View the related Tax Guidance about Incorporation
Transferring goodwill on incorporation
Transferring goodwill on incorporationOne of the assets transferred on incorporation is the business goodwill, which can then be used to create a loan account which can be drawn tax-free. There are specific tax treatments in respect of any goodwill transferred both for the person transferring it to the company and for the company acquiring it on incorporation, these are set out below. However, it is first necessary to consider the valuation of the goodwill.Valuation of and recognition of goodwillIt is essential that a careful approach is taken to the valuation and recognition of goodwill, as this is liable to be challenged by HMRC. In order to be transferred to the company, the goodwill must, in HMRC’s view, be free, ie not personal goodwill which remains with the individual running the business, and not attaching in some way to the property. If it does attach to the property, a higher property valuation should apply for which there is no corporation tax relief, though business asset disposal relief (previously known as entrepreneurs’ relief) will be available on the higher value. A detailed consideration of the nature of goodwill appeared in Balloon Promotions Ltd and others. HMRC published guidance on the valuation of goodwill following the Balloon Promotions case as a practice note.However, a taxpayer has successfully challenged HMRC’s view at the First-tier Tribunal. See Simon’s Taxes B9.112. If it is held
Capital gains tax implications of incorporation
Capital gains tax implications of incorporationThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the capital gains tax aspects.The transfer of business assets by an individual to a company controlled by them is a disposal for capital gains tax purposes. The disposal is deemed to take place at market value because the sole trader and the company are ‘connected persons’. The sole trader will therefore have a capital gain on the chargeable assets at the point of incorporation. The chargeable assets will usually be land and buildings, and possibly goodwill. It is unlikely that gains will arise on other assets such as plant and machinery as these will either be standing at a loss (for which relief is given via the capital allowances computation) or at a gain, which will be exempt under the chattels rules.The CGT liability arising on the disposals can be deferred by claiming one of two possible CGT reliefs:•incorporation relief (otherwise known as roll-over relief on the transfer of a business to a company), or•gift relief (otherwise known as hold-over relief)TCGA 1992, ss 162, 165Alternatively, a capital gain could be realised by an outright sale and a claim made for business asset disposal relief (BADR), if available, to obtain a 10% tax rate.For further reading on capital gains aspects of incorporation, see Simon’s Taxes Division B9.1 and HMRC’s guidance at CG65700C and CG68050.Incorporation reliefThere are three conditions to be satisfied
Relief for current year trading losses ― planning considerations
Relief for current year trading losses ― planning considerationsIn summary, for continuing trades, current year trading losses may be relieved against the following: •total income of the year of loss or the preceding year, or•current year or preceding year capital gains, to the extent that losses cannot be relieved against current or prior year total income, or •future profits arising from the same tradeITA 2007, ss 83, 64; TCGA 1992, s 261BThis is discussed in detail in the Sole trader losses ― established trades guidance note, which also includes commentary about the temporary extension for the use of trading losses incurred in the 2020/21 and 2021/22 tax years. Relief for trading losses in opening and closing years is discussed in the Sole trader loss relief ― opening years and Sole trader losses on cessation guidance notes. This guidance note focuses on the planning aspects that need to be considered to ensure the best outcome for the taxpayer. Things to consider when relieving lossesThe main factors that should be taken into account in loss relief planning are as follows:•marginal rate of tax ― losses should be offset against income taxed at higher marginal rates of tax in priority•personal allowances and annual exempt amount ― where possible, relieve losses in such a way as to preserve these
Legal implications of LLP membership
