Owner-Managed Businesses

Corporation tax implications of incorporation

Produced by Tolley in association with Julie Butler
  • 21 Mar 2022 07:23

The following Owner-Managed Businesses guidance note Produced 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

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 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 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:

  1. its first accounting period, ie of its existence when it first comes within the scope of corporation tax, and

  2. any subsequent

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