In March last year, the government published a White Paper setting out its final position on reforming Companies House ahead of introducing legislation. The big headline from the reforms is that micro and small companies will have to report profit and loss statements i.e. the option to file ‘filleted’ accounts is to be removed. Some smaller ‘one-man band’ companies may not be happy to see their profit figures displayed on the Companies House website for all to see and decide it is time to disincorporate.
‘Disincorporation’ is the process of a company changing its legal form to a sole trader or partnership. It is easier for a sole trader or partnership to incorporate than for a company to disincorporate as the latter process involves the transfer of the business as a going concern, including assets and liabilities (i.e. goodwill, property, plant and machinery, stock and creditors) from the company to its shareholders.
The most significant problem is the treatment of capital gains under corporation tax as there will normally be a capital disposal of the company’s assets, deemed at market value. Such gains are more likely to arise concerning land and premises and any other non-wasting, or large, tangible assets including goodwill. ‘Roll-over’ or ‘hold-over’ relief on assets initially transferred to the company on incorporation may have to be considered in any tax computation. A few years ago there was a tax relief designed to remove this tax charge (‘Disincorporation relief’) but this was abolished as from 1 April 2018.
Should you disincorporate?
Following various governments’ tax reforms, there are now limited tax savings to be achieved in operating through a company if the profit is relatively low (i.e. approximately £50,000 or less). Factor in the increased accountancy and administration fees that come with running a company and it may be that the corporate structure is leaving the business owner out of pocket. Other factors that might tip the balance in deciding whether or not to disincorporate include where the company does not hold land and buildings or, where it does, they stand at a relatively small taxable gain and there is minimal goodwill (or what goodwill there is gives rise to a relatively small gain).
The main reason for such companies to remain is to build credibility with potential customers, investors and peers, or if the company holds copyrights or trademarks, or to protect its brand. Protecting owners from personal liability used to be a reason but, again, there are various examples where this protection is no longer as strong as it was.
Partner note: s17, s18 TCGA 1992; s162, s165 TCGA 1992 (s162B TCGA 1992)