Incorporation of a Business
The increases in income tax rates from 6 April 2010 may lead many sole traders and partnerships to consider incorporating. This will be particularly relevant when not all of the profits of the business are withdrawn. A summary of the effective rates of tax for the next three years for an unincorporated business compared to a limited company is shown in Table 1 below. The table assumes that the taxpayer has income in excess of £150,000.
On the face of it, trading through a limited company would only be of benefit where it pays corporation tax at the small company rate (i.e. taxable profits are less than £300,000). However, if some of the profits are retained these would be taxed at lower rates in a corporate entity compared to a sole trader or partnership.
Main tax issues to consider on incorporation
- Valuation of goodwill
- Capital gains tax
- VAT
- Stamp Duty Land Tax and Stamp Duty
- Employment related securities
Non-tax issues
Although clearly the tax issues are important there are many commercial and other non-tax matters which need to be considered on an incorporation. Some of the main ones are as follows:-
- Transfer of employees’ contracts under TUPE
- Banking and insurance arrangements
- Novation of contracts
- Companies Act requirements
Please note that this list is by no means exhaustive.
We have extensive experience on agreeing valuations of goodwill with HMRC as well as advising clients generally on incorporations.
For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.
