The Autumn Statement, delivered by the Chancellor in early December, included a surprising announcement of an immediate change to the taxation of goodwill for business incorporations. This article looks at how this could affect future incorporations of health and care businesses.
In the 'old' days
In the past, care home businesses were frequently operated via a partnership structure. In recent years, however, many such businesses have chosen to incorporate and now run their business through a company. Such decisions were largely driven by commercial and legal reasons but tax, as always, plays a big part.
One of the main tax benefits of an unincorporated care business selling its trade and assets, (including goodwill), to a company owned by the same individuals was that the sale proceeds could be left as a loan, which was then repaid out of the profits generated by the company post sale.
Providing certain criteria were met, Entrepreneurs' Relief could be claimed on the disposal, resulting in tax at a rate of 10%. The company would then be subject to corporation tax at a rate of 20% on profits, the balance of which could then be used to repay the directors loan account with no additional personal tax liability.
This was a very tax efficient way to extract cash from the company, which would otherwise be subject to income tax if it were drawn as salary or dividends (with national insurance also possibly applicable to salary payments). This route was also favourable in comparison to income tax on the same profits of up to 45% plus national insurance for the individual, had the care business remained unincorporated.
In addition to the above, new businesses, broadly those established after 1 April 2002, the amortisation (depreciation) of any goodwill transferred to the new company reduced the company's corporation tax bill.
It's all history
In an unexpected move, the Chancellor changed the landscape for business incorporations as part of the Autumn Statement, such that the taxation of goodwill was changed effective from 3 December 2014, the date of the announcement.
Firstly, goodwill acquired by a close company (broadly one controlled by five or fewer people) related to the seller no longer qualifies for Entrepreneurs' Relief. This change increases the tax payable by a care business on a future incorporation from the Entrepreneurs' Relief rate of 10% to the main rate of 28% (or possibly 18% to a limited degree).
With the tax rate on the sale increased to 28%,...