Clauses 57 to 60 introduce a new disincorporation relief, which has effect from 1 April 2013 and is available for five years. The relief will make it easier for business owners to move their business to a sole trader or a partnership by removing some of the tax charges.

I will begin with a little background to the measures. Disincorporation is the term we use to describe a transfer of a limited company’s business to one or more of its shareholders; the business is then operated by either a sole trader or a partnership. As hon. Members may recall from earlier debates, the independent Office of Tax Simplification, also known as the OTS, published its final reports into small business tax in February 2012. The reports identified some business owners who would prefer to operate their limited company in unincorporated form. For some individuals, that would be less burdensome, as they would not have to submit annual returns to Companies House or to operate a pay-as-you-earn system for directors’ pay. There would also be no need to distinguish between cash held by the company and personally, or to worry about directors’ overdrawn loan accounts.

Many of the businesses referenced in the reports were incorporated in the mid-2000s under the 0% corporation tax rate introduced by the previous Government, which I think Members on both sides of the Committee, on reflection, would probably agree was not the cleverest policy in incentivising businesses that are more naturally happy to be unincorporated to become incorporated. Despite the benefits of operating as a sole trader or partnership, many of those businesses have been discouraged from disincorporation by a number of tax charges.

Clauses 57 to 60 provide a relief for shareholders who choose to continue their business in an unincorporated form. The changes made by the clauses will allow business owners to transfer qualifying assets from a company to one or more of its shareholders, with no immediate corporation tax charge on the company. Relief will be available to about 610,000 companies with total qualifying assets of goodwill and interest in land not exceeding £100,000, covering about 40% of UK companies and the majority of very small businesses that may want to disincorporate.

The hon. Member for Newcastle upon Tyne North asked how many are likely to make use of it, as opposed to likely to be eligible for it. OTS research suggests that 14% of small companies would like to operate as unincorporated businesses. I think 14% of 610,000 companies is around 90,000; we shall see. Disincorporation relief will remove a key barrier to disincorporation and therefore allow a business greater flexibility to choose the most appropriate legal structure in which to operate. Unincorporated businesses may also be eligible to use the new cash basis for unincorporated businesses, simplifying their tax calculations still further.

HMRC and BIS are working together to provide simple guidance on their websites. That should be available from around September. I was asked about the impact on HMRC resources. HMRC is working through the details, but I understand that it expects minimal impact on its resources.

I was also asked about the impact on those who sign up but then have assets valued above £100,000. Those businesses will not receive disincorporation relief, but they are able to agree the valuation with HMRC beforehand, so it may be possible to avoid working extensively through the process. It will be available to them to agree the valuation before a claim is made, and HMRC allows businesses to check post-transaction valuations using form CG 34, in case anyone wanted to know.

Disincorporation relief will reduce the tax charges on eligible businesses that wish to disincorporate. It will encourage individuals to select a legal form based on their business needs, rather than continue with the form in which they found themselves a few years ago that is not to their liking, and it is a useful addition to our tax regime.