As some clients look to swerve the more onerous aspects of Making Tax Digital or indeed personal taxes more generally, we may be seeing a rise in the number of existing businesses converting to an incorporated status (and in the light of the latest consultation as outlined elsewhere in this newsletter, the words “frying pan “ and “fire” nay not be far from the lips of some advisers).
The route is fairly well posted although if one is looking at a potential capital gain which can be sheltered by incorporation relief, a formal claim will now be required (prior to 5th April 2026 the relief was given automatically). Where there is no such liability clients will often prefer to merely sell the working assets of the business to the new company, making a claim under s214 CAA 2001 for the transfer to be made to a connected person at pool value for tax purposes (but open market value for the accounts). This can be advantageous, but the election does need to be made by both parties, and care needs to be taken that no artificial tax advantage (E.g. acceleration of relief) is procured.
There are, however, some more practical issues which will need to be considered. The list is nor exhaustive, but these could include:
- Ensuring that customers and suppliers are advised.
- Getting a company bank account set up in good time.
- Registering the new company for VAT and checking that the VAT conditions for Transfer of Going Concern are met.
- Advising insurers of the new business status
- Changing the relevant DEFRA registrations (which may include special arrangements to run off existing subsidy agreements)
- Setting up a formal and properly evidenced arrangement so that any transactions which are accidentally carried out in the old business after the transfer are done so as agent for the new company.
- Obtaining accurate values of the assets (and liabilities) changing hands – these may not be the same as the book value, particularly in the case of depreciated fixed assets.
- Setting up a new PAYE scheme and ensuring employment records are transferred.
- Registering machinery and vehicles in the new company with the DVLC
- Sorting out occupation rights if land is being retained by the former partners and rented to the new company – or obtaining landlords’ consent (which might NOT be a foregone conclusion)
One point which is sometimes overlooked is that the sale contract will need to be approved by the board of the new company. Where Company House standards Articles of Association are adopted this may mean that the old owners (and new directors) may be conflicted and thus unable to attend and vote at the meeting, and in all probability the meeting may also be inquorate with potentially serious consequences for the future. The matter can probably be resolved by appointing some temporary directors or changing the Articles. It is, however, a problem best dealt with a few days before the handover day rather than at the last minute or even several months later.
Using incorporation simply to avoid MTD is sometimes suggested, particularly in some of the more adventurous social media sites. For a simple small business it is probably a sledgehammer to crack a particularly annoying nut. In other cases, where there are perhaps multiple income sources or the prospect of significant profits in future, it may have a role, but the process itself will probably require an interdisciplinary team of accountants, land agents and solicitors to be safe on all fronts.