Legal implications of LLP membershipThis note explains the legal implications and requirements in respect of being a member of a limited liability partnership (LLP) and provides guidance on the issues surrounding the rights and obligation of members.The tax implications of being a member of an LLP are covered in the Limited liability partnerships (LLPs) ― overview guidance note.LLP members’ legal rightsEach member is an agent of the LLP and can bind it, so any contract signed by a member on behalf of the LLP binds all members equally. Each member therefore has a duty to act in the best interests of the LLP and its other members. Additional legal requirements are placed on the designated members of an LLP, see the How to set up an LLP guidance note.Each member will have the benefit of limited liability in a very similar way to shareholders in a company. The extent of each liability is effectively restricted to their members’ interest and creditors have no recourse to the members’ personal assets. This is however subject to certain exceptions as follows:•where a member has accepted a personal duty of care or contractual commitment such as a personal guarantee, and•where a member has acted negligently or is guilty of wrongful tradingIn addition to the above, if the LLP becomes insolvent any withdrawals taken by a member in the previous two years may be at risk if it can be shown that the member knew there was no way of avoiding insolvency
Cancelling a VAT registration number
Cancelling a VAT registration numberThis guidance note provides:•guidance regarding when a person must deregister from VAT on a compulsory basis•guidance regarding when a person can deregister from VAT on a voluntary basis•practical points to consider in relation to the cancellation of a VAT registrationFor in-depth commentary on VAT deregistration please refer to De Voil Indirect Tax Service V2.151 to V2.155.When must a person deregister from VAT on a compulsory basis?The VAT registration ― voluntary guidance note explains when a person is entitled to be registered for VAT. A person who is registered for VAT and ceases to be entitled to be registered must notify HMRC within 30 days from the date they ceased to be entitled to be registered. HMRC can cancel the registration of a person who has ceased to be entitled to be registered for VAT, even if the person has not notified HMRC. A failure to notify HMRC may result in a penalty. If the reason the person is no longer entitled to be registered is because they have transferred their business as a going concern the VAT registration number may, subject to the agreement of the person acquiring the business and HMRC, be transferred to the person acquiring the business. The request for the VAT registration number to be transferred should be submitted to HMRC using the form VAT68. In all other circumstances the VAT registration number must be cancelled, although HMRC may agree to a request for the deregistration to be
Patent box tax regime ― overview
Patent box tax regime ― overviewIntroduction to the patent box regimeThe aim of the patent box regime is to provide an incentive for companies to develop and retain patents and other qualifying intellectual property within the UK. The regime is available for accounting periods commencing on or after 1 April 2013. It applies to companies within the charge to corporation tax that actively hold qualifying patents. Qualifying companies can elect for a reduced effective rate of corporation tax of 10% to apply to the income generated from the relevant patents (‘relevant IP profits’). The reduced rate of corporation tax is given effect by allowing a deduction to be made in the calculation of the company’s total taxable profits, rather than by actually applying a reduced rate of tax to the relevant IP profits. Patent and non-patent profits are therefore not separated and taxed at different rates in the corporation tax computation, although detailed calculations must be performed to identify the relevant IP profits themselves. The benefits provided by the patent box regime became more valuable with the increase in the UK main corporation tax rate from 19% to 25% from 1 April 2023. Non-qualifying profits generated by a company which has elected into the regime will continue to be taxed at the normal rates of corporation tax.Please refer to the Patent box ― qualifying companies guidance note for information on the relevant conditions. The regime applies equally to corporate partners, with some necessary modifications. It is not available to
BPR and changes to the business structure
BPR and changes to the business structureThis guidance note considers how changes to the business structure affect the BPR position of the assets concerned. It considers changes arising from incorporation, the formation of a partnerhsip, reconstruction, liquidation, winding up and otherwise ceasing to trade.IncorporationSole traders, partnerships or LLPs may choose to incorporate their business and to trade instead as a limited company. This may be for tax, liability or other reasons. See the Incorporation - introduction and procedure guidance note for further details about the tax effects of incorporation.There are different ways to incorporate and different tax effects follow from each. This note focusses on the BPR consequences of incorporation. The potential loss of the relief should be considered when choosing a method of incorporation.Incorporation for sharesAn incorporation for shares means that all of the assets and liabilities of the business are exchanged for shares in the new company. Any gains on those assets are rolled into the base cost of the shares. See the Capital gains tax implications of incorporation guidance note for further details of the CGT position. For BPR purposes the existing original business has been disposed of and a new asset has been received, being the shares in the new company. To qualify for BPR before holding the shares for more than two years the taxpayer will need to rely on the replacement property provisions. These provide that where new relevant business property replaces other relevant business property and they have been held for a
