Incorporating a sole trade is not a conversion: the company is a new legal person, so the business has to be moved into it piece by piece. Employees transfer automatically under TUPE, but customer contracts, debts, assets, premises, the VAT registration and data protection registration each need their own step, and the sole trade has to be closed with HMRC.

Why does nothing move across automatically?

A sole trader and the business are the same person in law. Once a company is formed, it is a different person with its own name, number and bank account, and it owns nothing until something is transferred to it. The practical work of incorporation is therefore a series of transfers, done on an agreed date, with the paperwork to show what the company acquired and on what terms. Forming the company itself is covered in how to incorporate a limited company, and whether to do it at all is weighed up in sole trader vs limited company.

Most businesses record the move in a transfer agreement between the sole trader and the company, listing the assets, the liabilities the company takes on, the price and how it is paid (often in shares, a credit to a director’s loan account, or both). That document is also the evidence for the tax reliefs discussed below.

What happens to employees?

Employees are the one part of the business that does move automatically. Regulation 3 of the Transfer of Undertakings (Protection of Employment) Regulations 2006 applies to the transfer of a business to another person where an economic entity retains its identity, and GOV.UK guidance confirms the identity of the employer must change, which it does when a sole trader hands the business to a company. Under regulation 4, each contract of employment then has effect as if originally made with the company, and the sole trader’s rights, duties and liabilities under it pass to the company. Continuity of employment, holiday entitlement and existing terms are preserved.

The duties that catch small businesses out are procedural:

  • Inform and consult. Regulation 13 requires information to be given to appropriate representatives. Under regulation 13A, if there are no representatives and the employer has fewer than 50 employees, or fewer than 10 employees are transferring, the employer can inform and consult each affected employee directly.
  • Employee liability information. Regulation 11 requires the transferor to give the transferee details of each employee, including identity, age, written particulars and any disciplinary or grievance procedures and claims in the previous two years, at least 28 days before the transfer.
  • Penalty for failure. A tribunal can award each affected employee up to 13 weeks’ pay where the duty to inform or consult is broken (regulation 16(3)).

The company also needs its own PAYE scheme. HMRC says you must register as an employer before the first payday, even if the only person paid is yourself as sole director. Employers’ liability insurance of at least £5 million is required as soon as the company becomes an employer, unless an exemption applies; see employers’ liability insurance requirements.

How do customer and supplier contracts move?

Contracts do not follow the business by themselves. For ongoing work, the clean route is to ask each customer to sign a short letter confirming that the company takes over the contract from the transfer date and that the customer will deal with, and pay, the company from then on. Before writing, read each contract for clauses that restrict transfer or require consent, and for anything personal to you, such as a named individual providing the service.

Money already owed to the sole trade can either be collected by you personally after the transfer date or passed to the company. If it is passed across, section 136 of the Law of Property Act 1925 makes an absolute assignment of a debt effective in law where it is in writing signed by the assignor and express written notice has been given to the debtor. In practice that means a written assignment in the transfer agreement plus a notice to each customer with an unpaid invoice.

On the supply side, the simplest approach is to settle sole trade bills up to the transfer date and open new accounts with suppliers in the company’s name. Contracts signed for the company before it exists raise separate problems, covered in pre incorporation contracts.

How are assets and premises transferred?

Equipment, vehicles, stock and goodwill pass under the transfer agreement. If the whole business is transferred as a going concern, with all its assets other than cash, wholly or partly in exchange for shares, section 162 of the Taxation of Chargeable Gains Act 1992 defers the capital gain on those assets into the shares. For transfers made on or after 6 April 2026, Finance Act 2026 section 39 turned this into a relief that must be claimed, by the first anniversary of the 31 January following the tax year of the transfer. A transfer during 2026 to 2027 therefore needs a claim by 31 January 2029. The relief itself is explained in incorporation relief, and the accounting for goodwill in goodwill on incorporation.

Leased premises usually need the landlord’s consent to assign. Where the lease says consent is not to be unreasonably withheld, section 1 of the Landlord and Tenant Act 1988 requires the landlord, once served with a written application, to give consent within a reasonable time unless it is reasonable not to, and to give written notice of the decision with any conditions or reasons. Apply early, because the landlord may want a guarantee from you personally.

What happens to the VAT registration?

Two routes are available. You can cancel the sole trader registration and register the company afresh, or you can apply to transfer the existing VAT number to the company as a change of legal entity, using form VAT68 alongside the company’s registration. HMRC’s VAT Notice 700/9 warns that transferring the number is legally binding on both parties: the company becomes liable for any VAT outstanding on the old registration, and the sole trader loses any entitlement to repayments. Customs or excise approvals do not move with the number. Whether the transfer itself is outside the scope of VAT is covered in transfer of a going concern.

What else changes on the paperwork?

  • Trading disclosures. Business letters, order forms and websites must show the company’s registered number, registered office, where it is registered and that it is a limited company, and a sign with the company name must be displayed at the registered office and wherever the business operates, though not at a home address.
  • Bank account. The company needs its own account; customer payments into your old personal or sole trade account after the transfer date belong to the company.
  • Data protection fee. ICO guidance says one fee covers a single legal entity and separate fees are paid for each company that is a data controller, so the company needs its own registration if the fee applies.
  • Corporation Tax. Corporation Tax services should be added to the company’s business tax account when it starts to do business.
  • Closing the sole trade. HMRC must be told that you have stopped self employment, and a final Self Assessment return is needed.

How might this look for a small business?

Illustration only. Priya runs a florist as a sole trader with three staff, a shop on a short lease, a van and unpaid invoices of about £8,000. She forms a company in December 2026 and picks 1 February 2027 as the transfer date. By late December she sends the company the employee liability information and writes to each employee about the transfer. She applies to the landlord for consent to assign. The company registers as an employer and arranges employers’ liability cover, and she submits form VAT68 with the company’s VAT application.

On 1 February 2027 she signs the transfer agreement, assigns the debts and writes to customers with the company’s details. Because the transfer falls in the 2026 to 2027 tax year, her incorporation relief claim is due by 31 January 2029, and she tells HMRC that her self employment ended on 31 January 2027.

What mistakes come up most often?

  • Trading through the company before contracts, debts and the lease have been dealt with, leaving it unclear who owns what.
  • Forgetting that staff move automatically, then trying to issue new contracts on worse terms because of the transfer.
  • Missing the 28 day deadline for employee liability information.
  • Transferring the VAT number without checking the sole trader’s VAT position, and inheriting a liability.
  • Assuming incorporation relief is automatic for a transfer on or after 6 April 2026.
  • Keeping the old letterhead and website footer, which lack the company details the law requires.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.