An individual setting up a business currently faces a difficult choice: incorporate and trade through a limited company – which means limited liability for the individual but comes with an increased administrative burden and a more complicated tax regime; or trade as a sole trader – a simpler route but one which carries the risk of unlimited personal liability for the business’s debts.

A recent report suggests that the government is considering a third way.

Protecting the family home

The research behind the report confirmed that the main reason for individuals incorporating their business was the protection of limited liability. Further digging revealed that the biggest concern was protecting the individual’s primary residence. So, the Office of Tax Simplification has come up with a potential new trading vehicle known as a Sole Enterprise with Protected Asset or SEPA.

What is a SEPA?

The principle behind the new SEPA is that an individual will be able to continue to trade as a sole trader (with the associated simpler tax and regulatory regime) but their primary residence will be protected against claims from the business.

Unlike a company, a SEPA would not have a separate legal identity but it would need to be registered. The report indicates that there will be a light-touch approach to registration which would be done online and require a minimum amount of information. Once registered, all of the trader’s activities would be covered by the SEPA status. The SEPA would continue to be taxed as a sole trader but the business would be carried on under the SEPA’s name – for example ‘Jane Smith SEPA’.

SEPA status will only be available for individual sole traders; two or more people cannot jointly share SEPA status and would need to look to some other structure (for example a limited liability partnership or a limited company) to protect their personal assets.

The limits of protected liability

Registering as a SEPA will not confer the full benefits of limited liability status. It is only the individual’s primary residence that will be protected from claims against the business. As the report notes, if a trader wants more protection they could incorporate the business into a limited company, accepting the wider reporting requirements that come with that status in order to protect other stakeholders. The report does question whether an individual’s pension fund should also have protected status but suggests further research is required on this point.

The benefit of protecting the family home via a SEPA will be lost if a creditor (in particular, a bank) requires a loan to the business to be secured against the property.

What next?

The report believes that the introduction of SEPA has the potential to be a useful, simpler alternative to incorporation and it may even boost enterprise. The suggestion will now be developed into a formal proposal for further consideration so watch this space…

This blog post was edited by Sophie Brookes. For more information, email blogs@gateleyplc.com


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.