Happy New Year to all.

It is an election year so traditionally we would all be looking forward to some kind of tax give away as a bribe. Not this year. Anyone who has been paying attention will have noticed that recent Government announcements make bleaker and bleaker reading for those who like to plan their tax affairs efficiently.

The latest assault on previously legitimate tax planning was announced in the Autumn Statement and applies to tax motivated incorporations. The tax motivated incorporation is the transfer of a business that is not a company into a company triggering a disposal of goodwill. Provided the business was a trade, and subject to certain other conditions, the disposal is charged to capital gains tax at a mere 10%.

Whilst this may look like strange planning (an amount of tax will be payable to HMRC that would not otherwise have been due) there are longer term benefits since the company can pay the proceeds for the goodwill to the individual, the individual already having been taxed on these amounts. In addition, for disposals of businesses that commenced after April 2002, before the Autumn Statement the company was able to claim a tax deduction on the amortisation (gradual write off) of the goodwill in its own accounts.

This is not the extent of all of the motivations encouraging incorporations. Successive Finance Acts have increased the attraction of incorporating a hitherto unincorporated business. The most significant of these include:-

1. Introducing a distortion into the capital gains tax regime by providing for an effective 10% rate on disposals of some, but not other, assets;

2. Introducing a regime whereby a capital asset for an individual becomes a different type of asset entirely for a company including provisions allowing the write off of the cost of that asset for that company to be tax deductible;

3. Making corporate structures ever more attractive through lowering corporate rates of tax whilst increasing rates of national insurance;

4. Making the lifetime limit for Entrepreneur’s Relief so enormous (at £10m per person) that for most business incorporations, the gain on disposal would make no meaningful impression on future access to the relief for the person making the disposal so that any advantage received represents a real loss to the Treasury;

5. Introducing anti-avoidance legislation attacking the position of salaried partners in (unincorporated) partnerships.

If more and more legislation provides greater and greater advantage in pursuing one course of action over another, it is hardly a surprise that people are encouraged to do that.

From 3^rd December however that has all changed. For individuals who are shareholders in a company into which they transfer their business, there will not be any access to the 10% capital gains tax rate on disposals of trading businesses and nor will a purchasing company get any tax deduction for the write off of its expenditure on the goodwill acquisition. That does not mean that there is no capital gain however.  In fact there is a deemed gain on the disposal of goodwill measured at the market value of that goodwill so that, if you do not take any mitigating action, HMRC will be after you for a 28% slug of what they consider to have been the value of the goodwill that you transferred.   This can be avoided by the making of a claim for holdover relief – such a claim is now absolutely crucial to any trade incorporation (while it is still available anyway).

To be honest I am finding it very difficult to be indignant about this – there is another possible strategy transferring a trade in exchange for shares which can, in some circumstances, give a similar or even better outcome, although the application of the relief is less flexible. In addition, significant on-going term tax benefits of corporate rather than non-corporate operation remain.

What is surprising about these announcements is, perhaps, their timing, pre-election. I suppose that given the grim times in which we find ourselves, the new political reality is a competition as to who can look toughest on tax and immigration. This is about as inspiring as the misquoted Oscar Wilde: we are all in the gutter but some of us are looking at the stairs!