Transfer of a Business to a Company (Incorporation)- The Tax Issues

Transfer of a business to a Company (incorporation) – the tax issues

Introduction

Incorporation, or the transfer of a business to a Company, involves the transfer of an existing business to a new or existing company.

This will generally take place at market value (though if a trading business one might gift the assets and claim holdover relief) with the consideration usually taking the form of:

  • Cash,
  • Debt; or
  • Shares

To incorporate or not incorporate, that is the question

…and it is the $64m question.

As with most aspects of tax, it depends.

Essentially, we are moving from a tax environment where, either as a sole trader or partner, one will be taxed on the net profits as they arise. It essentially does not matter whether the profits are reinvested in the business or used to pay for holidays. One is simply taxed on the profits.

Things are more nuanced with a Company. There are two levels of taxation. Firstly, at the corporate level and, secondly, at the personal level. This is often referred to as the double layer of taxation.

As the corporation tax rates (19%) are quite low, where (and to the extent that) one reinvests back in to the business or makes other investments or leaves in cash within the corporate level then there is clearly.

However, anything taken out for personal expenditure is subject to a second chunk of tax. Depending on the how this is structured – dividend, bonus, loan etc – then the tax (and NIC) consequences will differ. However, for the first two of these cases, the charge to tax will be significant where paying tax at the higher rates of personal tax. So much so that where the profits of the Company are cracked open like a coconut and paid out to the shareholders there is likely to be little discernible benefit to them.

However, where value is left in the Company then this may well be a better way of operating (and do not forget the benefit of limited liability etc).

Further, anytax savings from incorporation are likely to be diminished if the sole trader is not paying tax at higher rates.

Tax compliance and other administration – transfer of a business to a Company

  • File annual accounts;
  • Depending on the size of the business, those accounts may need to be audited;
  • File a corporation tax return
  • There will also be other annual and other filings to Companies House that will need to be made relating to the ownership of the Company

What needs to be transferred?

As stated above, incorporation involves the transfer of a business to a new Company. What does this entail?

The general position is that one can transfer all or part of the business to the new company. However, this might have a bearing on the tax treatment of the transfer.

Where the business holds capital assets such as goodwill, land and property then there will be a disposal for capital gains purposes. This will be deemed to take place at market value on the assumption that the transferor and the Company are connected for tax purposes. This could leave to a charge to capital gains tax (in the absence of any appropriate reliefs). The availability of CGT reliefs might dictate the form of consideration in addition to the assets transferred.

Further, whether the business is being transferred as a ‘going concern’ will be relevant in terms of the VAT treatment.

In addition, where there is UK land and property being transferred to the Company one will need to be alive to the SDLT consequences of the transfer.

Transfer of a business to a Company – Capital assets

Please see our separate note in respect of capital assets on the transfer of a business to a Company as part of an incorporation.

Transfer of a business to a Company – VAT issues

For VAT issues on the transfer of a business to a Company then please see our separate note on VAT issues on incorporation.

 

If you have a query on any tax issues arising as a result of the transfer of a business to a Company then please do not hesitate to get in touch.

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