Business clinic: Tax elections in move to a company structure

We’re considering changing from a partnership to a company; we understand there are decisions and elections we should make. What are these?

The use of the right elections could save considerable amounts of tax and should be considered well ahead of incorporation. Below is an outline of a few of the key elections, which have to be made within two years from the date of transferring to a company.

The transfer of plant and machinery to the company results in two choices for capital allowances. Firstly, all plant and machinery could be sold to the company at market value, which will either result in balancing allowances or balancing charges depending on the tax pool in which the asset sits.

If disposal of assets at market value results in a tax liability there is the option to make a joint (why joint – is it because it is made both on behalf of the closing business and of the company?) election for plant and machinery to be transferred to the company at its tax written down value, resulting in neither a balancing allowance nor a charge.

Note that that under both options no annual investment allowance can be claimed by the company for these assets.

Mike Butler
Partner
Old Mill

Stock transferred to the company is deemed to be transferred at its market value, therefore it is likely to create a profit for the partnership or sole trade.

This profit will be reported under income tax rules, with tax liable at the individual’s marginal rate.

To avoid generating such a profit, a joint election can be made to transfer the stock at whichever is the higher – its original cost, or the price actually paid by the company.

The benefit of this election is that any profit is deferred until the company sells this stock. Company profits are taxed at a flat rate of 20% or 21%, in contrast with the higher rates of Income tax at 40% and 45%.

Election for the herd basis should also be considered. As a rule, farm animals are dealt with as trading stock. However, some farm animals which are kept not primarily for resale but for their products (milk or eggs) or offspring (lambs or piglets), are in many ways more like capital assets.

Tax law recognises this by giving farmers the option of dealing with such production animals under the herd basis. Your accountant should be able to guide you further as to whether this will be of long-term benefit.

VAT will also be an important consideration and can be very complex. It is possible for no VAT to apply to any transfer of assets if the transfer can be treated as a ‘transfer of a going concern’ (TOGC). There are exceptions to this rule and these should be considered by your accountant.

It may also be possible to reduce tax payments on account for your personal income tax liability when you move to a company structure. However, you need to have sound figures on which to base any claim to do this.

Deliberately making a claim to reduce a payment on account to secure a cash-flow advantage, when knowing that the tax liability for the year would be higher than the amount paid, may result in a penalty from HMRC.

Fixed assets such as land and buildings are transferred on incorporation at their current market value. This may give rise to a capital gains tax (CGT) liability and possibly a stamp duty land tax liability.

Relief from CGT may be available if plans are made well in advance of incorporation. Also, the recent Finance Bill 2015 sets out changes to tax reliefs available on internally generated goodwill, often recognised on incorporation. These new rules require careful consideration.

The elections and considerations outlined above are not an exhaustive list – other matters such as the abolition of milk quota and National Insurance payments need to be well thought-out. The process of incorporation should be carefully considered and mapped out. Your accountant should be well placed to guide you on this.

The information provided in these articles does not constitute definitive professional advice and is provided for general information purposes only.