Disincorporation – time to consider?

Date posted: 11th Dec 2023

In October 2023 one of the most significant pieces of company legislation in recent history, came into being.

The aim of the Economic Crime and Corporate Transparency Act 2023 is to ‘prevent companies and others from carrying out unlawful activities or facilitating others to carry out unlawful activities.

As part of the legislation, new obligations are to be imposed on companies that may be of particular concern to directors of smaller companies, as there will be a requirement for all companies to file accounts showing key information such as the profit or loss account as well as the balance sheet and accompanying disclosures.

Partner, Martin Hobson has written a blog explaining more on the changes that may impact audit and accounts filing here. 

This information will be available on the public register (Companies House) for all to view. Those directors who are uncomfortable with this disclosure may want to consider disincorporation as a means of keeping the business going but under self-employment rather than via a company.

What is disincorporation?

Disincorporation involves the transfer of the assets and liabilities of a company (i.e. goodwill, property, plant and machinery, stock and creditors) as a going concern to the director-shareholder(s), who then continue the business in an unincorporated form (sole trader or partnership).

What taxes do I need to consider?

As the company is ‘connected’ to the purchaser and the trade is continuing, the deemed ‘market value’ rule also applies to the transfer of any assets of the company. Whilst there are some elections for capital allowances and stock, that could mitigate some tax liabilities, the company may still face corporate tax charges on the transfer of the trade and the director-shareholder may face income tax charges on the transfer of the business, unless it is acquired at market value.

For the company, the transfer of chargeable assets (goodwill being a prime example) will be a connected party transaction, and the company will need to use market value to compute the gains and work out any tax due.  However, in the absence of a third-party sale, the company will have no proceeds with which to pay the corporation tax. The director-shareholder could acquire the business at full market value, but would need the cash to do so. An alternative may be for the director-shareholder to acquire the trade at a value equivalent to the corporation tax but be aware that where the proprietor buys the business at an undervalue, the excess of market value over the actual consideration paid is treated as a distribution (dividend) taxed on the proprietor at their highest rate of income tax.

Alternatively, if the company has enough cash to pay the tax, the trade can be distributed to the shareholders with no cash being transferred. Such a situation is a dividend distribution and again the proprietor is taxed at their highest rate of income tax on the grossed-up value of the business transferred. Note that there is a double charge here: the company has a liability on its gains (as well as on any trading profit on the cessation of its trade) and the sole trader/partnership proprietor has a liability on the receipt of the business.

As a general rule, when a trade ceases, the VAT registered person is deemed to make a taxable supply of goods held by the business. However, there should be no VAT on the transfer by virtue of the ‘transfer of going concern’ provisions. To avoid any delays in obtaining a new VAT registration, consider electing to continue using the business’s existing VAT registration number.

Practical points

In addition to taxes, moving the trade to a sole trader or ordinary partnership, will mean that the limited liability protection offered by a company, will be lost. The business could potentially be moved to a limited liability partnership (LLP) but that would need two partners/members. But a LLP would still be in a similar disclosure position in relation to Companies House.

HM Government did introduce a disincorporation relief a few years ago but that was for a limited period. It remains to be seen whether such a relief will be re-introduced in light of these changes

It will be necessary to consider the impact of the targeted anti-avoidance rule that was introduced in 2016, so as ever, professional advice remains critical.

Finally, it is anticipated that many of the measures introduced by the Act will require secondary legislation and Companies House guidance, as well as the development of Companies House systems to implement the changes. As such, it will be a while until many of these provisions are implemented.

As ever, if you have any queries, please contact us.


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