If you have a business and trade as either a sole trader or a partnership, an option you may have is to trade as a limited company – i.e. incorporate your business.  There are a number of factors which affect the decision, and it’s a subject we’ve looked at before (see here).

When a business is incorporated, it is also possible to sell the assets to the new limited company, which typically includes stock, fixed assets and goodwill.  This last asset class, goodwill, provided a tax planning opportunity.

Firstly, the sale of the goodwill would be subject to Capital Gains Tax (CGT).  However, provided that the owner had worked in the business for 12 months, it was possible to claim Entrepreneur’s Relief (ER).  This is 10% of the value of the goodwill, after deducting the CGT annual exemption, currently £11,000.

Secondly, the company would write off the goodwill over its expected useful life (known as amortisation), and would receive tax relief on the annual goodwill written off.

The company doesn’t pay the seller for the assets it has just acquired, as it doesn’t have any money, so leaves the balance owed in a director’s loan account within the company, which is available to draw against at any time with no tax due.

The 2014 Autumn Statement has effectively restricted this.  In respect of business disposals made on or after 3 December 2014, ER is not available for the sale of goodwill to a limited company, so normal CGT rules apply.  ER will still be available on the sale of other assets on incorporation, just not goodwill.  See here for details.

Also, the company will not receive tax relief on the amortisation of goodwill.  Again, see here for details.

However, there are still a few good reasons to incorporate a business.  If you wish to discuss further, please feel free to contact us.

If you are self employed and trade as a sole trader (or a partnership), you may wonder why you should incorporate your business – i.e. transfer your business to a limited company.  There obviously has to be some benefit.

Well, there is.  In broad terms, there are 3 main reasons why businesses choose to trade through a limited company:

• Limited liability.
• Enhanced reputation (larger organisations prefer to deal with limited companies).
• Lower tax rates.

Without doubt, one of the biggest attractions is the lower tax rate, which effectively saves on National Insurance.  For instance, if you make a taxable profit of £30k as a sole trader, your tax charge is likely to be in the region of £6.5k.  If you operate the same business through a limited company, the tax liability can drop to £4.5k, saving £2k in tax each year.

However, there are many other factors to consider.  For instance:

• A limited company is a separate legal entity, so the money that sits in the company bank account belongs to the company, not the shareholders or directors.
• If you take money out of the company without ‘legitimising’ it (using such things as dividends) and the money is outstanding at the year end, there are corporation tax and benefit in kind implications.
• You need to ensure that you act responsibly, which includes making sure that the company doesn’t trade whilst insolvent (which can seriously affect your chances of getting credit from suppliers).
• You may need to change the way you claim tax relief on motor expenses, particularly if you use a car.
• If you are a subcontractor operating under ‘gross’ status, transferring your business to a limited company will mean reverting to 20% and reapplying for gross status when you have met the criteria.

The aim of this article was simply to highlight that incorporation is a straight forward process, but there are many things that should be considered before a decision is made, and traps to avoid once the decision has been made.  If you want to read about how things can go wrong, see this recent case study.

We can help in the process, including setting a limited company up.  Please contact us if you wish to discuss this further.