Incorporating a business

When does incorporation relief apply?

automatically, where whole of the assets (except cash) are transferred ot the company.

How does incorporation relief work?

defers the gain and deducts it from the base cost of the shares.

When can gains be fully deferred re incorporation relief?

If you receive consideration from company wholly in the form of shares.

Can you get BADR on gain on transfer of goodwill?

Not if its a close company

when may it be advisable to disapply incorporation relief?

if you do not think you will be entitled to BADR on future sale of company shares

If you have brought forward capital losses you want to utilise

What taxes arise on the transfer of property?

SDLT on MV of property - arranged by solicitor and paid within 30 days of completing transfer of sale

How does interest work in the situation of being remunerated?

This happens when consideration in the form of loan stock is received.

No NICs.

Taxed as SI.

Company is required to withhold BR tax at source from any interest payments and remits this to HMRC on quarterly basis.

Company receives CT relief for interest expense

What is a typical remuneration strategy for a director?

Take small salary to utilise NI earnings threshold and then take dividends.

Salary of £12,570 and divi of £500 can be taken without any tax or NI liability - next £37,200 of divi drawn is taxed at low rate.

Drawing small salary gives entitlement to contributory benefits on retirement

VAT implications on incorporation?

No VAT liability as its the transfer of a going concer,

You must deregister your sole trade business for VAT within 30 days, the new company should then register.

Can the company take over the VAT number?

Yes but Newco will be become liable for unpaid VAT

Quirk when transferring business to company in exchange for consideration comprising more than 80% share capital?

Losses from sole trade carried forward can be set against income received by individual from the company.

How to treat profit on sale of assets in tax comp?

deduct it - it is an accounting adjustment

Are company formation costs deductible?

No - it is capital expenditure

Are lease transfer costs deductible?

No - capital

What is formula for marginal relief?

3/200 (UL - Augmented profit) * (Basic profit / Augmented profit)

How to calculate BC where asset has qualified for 130% FYA

100% proceeds = balancing charge

Is a valuation fee required by the bank deductible?

Yes

What isn’t chargeable for CGT purposes?

P&M transferred below cost, stock, debtors and cash.

What happens to the base cost of the new shares when IR is claimed?

The gain which is deferred will be rolled over and reduces the base cost of the new shares by this amount

How do you restrict incorporation relief?

IR Relief = Potential gain * (Issue of new shares / MV of business)

When thinking about IR, will the gain attributable to goodwill get BADR?

Not if the seller will hold more than 5% of the shares in Newco

What will the base cost of the assets transferred to Newco be?

Market value at point of transfer

What is a s178 election?

Joint election made on incorporation, the higher of cost or price paid by company can be used.

What happens to F&F ?

No WDA are available in period of cessation. Balancing adjustments will arise

What is a s266 election?

Joint election - made when transferring P&M/F&F - the assets will be transferred at TWDV.

When does s266 election need to be made?

within 2 years from date of transfer of assets

What is alternative to making s266 election?

Transfer for consideration of £1 to create balancing allowances - potentially saving tax at 40/45%

Why could it be advantageous for transfer of trade to be partly in cash?

Utilise AEA and access tax-free drawdown of loan account in future

IHT implications of retaining ownership of L+B personally?

Only eligible for 50% BPR on death

Pros of passing on shares rather than transferring a part o business?

Simpler and can retain control of company while gifting some shares

Pros of leaving shares and L+B in estate?

Tax-free uplift in base cost for CGT purposes

What does company need to do when it gets employees?

register with HMRC as employer and access PAYE online service

it will be issued with a unique PAYE reference number

What do you do when new employee gets a car?

File a form P46 within 28 days of end of relevant quarter in which car is provided

what does company need to report when new employees start?

include date employment started, address, passport number on full payment submission when employees first paid

report a starter declaration and determine the tax code which should apply

what if new employee has P45?

Use this to complete starter declaration - tax code used

If not - employee needs to make starter declaration themselves.

What does employee need to be given at the end of the tax year?

P60 showing total pay and tax details - give to employee by 31 May

When are Class 1A NICs payable?

22nd July

Why is it beneficial to claim AIA over FYA?

Reduces potential for a balancing charge

Purchase of asset via HP v Finance Lease

HP - qualifies for CA when brought into use

Finance leas - shown on balance sheet as assets, depreciation deductible for tax purposes.

Employee and director stole cash - what is tax treatment?

Theft by employee is allowable loss as risk of doing business

Theft by director not allowable

Business gifts with logos ?

Allowable

Business gifts (e.g. hampers) ?

Disallowed

how do you go about when a company has long period of accounts

sort taxable profits by doing adjustments all as one

time apportion total taxable profit to the relevant period

do capital allowances separately

deduct from each periods profit/loss

is interest on a loan note deductible for company?

only if individual has drawn the interest on the loan note (due to late paid interest rules for a close company)

when can a provision be recognised (i.e ok to deduct)

If there is no present legal obligation from a past event

if outflow of cash is not probable

if there is a lack of reliable estimate

Tax consequences of loaning money to partnership where you’re only connected to one of the partners

Even though the other two partners are not associates, the full loan is not apportioned and the loan falls under s455 provisions

what happens if a loan to family member is deemed to be made by reason of Director’s employment

loan should be included on P11D and Class 1A NICs payable

If loan is for qualifying purpose though benefit does not arise

How is the release of a loan treated for employee?

Treated as earnings and reported on P11D

The loan write off and Class 1A/Employer NIC is allowable for CT purposes.

Transfer of stock to connected company?

Gain arises

Joint election can be made to transfer at higher of transfer value and original cost.

What constitutes a “succession”?

Transfer of trade where owner owns at least 75% of both co,panies T

Transfer of P&M on succession?

Transferred at TWDV - automatic and cannot be disapplied

what is the consideration on incorporation?

MV excluding cash

can you allocate a crystallised gain to non-BADR assets?

no - you should apportion based on relevant gains