Incorporation definition

View the related Tax Guidance about Incorporation

Transferring goodwill on incorporation

One of the assets transferred on incorporation is the business goodwill, which can then be used to create a loan account which can be drawn tax-free. There are specific tax treatments in respect of any goodwill transferred both for the person transferring it to the company and for the company acquiring it on incorporation, these are set out below. However, it is first necessary to consider the valuation of the goodwill.Valuation of and recognition of goodwillIt is essential that a careful approach is taken to the valuation and recognition of goodwill, as this is liable to be challenged by HMRC. In order to be transferred to the company, the goodwill must, in HMRC’s view, be free, ie not personal goodwill which remains with the individual running the business, and not attaching in some way to the property. If it does attach to the property, a higher property valuation should apply for which there is no corporation tax relief, though business asset disposal relief may be available on the higher value of the property. A

Capital gains tax implications of incorporation

The Incorporation ― overview guidance note summarises various tax implications of incorporating a business. This guidance note provides further details of the capital gains tax (CGT) aspects.The transfer of business assets by an individual to a company controlled by them is a disposal for CGT purposes. The disposal is deemed to take place at market value because the sole trader and the company are ‘connected persons’. The sole trader will therefore have a capital gain on the chargeable assets at the point of incorporation. The chargeable assets will usually be land and buildings, and possibly goodwill. It is unlikely that gains will arise on other assets such as plant and machinery as these will either be standing at a loss (for which relief is given via the capital allowances computation) or at a gain, which will be exempt under the chattels rules.The CGT liability arising on the disposals can be deferred by using one of two possible CGT reliefs:•incorporation relief (otherwise known as roll-over relief on the transfer of a business

BPR and changes to the business structure

This guidance note considers how changes to the business structure affect the BPR position of the assets concerned. It considers changes arising from incorporation, the formation of a partnerhsip, reconstruction, liquidation, winding up and otherwise ceasing to trade.IncorporationSole traders, partnerships or LLPs may choose to incorporate their business and to trade instead as a limited company. This may be for tax, liability or other reasons. See the Incorporation ― overview guidance note for further details about the tax effects of incorporation.There are different ways to incorporate and different tax effects follow from each. This note focusses on the BPR consequences of incorporation. The potential loss of the relief should be considered when choosing a method of incorporation.Incorporation for sharesAn incorporation for shares means that all of the assets and liabilities of the business are exchanged for shares in the new company. Any gains on those assets are rolled into the base cost of the shares. See the Capital gains tax implications of incorporation guidance

NIC implications of incorporation

OverviewThe Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the national insurance contributions (NIC) aspects.When a sole trader transfers their business to a company, they will be changing their status for NIC purposes.Sole traders pay NIC under Class 4 which are charged at the main Class 4 percentage on the trading profits between the lower profits limit and the upper profits limit. The additional Class 4 percentage is charged on profits above the upper profits limit. The Class 4 limits and percentages are:2025/26 tax year2024/25 tax yearLower profits limit£12,570£12,570Upper profits limit£50,270£50,270Main Class 4 percentage6%6%Additional Class 4 percentage2%2%SSCBA 1992, s 15(3), (3ZA)Note that Class 4 NIC (like income tax) are charged on the taxable profits of the business for the tax year, irrespective of whether the trader draws the profits out of the business. The trader’s actual

Retiring partners and cessation of partnership

This guidance note sets out the extension of loss relief for individual and corporate partners on the cessation of trade, the treatment of post cessation losses and losses which remain on incorporation of a partnership.Terminal loss relief for partnersWhere a partner either retires from partnership or there is a permanent cessation of a partnership’s business, special ‘terminal’ loss relief rules apply. The rules are the same as those which apply to sole traders where the partner is an individual, see the Sole trader losses on cessation guidance note and also the same as those which apply to companies where the partner is a company, see the Terminal trading loss relief guidance note.The rules for individual partners and corporate partners are similar in operation in that loss relief can be claimed for the year of the loss and the preceding three years. For corporate partners, the terminal loss relief provisions will only apply if the trade carried on in partnership was a separate trade in its own right. If it was not, the

