Changing your business to a limited company

The advantage of using a limited company is a beneficial rate of tax and certain limited liability protection from insolvency.

Once your new company is set up and registered at Companies House it is ready to trade. You need to open a new bank account in the company name and inform both customers and suppliers of your change in status. Employees can be transferred over under TUPE which is the transfer of undertakings (protection of employment) regulations so there is no need to make them redundant and re-employ them again. For the assets used in your un-incorporated business you can simply raise a sales invoice to your new company. This will transfer their ownership.

If a business has traded for a number of years it will have built up a reputation in its established environment. This is referred to as goodwill which has a value when you incorporate. The value attributable to goodwill can be determined in a commercial transaction where a buyer pays an amount for a business in excess of its total net assets but when the transfer is between connected parties i.e. your new company and your old business, the valuation is a bit more complicated.

HMRC have a dedicated team to check the valuations that we propose and the form CG34 – Post-transaction valuation checks for capital gains can be used to obtain their approval. A business will need to trade for at least three years so that its accounts can accompany the valuation. Once the value has been agreed with HMRC the amount can be capitalised as an asset in the new company accounts with the opposite entry being a loan outstanding to you. The tax advantages available from doing this are as follows;

Providing certain conditions are met:

  • Capital gains tax at 10% on the disposal of the old business after deducting the annual allowance
  • Corporation tax relief on the amortisation (depreciation) of the goodwill asset
  • Higher rate tax relief
  • A genuine reduction in income for children’s tax credit claims

As a director of a limited company it is possible to receive ‘director’s fees’ equal to the secondary threshold limit for national insurance each year. This amount is currently £7,696 and provided it is your only source of employment or pension income it is received tax free but is deducted in full against income in arriving at the company’s taxable profit.

As a shareholder of the company any remaining profits after paying corporation tax can be paid to you as a dividend. Dividends are classed as investment income and are taxed after non-savings & savings income. If your total income for a tax year does not exceed the basic rate band currently £41,450 there will be no further tax to pay on the dividends. As there is no national insurance on dividends it makes the limited company more tax efficient than a sole trader or partnership business.

We have helped many growing businesses incorporate over the past years which have enabled them to reduce their annual tax bill. As we only charge on the tax you save, subject to a minimum administration fee, you will always be better off.

The relevant legislation relating to this report is as follows:

  1. Entrepreneurs’ relief introduced in the Finance Act 2008 at sections 169 of the Taxation of Chargeable Gains Act 1992
  2. The corporate intangible assets regime contained with chapter 16, part 8 of the Corporation Tax Act 2009

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