Transferring from a sole-trader or partnership, to a Limited Company is sometimes recommended by accountants for tax planning reasons or to benefit from Limited Liability and they will consider the following issues.
Work out which side of a tax year end to transfer the business because this decision will affect taxable income (and rates) between tax years.
A Company is a separate legal entity; this needs to be reflected in all legal documents including invoices, contracts, your website and any insurance policies.
Capital Gains Tax and hold-over elections (s.162/s.165 elections):
Transfer of a business can result in Capital Gains Tax. Valuation of assets (particularly ‘goodwill’) may be necessary and ‘hold-over elections’ considered and, if necessary, submitted to HMRC in order to reduce/postpone Capital gains Tax.
Employees should be formally laid off with P45’s and transferred, prior to the transfer (in accordance with TUPE rules) to the Company’s payroll.
To transfer the VAT number, use form VAT 68 as soon as the business is transferred.
Our profit is much better than last year. My Co Director and I were thinking of paying a bonus. What is the best way to do this?
Generally, for small Companies, dividends are still more tax efficient than salary because they avoid 13.8% Employer’s National Insurance plus 12% Employee’s National Insurance. So usually it’s better to vote, and pay dividends – but it depends on your income and tax situation.
But occasionally, paying a salary bonus is worthwhile. It reduces your Corporation Tax so long as you pay it within 9 months of the company’s year-end. It may be more beneficial than paying dividends e.g. if there are some shareholders who aren’t directors (they would be entitled to a dividend but not a bonus); or if you want to pay a large personal contribution into a pension scheme and need higher earnings (salary not dividends) to justify the pension payment.
My Company of 16 years was set up with share classes: A – myself, B – wife, C – son, D - daughter, which lets us pay dividends in the most tax efficient way. Is this safe?
A: It’s not illegal, but HMRC do not like this ‘alphabet shares’ set-up. It is argued that these shares merely give a “right to income” and don’t represent ownership of the Company.
Some years ago, there was a court case (Arctic Systems), in which HMRC wanted a wife’s dividends to be taxed on her husband because he, effectively, earned the money and then gifted it to her. HMRC lost the case but it led to draft legislation to stop so-called “income shifting”. This was subsequently cancelled when the financial crash occurred.
If it is resurrected, these ‘alphabet share’ classes could again be in the firing line.
But...different accountants give different advice!
I opted out of receiving Child Benefit but my actual income is lower than I thought – what should I do?
You should probably opt back into the Child Benefit system. You can do this by using an online form at the HMRC website, or by calling the Child Benefit Helpline. If your taxable income is less than £50,000/year then you can spend all of the benefit. If it is between £50,000 and £60,000/year, you should keep some aside for repaying HMRC once your tax return has been submitted.
Ways to reduce your taxable income (and potentially qualify for more child benefit) include paying into a personal pension scheme; and transferring deposits and investments to a spouse. Also, if you have your own business, you could discuss with your accountant possible ways to reduce your income or move it into a lower earning tax year.
The ongoing controversy about avoidance and evasion continues to create a lot of heat but nothing constructive seems come out of the debate. Since the 1920’s the law has stated that we all have the right to order our affairs in a tax efficient way. We have the right to choose ways in which we pay less rather than more tax. Put another way – to avoid paying tax.
The difficulty is to identify when acceptable tax avoidance becomes ‘abusive and aggressive’ avoidance and then tax evasion, which is illegal. Evasion is relatively easy to spot as it always involves direct lies or omissions – not declaring income received etc. Avoidance is a much more difficult area because it is legal and there are so many views as to how “moral” it is.
There are numerous current examples of government sanctioned (or suggested) ways of reducing how much tax we pay – tax free ISA’s, tax relief on pensions, VCT investments etc. on the basis that the benefits to the country outweigh the immediate loss of tax.
Quite apart from any questions of morality the difficulty for the government is that, given the complexity of our tax system, it is remarkably hard to frame clear and robust legislation on what is prohibited.
I suggest the answer is for the government (and even the Opposition!) to have a proper debate on limits to tax avoidance and create a fast track tribunal to rule on disputes.
Talk the franchise proposition through with an accountant. If you still think it is a good proposition, decide on the business structure (e.g. Limited Company), bookkeeping records and VAT registration, as with any business.
Franchisees often pay a large lump sum for a number of different costs – but without paperwork to show the split between the various items, it’s potentially a big problem for your accountant.
Example: a franchisor may ask for £10,000 to cover: the licence; initial stock; equipment; training and support for several years. Each of these costs needs a different accounting and tax treatment – so get a breakdown with the costs for each individual item. Without this, HMRC could seek to treat all costs as Capital expenditure resulting in a higher tax bill for you – at least in the first year of the business.
- Capital allowances – tax relief on fixed assets
- 100% write off of capital items using AIA
- Current annual level - £200,000
- Writing down allowance claims when annual limit exceeded
A Limited Liability Partnership (LLP) is safer than a typical Partnership, just as a Limited Company is safer than a Sole Trader business.
Safer because: The advantage an LLP has over a Partnership is that partners in LLPs are not personally responsible for the LLP’s debts. The business debts of the individual are ‘limited’ and their personal assets are safeguarded just as in a Limited Company.
Tax savings: Since December 2013 and the Mixed Partnership Rules, neither normal partnerships nor LLP’s are generally as tax efficient as Limited Companies. However there is usually more flexibility in how you pay individual partners though either a partnership or LLP than through a Limited Company