Converting to limited company status? The choices just got harder

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 in 2015 on goodwill 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.

We can look closely at your circumstances and give you appropriate advice in light of all the recent changes. Get in touch to discuss things further.

Graeme Loudon
Partner