Your accountant has suggested transferring your business to a limited company to save tax and NI. While you’re leaving the red tape up to her are there any steps you can take to make the transfer even more tax efficient?
Incorporating your business
Despite anti-avoidance measures sole traders and partnerships can save tax and NI by transferring their businesses to a company. An unincorporated business that’s transferred to a company is treated as if it permanently ceased. This means that special tax rules for calculating taxable profits apply. One of these says that the equipment owned by the business is treated as if it were sold at market value and acquired by the company at the same price. This usually results in adjustments to the tax deductions, i.e. capital allowances (CAs) previously claimed by the old business. The hassle of valuing equipment and making adjustments to CAs can be avoided if the sole trader/partnership and the company jointly elect to treat the equipment as sold and acquired at the tax value instead of the market value.
Another special rule applies when a business is incorporated. It says that a business is not entitled to the AIA on assets transferred to it. This means the business can’t claim CAs for the whole £90,000 expenditure on the vans all at once. Instead, it gets a CAs “writing down allowance”. This spreads the tax deduction over many years.
£90,000 CAs received by the unincorporated business), for the transfer of the vans to the new business. For relatively little effort the CAs trap, which substantially delays tax relief for the vans, has been avoided.