Businesses can be said to have a life cycle. During that lifecycle they change and will have different needs. It may be expansion, contraction, diversification or concentration.
One change is the “vehicle” through which the business operates. Many businesses start life as a sole trader or partnership. With expansion and increased turnover and profits there has been in the past a good argument to incorporate, that is, become a limited company.
Indeed this was actively encouraged by previous governments and there were some nice tax breaks, namely Entrepreneurs Relief.
To incorporate a sole trader or partnership would need to value its assets and liabilities and goodwill. Having obtained HMRC approval to the valuation of goodwill this could be introduced to the new limited company by way of the directors’ loan account. The benefit would be that this disposal would attract Entrepreneurs relief and in effect the disposal would be at 10% and enable the director to obtain income effectively at 10%.
Unfortunately in December 2014 the government specifically withdrew the ability to claim Entrepreneurs relief on this transaction. Incorporating goodwill in this way will now result in a tax charge of 18% or 28%.
This makes incorporation not as attractive as it was.
Depending upon turnover, profits, directors’ circumstances etc it may still be advisable to incorporate and every case must be reviewed in isolation. There are still tax breaks for dividends as opposed to salary or trading profits.
Thinking of incorporating? Nathans can review your circumstances and help with the decision.