The Office of Tax Simplification is considering whether there is any merit in the introduction of some form of disincorporation relief in a new discussion paper: "Disincorporation of small companies".

It is thought that persons find the lack of any relief a hinderance as it prevents them from changing trading vehicles.

The decision to examine disincorporation arises as a result of two factors: 

1. In 2010 HMRC consulted on modifying Extra Statutory Concession C16. The concession currently grants comparable tax treatment when a company is informally struck off to that afforded under a formal liquidation. If HMRC were to make the changes that it proposed many companies might rush to take advantage of the concession in order to save the costs of liquidation. The changes were originally proposed to take effect on 1 April 2011, so many companies may have already been struck off already. They may now have started up as new companies.

2. There is on-going discussion as to whether income tax and National Insurance Contributions (NICs) should be combined. If combined the NICs advantages of incorporation may diminish for many owners of smaller companies, who will presumably rush to disincorporate. If so then there is the problem for them as to how to account for goodwill. However, this overlooks the main advantage of limited liability and assumes that these owners understand enough about Limited Liability Partnerships to move their business into these instead.

The discussion paper considers whether the complexities of a new relief outweigh any advantages and also whether there is actually any demand for a new relief at the current time.

Responses are required by 7 October 2011


Disincorporation of small companies