As part of its review of small company taxation, the OTS published a discussion paper in July on the potential for a simple new trading vehicle, ‘sole enterprise with protected assets’ (SEPA). The concept stems from research findings that one of the main reasons for forming a limited company is to obtain limited liability protection. The principle behind SEPA is that it will allow an individual to continue to trade as a sole trader, whilst offering protection for their primary residence against claims arising from the business.
The OTS has now published its report, based on the responses received, concluding that SEPAs could be a useful simplification for those that would otherwise consider incorporation, and recommending that it should be developed into a formal proposal. The OTS believes that the introduction of SEPAs would help to encourage enterprise, ‘not least by sending a signal to the marketplace that the government is interested in trying new ideas and encouraging enterprise while balancing this encouragement with fair protection’.
Responses indicated that SEPAs would be adopted on a reasonable scale and some felt they could become the norm for unincorporated sole traders. The main users would most likely be those in traditional trades and individuals in their 40s and 50s starting up a new venture, who have property to protect.
Respondents supported the view that protection should just be in terms of the main residence. The one additional asset which the OTS thinks might merit consideration is the individual’s pension fund, although more work would be needed before it could be established whether including pensions within the scope of SEPA would meet the objective of simplicity.
One concern was whether a SEPA would have access to banking finance and credit in the same way as a sole trader. The OTS believes this will not be a significant problem in practice, given the likely nature of those opting for SEPA, mainly sole traders, who tend not to require access to large loans.
No significant confusion or complication is expected to result for existing businesses, since SEPAs would not introduce any new tax treatment and would be entirely optional. Also, in the time it would take to introduce SEPAs, perhaps three to five years, the OTS expects digital reporting under MTD to have settled down and be ‘business as usual’.
The core principles of a SEPA are:
SEPA status is attained through registration by a sole trader;
SEPAs would not have a separate legal identity;
the SEPA user would still be taxed as a sole trader, with no tax differences compared with a sole trader;
business would be carried on in the name of the SEPA, for example ‘John Smith SEPA’ rather than ‘John Smith’;
assets would be held by the trader, as the SEPA has no separate identity;
SEPAs would be able to use cash accounting, in the same way as sole traders;
there would be no size limit/threshold for SEPA; and
once registered, all of a trader’s activities (not companies or LLPs) would be covered by SEPA status.
As part of its review of small company taxation, the OTS published a discussion paper in July on the potential for a simple new trading vehicle, ‘sole enterprise with protected assets’ (SEPA). The concept stems from research findings that one of the main reasons for forming a limited company is to obtain limited liability protection. The principle behind SEPA is that it will allow an individual to continue to trade as a sole trader, whilst offering protection for their primary residence against claims arising from the business.
The OTS has now published its report, based on the responses received, concluding that SEPAs could be a useful simplification for those that would otherwise consider incorporation, and recommending that it should be developed into a formal proposal. The OTS believes that the introduction of SEPAs would help to encourage enterprise, ‘not least by sending a signal to the marketplace that the government is interested in trying new ideas and encouraging enterprise while balancing this encouragement with fair protection’.
Responses indicated that SEPAs would be adopted on a reasonable scale and some felt they could become the norm for unincorporated sole traders. The main users would most likely be those in traditional trades and individuals in their 40s and 50s starting up a new venture, who have property to protect.
Respondents supported the view that protection should just be in terms of the main residence. The one additional asset which the OTS thinks might merit consideration is the individual’s pension fund, although more work would be needed before it could be established whether including pensions within the scope of SEPA would meet the objective of simplicity.
One concern was whether a SEPA would have access to banking finance and credit in the same way as a sole trader. The OTS believes this will not be a significant problem in practice, given the likely nature of those opting for SEPA, mainly sole traders, who tend not to require access to large loans.
No significant confusion or complication is expected to result for existing businesses, since SEPAs would not introduce any new tax treatment and would be entirely optional. Also, in the time it would take to introduce SEPAs, perhaps three to five years, the OTS expects digital reporting under MTD to have settled down and be ‘business as usual’.
The core principles of a SEPA are:
SEPA status is attained through registration by a sole trader;
SEPAs would not have a separate legal identity;
the SEPA user would still be taxed as a sole trader, with no tax differences compared with a sole trader;
business would be carried on in the name of the SEPA, for example ‘John Smith SEPA’ rather than ‘John Smith’;
assets would be held by the trader, as the SEPA has no separate identity;
SEPAs would be able to use cash accounting, in the same way as sole traders;
there would be no size limit/threshold for SEPA; and
once registered, all of a trader’s activities (not companies or LLPs) would be covered by SEPA status.
.jpg?sfvrsn=335a554c_0 "300 x 250 (MPU)")