Following changes to the rules around
partnership and LLP structures, many businesses have been looking to convert to
limited company status. But the
announcement in the Chancellor’s Autumn Statement on goodwill has now left
people scratching their heads.
When the
Chancellor announced changes to entrepreneurs’ relief in the Autumn Statement,
it came as something of a bolt out of the blue. With more and more clients in
partnerships and LLPs looking to convert to limited company status, the news
that relief would no longer be granted on the sale of goodwill caused many
owners to revisit their strategy.
The context,
of course, is a series of moves which have made partnership status less attractive.
For many businesses, a partnership structure has the flexibility needed to
bring new people in to an equity stake.
Recent changes mean that ‘salaried members’ have to go on to the payroll
and the use of ‘corporate partners’ is, in many cases, prohibited, leading to
potentially very high tax rates being suffered irrespective of whether profits
are available to be drawn out.
As a result,
many accountants and advisers have been helping clients to make the transition
to a limited company. Although this structure is more rigid, one of the clear
benefits of the change of status has – until now – been the ability to pay only
10% tax on a profit from the sale of goodwill to the limited company.
When the
Chancellor announced that this would no longer be possible, it was mentioned
within the general context of closing loopholes on tax avoidance. The decision has,
however, caused a great deal of concern – particularly to businesses which were
in the middle of the conversion process.
For some it’s a “double whammy”, because as well as removing the
availability of entrepreneur’s relief, any deduction within the company for
amortisation relief has also been removed.
With a little
time to reflect, it’s clear that the decision to convert to limited company
status is now much more finely balanced, but many clients may still decide to
make the change. There’s always the option of gifting goodwill on incorporation
rather than selling it. It’s also important to look at the question of whether
you have ‘base cost’ in your goodwill, in circumstances when it might have been
bought from previous retiring partners. If so, there may be a small tax
advantage still, although it’s fairly marginal.
Ultimately,
the circumstances which were provoking LLPs and partnerships to change their
company structures haven’t gone away. It’s just that the Chancellor has removed
one of the attractive carrots that was previously dangling in front of business
owners. Your accountant will be able to look closely at your circumstances and
give you appropriate advice in light of all the recent changes.
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