Accountants call on Brown to free startups from tax trap

Incorporation system is 'unfair' and needs reform, claim ACCA

The chancellor should overhaul the “unfair” tax system suffered by entrepreneurs who don’t wish their business to be incorporated, according to the Association of Chartered Certified Accountants (ACCA).

In its submission for the upcoming Budget, ACCA said that businesses are often tempted by tax breaks to incorporate, but if they decide to drop their company status, they are unfairly hit by ‘stealth taxes.’

The accountancy body said that many businesses are effectively trapped by the tax system in an inappropriate legal status because of the penalties that come with disincorporation.

ACCA said that Gordon Brown should reform the system, allowing companies to make a clear decision whether they want to incorporate based on the position of their business.

Chas Roy-Chowdhury, head of taxation at ACCA, said that the current tax favouritism towards the incorporation process is inequitable and a fair route to tax-free disincorporation should now be introduced.

“The chancellor is giving with one hand what he takes away with the other. Recent reductions of corporation tax rates and the introduction of a zero rate band have encouraged ever increasing numbers of businesses to incorporate. And it is tax free to adopt company status.

“Once in the net, however, many of these businesses have found that the benefits of incorporation are outweighed by the disadvantages – which can include being subject to the negative tax implications of, for example, IR35.

“Many firms will have second thoughts, but the process of disincorporation which incurs steep capital gains tax bills on the assets of the companies winding up is enough to make them stay put,” he said.

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