A sneaky new clampdown by the Chancellor?
Back in the summer (in July), we looked at the major changes to the company tax regime that have been introduced in this year’s Finance Act. And we asked,
- from a tax point of view, is it still advantageous to incorporate a sole trader or partnership business?
The Finance Act changes we had in mind here, of course, were the scrapping of the 0% band of corporation tax coupled with the withdrawal of the “dividend tax”. One of Gordon Brown’s notorious U-turns.
And we answered the question with a resounding
- yes, incorporation is still very much worthwhile.
We went on to list some of the principal tax advantages of incorporating – such as the lower annual tax and national insurance bills, the “tax payment holiday” of nearly 18 months following incorporation, the creation of a tax-free “” of up to £35,000 in the company, and so on.
But didn’t we miss out one other, substantial advantage? What about the special tax relief for intangible assets acquired by a company?
Good point.
Tax relief for the company on goodwill
Readers with good memories will recall an article on this very subject some three years ago – in the May 2003 issue of Finance Confidential to be precise.
There we explained how, under the intangible assets regime introduced in 2002, a company acquiring goodwill can get a gradual, annual tax write-down for the cost of that goodwill. So we asked: when a sole trader or partnership incorporates, will the newly-formed company qualify for tax relief on the goodwill it takes over?
The answer, we indicated, was a mixture of good news and bad. The bad news first.
The general rule is:
“Relief is denied in respect of the goodwill acquired by a company on the incorporation of a sole trader or partnership”.
However, we explained that this was not a blanket ban. There’s a notable exception:
“Relief is not denied where the goodwill was created by the sole trader or partnership after the new rules came into being (that is, on or after 1 April 2002). So an unincorporated business which starts from scratch at any time from April 2002, and which then builds up goodwill and subsequently incorporates, would... fall squarely within this exception. And tax relief for the goodwill could be claimed”.
Clearly, as time is now moving on – and April 2002 is receding further and further into the distance – more and more businesses which start up, and which then incorporate, will begin to qualify for this valuable relief. In fact, it’s already started to happen.
But wait.
Now you see it, now you don’t?
Could it be that, having seen the door slightly ajar here and set to open ever wider as time goes by, the Chancellor has now slammed it firmly shut?
Buried within this year’s Finance Act is a section which seems to outlaw tax relief for incorporation goodwill from 5 December 2005 (the date of his Pre- Budget Report). In fact, the jury is still out on the precise interpretation of this brand-new legislation (we give some technical comments in the Supplementary Technical Notes at the back of Finance Confidential), and we are seeking clarification from the Revenue here.
We hope to be able to report back shortly. In the meantime, we fear that those who thought they might benefit from this additional incorporation bonus might be disappointed. However, as mentioned before, many advantages still remain. So our message to sole traders and partners remains unchanged:
Carry on incorporating.
And to those who did start new businesses in April 2002 or later, and who then incorporated before 5 December 2005, we say:
Make sure that your company claims its entitlement to intangible assets relief – curtailed and modest though it may turn out to be.
And we will let you know in due course whether the Revenue can be persuaded to look at the new rules more favourably than we fear.
Robert Bond has been a practising chartered accountant for over 20 years.
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