Corporation tax implications of incorporation

By Tolley in association with Julie Butler

The following Owner-Managed Businesses guidance note by Tolley in association with Julie Butler provides comprehensive and up to date tax information covering:

Corporation tax implications of incorporation
Charge to corporation tax
Duty to give notice of chargeability to corporation tax
Loans to participators
Finance costs on let property

The Incorporation ― introduction and procedure guidance note summarises various tax implications of incorporating a business. This note provides further details of the corporation tax aspects. For details about forming the new company, see the Incorporation ― introduction and procedure guidance note.

Charge to corporation tax

The 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 rates of up to 45% 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 tax

A company must give notice to HMRC of the beginning of: