Commentary

B9.105 Incorporation—income tax aspects

Business tax
Business tax | Commentary

B9.105 Incorporation—income tax aspects

Business tax | Commentary

Incorporation—income tax and NIC aspects

B9.105 Incorporation—income tax aspects

Incorporation, by definition, will invariably result in a cessation of the trade for income tax purposes. The only exception to this rule is when only part of an existing trade is to be carried on by the company.

On cessation, all profits earned subsequent to those taxed in the previous tax year will be subject to tax (see B8.105), less a deduction for overlap relief (see B8.107). This is the case regardless of whether or not cessation occurs at the end of a 12-month accounting period. It should not be assumed that there are advantages in being able to secure relief for overlap profits because the cash flow impact of funding the final income tax liabilities on pre-incorporation profits out of taxed (post-incorporation) income must also be taken into account.

Cash flow

Many sole traders fund their current tax liabilities out of current income.

Example 1

Peter's tax liabilities for 2018/19 are computed by reference to his accounting period that ended on 30 April 2018. The tax is payable on 31 January 2019, 31 July 2019 and 31 January 2020. Like many self-employed people Peter will fund these liabilities out of current income. This will often be the case even though the profits being taxed are those of a 12-month accounting period that started as long ago as 1 May 2017 and ended on 30 April 2018. Taxpayers like Peter are, therefore, using current earnings to fund the balancing liability for 2018/19 about two

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