The incorporation decision

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As part of TaxCalc’s simple-step guide Rebecca Cave highlights the variation in tax savings which can be achieved by operating as a company.

This is an abridged version of the guide. To download the full version free of charge click here and follow the instructions.

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Making the decision to incorporate can save organisations tax in a variety of ways. However, the decision should be accompanied by a review of the business’s long-term objectives, as well as an assessment of the one-off costs, tax reliefs and ongoing savings and costs.

On-going costs and savings

Tax reliefs

If the business owners want to take advantage of certain tax reliefs for encouraging specific types of expenditure or investment, the business must operate through a company. The tax reliefs only available to companies include:

  • Enhanced reliefs for research and development (R&D tax relief).
  • Reduced tax on income from exploiting patents (Patent Box).
  • Enhanced reliefs for the creation of films, TV programmes, video games or theatre productions.
  • Tax reliefs for investors using the Enterprise Investment Scheme (EIS), or Seed Enterprise Investment Scheme (SEIS) or Social Investment Tax Relief (SITR). SITR is available to unincorporated charities.

Deductions

The accounting principles used to prepare accounts should be the same for all businesses but certain deductions may be allowed or disallowed for tax purposes where the business is conducted through a particular medium.

For example, companies are permitted to makes the following deductions, which are or will be restricted for an unincorporated business:

  • Interest and finance costs for letting residential property (restricted from April 2017).
  • Depreciation of intangible assets.

Companies are not permitted to use the cash basis of accounting or fixed rate deductions (also called simplified expenses), which may make a difference to the level of taxable profit.

Administrative costs

The additional costs and hassle involving in running a company should not be underestimated. For example, when operating as a company the business owner will need to:

  • Operate separate bank accounts for the company and maintain records of payments made to the business owners.
  • Draw-up and submit annual accounts that comply with company law to Companies House.
  • Submit an annual return to Companies House, including a filing fee.
  • Tag figures in the accounts and tax return to submit both online to HMRC.

A company will normally have to operate a PAYE scheme to report salary and benefits paid to its directors and any other workers. This will require monthly RTI reports, unless the directors are paid only annually. An unincorporated business is not required to operate a PAYE scheme if it has no workers other than the business owners.

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To download the rest of this report, including comparison tables and information on future tax law changes, click here and follow the instructions.

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Focusing on the available....

Tax Reliefs as a decision for incorporation is a great place to start in todays modern economy. Not every business will benefit from them, but every business that intends to do something scientific or technological should always bear these in mind.

They should also be considering their remuneration method as well, too often the owner and chief researcher/developer will take a low salary and high dividend (profits permitting) to the detriment of their claim. 

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