The introduction of the Economic Crime and Corporate Transparency Act on 26 October 2023 marks a significant shift in company legislation. Designed to combat unlawful activities, this Act brings new obligations that could particularly impact directors of micro-companies (those with a turnover of £632,000 or less, or £316,000 or less on their balance sheet).

Key Requirements of the Act

One of the Act’s primary requirements is that all companies must now file accounts displaying crucial details like the profit or loss account and the balance sheet. This transparency, with information accessible on the public register, may raise concerns for some directors about privacy and business confidentiality.

Disincorporation as an Option

In light of these new disclosure requirements, directors of micro-companies might consider disincorporation – transitioning from a corporate structure to self-employment (sole trader or partnership). This process involves transferring the company’s assets and liabilities to the shareholder(s) to continue the business in an unincorporated form.

Considerations and Implications of Disincorporation

Capital Gains: The transfer of assets in disincorporation is a connected party transaction, valued at market price for capital gains purposes. However, as there’s no actual sale, the company might not have immediate funds to cover the corporation tax on these gains, influencing the disincorporation strategy.

Asset Purchase by Proprietor: If necessary, the proprietor might buy the assets from the company, but it’s crucial to note that the payment doesn’t need to match the full market value used for gain calculations; it just needs to cover the tax liability. However, purchasing assets below market value can result in a taxable distribution.

Cash Distribution to Shareholders: If the company can cover the tax, the business can be distributed to shareholders tax-free. But this creates a double tax charge: one for the company on its gains and another for the recipient at the highest income tax rate.

VAT Considerations: Normally, when a trade ceases, there’s a taxable supply of goods held by the business. However, the ‘transfer of a going concern’ provisions should exempt this from VAT. It’s advisable to consider using the existing VAT registration to avoid delays in obtaining a new one.

Practical Considerations and Future Developments

It’s important to note that many provisions of the Act will require further legislative and administrative developments. Therefore, it may take some time for all the changes to be fully implemented and operational.

Conclusion

Disincorporation in response to the Economic Crime and Corporate Transparency Act 2023 is a significant decision that requires careful consideration of tax implications and legal requirements. For micro-company directors contemplating this move, it’s crucial to seek professional advice to navigate these complexities effectively.

 

 

 

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