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Incorporations revisited


As the tax change dust begins to settle, is now the time to revisit your business structure?

We have written an article on the potential benefits of R&D tax relief claims which, as the article notes, are still only potentially available to limited companies.

If a farming business has the potential to be making substantial R&D claims, then this reason alone may be sufficient to reconsider the business structure and possibly incorporate. However, are there any other factors that might make incorporation attractive?

The timing of this article is, on the face of it, a little strange.

The main rate of Corporation Tax has just been confirmed as due to increase to 25% from 1 April 2023. The rate of tax on dividends, which is the way most company owners opt to extract the vast majority of their drawings, have also increased by 1.25% across all tax brackets since 6 April 2022. The super deduction, which enabled a 130% first year allowance on qualifying capital expenditure on plant and equipment by limited companies, is ending on 31 March 2023.

However, aside from the R&D point, there could still be other reasons to consider incorporation.

One of the biggest tax benefits to a corporate structure is being able to decide how much taxable income you wish to extract from a company.

Where the business is making profits that are far in excess of what the owners actually need or want to extract from the business, then even with a 25% main corporation tax rate, the benefit of paying only that rate rather than a 40-45% rate on that undrawn profit in an unincorporated structure can be very significant, and obviously recur year after year.

For a sole trader, that has both farming and rental activities, arguing that the property business forms part of the overall business in order to shelter the rental properties from Inheritance Tax (IHT) using the principles established in the Balfour and Farmer Business Property Relief (BPR) tax cases, can be tricky. If they are pooled together into a limited company then this could resolve that issue.

A barrier to incorporating has often been the potential one-off tax costs - Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). However, for the past decade or so, the Ramsey case has supported CGT incorporation relief potentially applying to defer the capital gains arising in such a scenario.

Furthermore, where the existing business is a partnership, invariably the partnership relieving provisions can reduce the chargeable consideration for SDLT purposes down to £nil, particularly for partnerships between close family.

There are, of course, both tax and commercial downsides that need to be considered and weighed against the possible tax benefits.

However, the point we are making in this article is that despite the increased rates of Corporation Tax and Dividend Taxation, some businesses will still be appropriate for conversion to a limited structure.

As always specialist advice should be taken because every case is different and some advantages/disadvantages will be more relevant to some than others.

This article is from the latest edition of our Agricultural Briefing. To receive future copies of any of our newsletters directly to your inbox, please visit  our preference centre  to register your interest.

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