Many business owners find it advantageous to change the structure of their business, most often by incorporation, transferring their owner-managed business to a personal company.
The rules governing business transfers are designed to enable incorporation with the minimum of fuss and complication in that:
- if the entire business is incorporated in exchange for shares there is generally no capital gains tax (CGT) charge because of ‘hold-over relief’;
- in other cases, the owner can use gift relief to transfer assets CGT-free; and
- other rules smooth the transfer of trading stock, etc.
I have explained in previous months how entrepreneurs’ relief advantages have been removed from incorporations, and changes to dividend tax rules that come into effect next year (i.e. from 6 April 2016) will reduce some of the income tax advantages of putting your business into a company.
Capital allowances at 100%
But for many there will still be some tax advantage; and in any case, many businesses benefit from the other commercial advantages of using a company, including limited liability and the possibility of raising investment through schemes such as the enterprise investment scheme.
But there is one area where the rules don’t quite keep up with reality: capital allowances. This is a special problem if you’ve chosen, or been forced, to invest in new assets qualifying for the annual investment allowance (AIA).
The AIA allows 100% of the cost of investment in plant and machinery qualifying for capital allowances to be written off against tax in the year in which the expense is incurred. The current allowance is very generous at £500,000 per year. This was due to be reduced to £25,000 per year from 1 January 2016. Now, however, the reduction will be much less severe, and the new allowance will be £200,000.
A trap for the unwary
For businesses that continue that is good news. But there is a catch for anyone who is thinking of incorporating the business. If you’ve invested in new plant or machinery for your business you will lose the right to claim AIA if you incorporate the business, either by transferring it to a company before your accounts year would ordinarily have ended, or by transferring it to a company on the day after the last day of your current accounting year.
The reason for this is that AIA is not available for the year of cessation of the trade. Now you may say that the trade hasn’t ceased; it has continued in a different guise. But that’s not how the taxman sees it, and he’s recently won a case to prove it (Keyl v Revenue And Customs [2015] UKUT 383 (TCC)). In that case, a trader who had bought a new van made up his accounts to 31 March and then transferred his business into a newly formed company on 1 April. HMRC refused his claim because tax law treated the business in his name as ceasing and the company as starting a new business for AIA purposes.
That meant that he didn’t get to claim any AIA on the van and the next year the company couldn’t claim AIA either because it had acquired the van second-hand from him.
Practical Tip:
If you are planning to incorporate your business and have already invested in new plant, or know you will have to do so before the end of the year, delay incorporation until you have carried on trading unincorporated into the following year. That way, you will still be able to claim the AIA for this year and you’ll be able to transfer the business and assets to a company next year. But in this case be careful that you can use all the tax allowances.
If you can do so, another option is to delay the purchase of the new equipment until after the business has been transferred and then claim.