VAT registration ― procedure

This guidance note provides information relating to the VAT registration procedure for persons established in the UK and includes:•points to consider when choosing the most appropriate date for the VAT registration to take effect•guidance regarding accounting for VAT from the date registration takes effect•points to consider when dealing with a late registrationFor information regarding VAT registration in the UK for non-established taxable persons (NETPs), please refer to the Overseas business ― registering for VAT in the UK guidance note. An NETP is any person who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated in the UK.For information regarding the conditions for recovering VAT on costs incurred prior to the date of registration, please refer to the Input tax ― pre-registration, pre-incorporation and post-registration guidance note.Although most applications to register for VAT are completed online, professional advice and assistance can add significant value, for example in relation to:•choosing

Input tax ― pre-registration, pre-incorporation and post-registration

This guidance note looks at the special rules for recovering input tax:•incurred prior to VAT registration•incurred prior to incorporation•after a VAT registration has been cancelledFor an overview of input tax more broadly, see the Input tax ― overview guidance note.For in-depth commentary on the legislation and case law in this area, see De Voil Indirect Tax Service V3.431–V3.432.Recovery of VAT incurred prior to registrationNormally, the right to recover input tax is contingent on a business being registered for VAT at the time at which a supply is received (ie the business must be a ‘taxable person’). However, special pre-registration input tax rules mean that (subject to certain conditions being met) a business can recover VAT incurred prior to its effective date of registration. Different conditions apply to goods and services and special record-keeping requirements apply. VAT incurred on goods purchased prior to registrationVAT can be recovered on goods supplied for business purposes before the effective date of registration provided:•the

Corporation tax implications of incorporation

The Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business including details of forming the new company. This note provides further details of the corporation tax aspects of incorporation.Charge to corporation taxThe company will pay corporation tax on its profits. For most sole traders there should be a significant reduction in the tax charged on the business profits compared with income tax and NIC. This is discussed further in the Calculating the tax benefits of incorporation guidance note.There is no income tax on ‘undrawn’ profits in a company. In contrast, sole traders pay income tax on the profits of the business, irrespective of the level of their personal drawings.Dividends are not deductible expenses in computing the company’s profits, but salary and related NIC payments are. For details, see the Allowable deductions for employee related expenses guidance note.For information on corporation tax computations, see the Computation of corporation tax guidance note.Duty to give notice of chargeability to corporation taxA company must

Company tax planning

The tax issues arising to a shareholder on a possible flotation are discussed in the CGT planning for shareholders guidance note. In addition to considering the tax issues for a shareholder, it may be necessary to do some planning for the business to be floated, including:•ensuring that all assets necessary to the running of the business are owned by the company, including intellectual property assets (it is not always clear who actually owns these, particularly where the company has grown over a long time) and real estate•separating out assets or trades which are not necessary for the business that is to be floated•incorporation of the business, where it is not already in a companyThis planning should be done as early as possible, to minimise any associated tax costs.Transfer of assets to the company by shareholdersWhere assets used by the company are owned by shareholders, either as a deliberate policy where the premises are owned by a shareholder as part of tax planning, or accidentally such as where intellectual

Income tax implications of incorporation

The Incorporation ― overview guidance note summarises various tax implications of incorporating a business. This note provides further details of the income tax aspects which include:•closing year rules / overlap profits which are relevant prior to the basis period reforms•capital allowances•stock•loss relief optionsThese are covered further detail below.Closing year rulesThe incorporation of a business by a sole trader or partnership brings about a cessation of trade for income tax purposes. The closing year rules for basis periods will therefore need to be considered for incorporations in the tax years up to and including 2023/24, including relief for overlap profits, see the Basis period (old rules) ― closing years guidance note.Prior to the abolition of basis periods, if the overlap profits were significantly greater than current profits for an equivalent time period, the cessation of the trade could trigger a substantial loss for which no relief is available. Careful choice of cessation date could help with this issue.See Example 1