The most important word to bear in mind when you start out in business is ‘preparation’ Spending some time creating a business plan can be invaluable It will bring to mind many issues which you may not have considered, such as financing, numbers of employees and the business structure, which will help you meet your aims. Do you want to run the business by yourself or in partnership with someone else, or would you rather trade under the umbrella of a limited company?
This is the simplest form of business since it can be established without legal formality. However, the business of a sole trader is not distinguished from the proprietor’s personal affairs
A partnership is similar in nature to a sole trader but because more people are involved it is advisable to draw up a written agreement and tor all partners to be aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate.
The business affairs are separate from the personal affairs of the owners but there are legal regulations to comply with.
The appropriate structure will depend on a number of factors including consideration of taxation implications, the legal entity, ownership and liability.
Limited Liability Partnerships (LLPs)
LLPs are a half-way house between partnerships and componies They are taxed in the same way as a partnership but are legally a corporate body. This means thai the personal affairs of the members can be separated from the business affairs.
Some matters are broadly the some no matter which route you take.
Choosing the right year end may in some circumstances, defer a tax bill but there will also be other commercial issues to consider
Tax will be due on the profits of your business but not all expenses the business incurs are tax deductible Careful thought needs to be given as to when and how much money is going to be spent
There are various ways of extracting profits from a company although careful consideration of the level and method needs to be given. For example payments by the company to an approved pension scheme are tax and Nl free!
In general, it is best to incur expenditure just before rather than just after the year end, as this will accelerate your tax relief However, it is important that you keep proper and comprehensive business records so that relief may be claimed. Examples of the type of expenditure to consider bringing forward include:
- • building repairs and redecorating
- • advertising and marketing campaigns
- • redundancy and closure costs
- • expenditure on plant and machinery.
Plant and machinery – Annual Investment Allowance (AlA)
The AlA gives a 100% write-off on most types of plant and machinery costs, including integral features and long life assets but not cars. of up 1o £100.000 (£50,000 limit applied for expenditure incurred by companies before 1 April 2010 and for other businesses before 6 April 2010) pa. Any costs over the AlA fall into the normal capital allowance pools at either 10% or 20%. The AlA applies to expenditure incurred on or after 6 April 2008 (1 April 2008 for companies) by all businesses. Special rules apply for accounting periods straddling these dates. The limit may need to be shared between certain businesses under common ownership.
Other plant and machinery allowances
The annual rate ot allowance is 20% First year allowances are abolished except a 100% allowance may still be available on certain energy efficient plant, goods vehicles and cars.
A 10% rate applies rate applies to expenditure incurred on integral features and on long life assets
The 20% rate also applies to cars, with an overriding maximum of £3,000 per car for expenditure incurred before April 2009. For expenditure incurred on cars on or after 6 April 2009(1 April 2009 for companies), costs will generally be allocated to one of the two plant and machinery pools Cars with CO2 emissions not exceeding 160gm/ km will receive a 20% allowance p.a. Cars with CO2 emissions over 160gm/km will receive a 10% allowance p.a.
Industrial and agricultural buildings and hotels
The annual rate of allowance is 1% from 6 April 2010 (1 April 2010 for companies) Special rules apply for accounting periods straddling these dates.
Whether you are a sole trader, partnership or LLR your profits will be taxed on a ‘current year’ basis, so that the business is taxed on the profits it makes during its lifetime; for example, if the business makes up accounts to 30 April each year, the profits for the year ended 30 April 2010 will be taxed in 2010/11.
By choosing the most appropriate accounting date, the payment of tax can be delayed, with significant cash flow advantages.
Unincorporated businesses usually pay higher rates of tax than a company but significantly less Nl.
Administrative costs are generally lower but you are personally liable for debts the business may incur. LLPs go some way to addressing this issue
A limited company may be advantageous, as the directors ore not personally liable for outstanding debts. However, a creditor, such as a bank, may require personal guarantees from the director.
Tax rates paid by the company may be lower than those paid by an unincorporated business However, there are effectively two layers of tax, one payable by the company and the other payable by employees/directors. Thus, profits made by the company need to be extracted by the directors in the most tax efficient manner.
You may wish to consider extracting profits in the form ot dividends rather than as increased salary or bonus. This can result in substantial savings in Nl. Planning should be undertaken before any money is taken out of the company.
Paying the Tax
The self employed may have to pay tax three times a year, namely:
- • 31 January in the tax year
- • 31 July following the tax year
- • 31 January following the tax year.
In certain circumstances, the first two payments can be waived.
For limited companies, the payment system can be more complicated
- • PAYE and Nl needs to be paid monthly even if the director is the only employee (although for smaller businesses it can be paid quarterly)
- • for most companies corporation tax is payable nine months and one day after the ena of the accounting period
As you can see, there are many issues to consider in deciding the best vehicle for your business. Pleose contact us to discuss the situation in detail
And finally – a word of warning
Many family businesses over recent years have sought to maximise tax and Nl savings by introducing an otherwise non-working family member or spouse into the business, sometimes as a co-owner
Transferring assets or interests in a business between husband and wife has always attracted the interest of HMRC Transfer of ownership of assets have always had to be real and complete, with no right of return and no right to the income on the asset given up
However, it appears that HMRC wish to introduce wide-ranging rules to try and block what they see as abusive tax planning from at some stage in the future.
How we can help
Whilst some generalisations can be made about Inheritance Tax Planning advice it is always necessary to tailor any advice to your personal situation therefore if you need advice regarding Estate Planning or Inheritance Tax then please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices. If you are interested in instructing us we will offer you a FIXED FEE service with no hourly charges or hidden costs. You have unlimited telephone support during our opening hours to assist you in making the correct strategic decisions. If you wish to view the other services that Keith Rogers Accountants offer then please visit our website KRA-Uk.com