limited company will be at the heart of the next government-commissioned review of small businesses, the Office of Tax Simplification (OTS) has made clear.

Outlining the terms of the rest of the review, the Treasury said the OTS is to explore the need for a form of “disincorporation” relief for traders who want to cease being an incorporated company.

This follows feedback to the OTS that such individuals can encounter tax, legal and administrative barriers which can make the disbanding of a limited company difficult and even prohibitive.

As a result, the OTS will examine forms for potential tax relief, whether the individual operates at company or shareholder level, and “fully develop” recommendations for its legal or administrative framing, assuming a case for it is found.

The office must also quantify the number of businesses that would adopt or be eligible for such a relief; tot up the potential cost to the exchequer and ensure other creditors would be protected in the event it becomes available.

Interaction with the Companies Act and other legislation is expected, the Treasury added, as is computability with the concept of a new, single-person business entity – which is under review by the business department.

Elsewhere, but also within the review, the OTS will explore the case for new ways of taxing the smallest unincorporated entities, such as sole traders, which would be easier for the business to administer.

The independent tax body will need to consider what size and type of business might fall within the new systems, but its scope will not extend to the position of incorporated businesses due to complexities with company law.

The Treasury reflected in its briefing paper: “The final OTS report on small business tax will be published ahead of Budget 2012. This report will cover both the work announced at Budget and the additional areas outlined”.

It added: “The OTS will publish interim reports on individual issues over the review period for discussion with business, tax professionals and other interested parties.”