NIC implications of incorporation
NIC implications of incorporationOverviewThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the national insurance contributions (NIC) aspects.When a sole trader transfers their business to a company, they will be changing their status for NIC purposes.The obligation to pay Class 2 NIC is removed from 2024/25, for further details, see the Class 2 national insurance contributions guidance note. Therefore Class 2 NIC from 2024/25 remains in place to allow self-employed individuals with profits below the Lower Profits Limit to make voluntary contributions.Sole traders pay NIC under Class 4 which are charged at the main Class 4 percentage on the trading profits between the lower profits limit and the upper profits limit. The additional Class 4 percentage is charged on profits above the upper profits limit. The Class 4 limits and percentages are:2024/25 tax year2023/24 tax yearLower profits limit£12,570£12,570Upper profits limit£50,270£50,270Main Class 4 percentage6%9%Additional Class 4 percentage2%2%SSCBA 1992, s 15(3), (3ZA)Note that Class 4 NIC (like income tax) are charged on the taxable profits of the business for the tax year, irrespective of whether the trader draws the profits out of the business. The trader’s actual drawings are irrelevant for tax and NIC purposes. For
Retiring partners and cessation of partnership
Retiring partners and cessation of partnershipThis guidance note sets out the extension of loss relief for individual and corporate partners on the cessation of trade, the treatment of post cessation losses and losses which remain on incorporation of a partnership.Terminal loss relief for partnersWhere a partner either retires from partnership or there is a permanent cessation of a partnership’s business, special ‘terminal’ loss relief rules apply. The rules are the same as those which apply to sole traders where the partner is an individual, see the Sole trader losses on cessation guidance note and also the same as those which apply to companies where the partner is a company, see the Terminal trading loss relief guidance note.The rules for individual partners and corporate partners are similar in operation in that loss relief can be claimed for the year of the loss and the preceding three years. For corporate partners, the terminal loss relief provisions will only apply if the trade carried on in partnership was a separate trade in its own right. If it was not, the loss from the partnership will be relieved as detailed in the Relief for partnership losses guidance note.If a taxpayer’s trade, profession or vocation ceases and has incurred a “terminal loss” then the loss can be deducted from any trading profits in the tax year of cessation and carried back to the three preceding tax years. Losses must be relieved against later years first and are offset against profits of the trade, profession
MTD ITSA for partnerships ― three points to consider
MTD ITSA for partnerships ― three points to considerMaking Tax Digital for Income Tax (MTD ITSA) quarterly reporting and basis period reform are the biggest changes to administration of income tax in over 25 years. What does this mean for advisers and their clients?The date at which partnerships are due to enter MTD ITSA has yet to be confirmed. On 19 December 2022, the Treasury Secretary announced a change to the timetable. This was confirmed in an HMRC press release, saying that the government remains committed to introducing MTD for ITSA to partnerships, but that the previously announced date of 2025 would no longer apply.Looking forward to this future development, this guidance note looks at some key choices, challenges and opportunities for partnerships:•partnership and partners are different: and it matters•tax bills need managing in the light of basis period reform•quarterly reporting and finalising annual returns: there’s a lot to think about For more details on MTD for ITSA and basis period reform see the Making Tax Digital (ITSA) ― overview guidance note and Simon’s Taxes A4.172 and B7.510. For points to consider for sole traders and property income see the MTD ITSA for property ― three points to consider and MTD ITSA for unincorporated businesses ― three points to consider guidance notes.Point 1 ― partnership and partners are different: and it mattersOverviewMTD ITSA quarterly reporting applies for an individual, where the sum of annualised trading turnover and gross property income is over £50,000 (from 6 April
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