When should you incorporate? Reply

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When and how should you incorporate a business?

I have often heard sole traders say that it will cost too much to become a limited company. This is because many sole traders prepare their own accounts and do their own self assessment returns and are unaware that the cost involved in becoming a limited company really aren’t that high.

What is a Limited Company?

A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

What is a Sole Trader?

If you start working for yourself, you’re classed as a self-employed sole trader – even if you’ve not yet told HM Revenue and Customs (HMRC).

As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.

You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.

You’re personally responsible for any losses your business makes.

The key Advantages and Disadvantages of Companies are shown below.

Incorporaton Calculator & 2016/17 Dividend Tax Calculator Allows calculation of tax on profit and dividends

The Incorporation Spreadsheet created by Practice Track is an Excel spreadsheet which shows the tax savings that are available to sole traders and partnerships if they chose to incorporate. It can also be used for incorporated clients to compute the taxes payable under the new dividend regime.

It is therefore a useful tool to use for planning purposes for clients who are already incorporated and can reinforce the point to many clients that they are still saving tax by being incorporated.

It also caters for salary and dividend profit distribution between multiple director-shareholders (up to six).

The detailed output sheets are not password protected so you can insert extra calculations or override the formulae if you wish.

How do you form a Limited Company?

You can form your company directly with Companies House for £15, it normally takes 24 hours

You’ll need:

  • the company’s name and registered address
  • names and addresses of directors (and company secretary if you have one)
  • details of shareholders and share capital

Personally, I find it easier to use a formation agent such as Company Wizard for £16.99

Often using an agent will mean the company is formed quickly, sometime within a couple of hours.

There are three different ways in which the sole trader can be incorporated. It’s highly likely that Incorporation Relief will be the best way to incorporate in most cases, however, it is worth considering all the options when advising clients.

These are: 

Incorporation Relief

Incorporation Tax will apply automatically unless the transferor elects for it not to in writing.

To benefit from Incorporation Relief the business will need to be valued at open market value including Goodwill prior to transfer to the limited company

There are 3 conditions which must be satisfied before incorporation relief can be claimed:

  1. The business transferred must be a going concern;
  2. All assets owned by the business (except cash) must be transferred to the limited company.
  3. The consideration paid for the business assets must be wholly or partly in shares.

Example You transfer your business in return for shares worth £100,000. You make a profit of £60,000. You later sell the shares and need to work out the gain – their cost for your Capital Gains Tax calculations is £40,000 (£100,000 – £60,000).

Example Your business is valued at £100,000 when you transfer it, and you receive 80% in shares (£80,000) and 20% in cash (£20,000). You made a gain of £50,000. You can postpone 80% of the gain (£40,000) until you sell the shares. You need to pay Capital Gains Tax on 20% of the gain (£10,000) in your next tax return.

The official helpsheet with further advice is HS276.

Holdover Relief

Holdover relief applies when business assets are transferred from an individual and avoids capital gains on the chargeable assets becoming immediately liable to capital gains tax.

Example

You sell a shop worth £81,000 to your brother for £40,000. It cost you £23,000. Include the £17,000 gain (£40,000 minus £23,000) when you’re working out your total taxable gain.

This method is useful if you want to keep a property outside of the company and prefer instead for the company to pay a rent for the property. This will have certain tax advantages but it is important to note that this can mean that the owner will lose entitlement to entrepreneurs’ relief on the property, because the property would then be regarded as an investment property.

Selling your Sole Trader Business to your Limited Company

Until December 2014, this was often the preferred option because Entrepreneurs Relief could be applied to gains and in many cases the company could write down the Goodwill against Corporation Tax.

However, this option could still be worth considering.

Let’s take a typical scenario:

  • Mr Smith has been running a small garage for a few years
  • he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
  • he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
  • at the time of incorporation, the goodwill of the business is valued at £11,100
  • Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £11,100 which, after deducting the annual CGT exemption (£11,100 2015-16) the company will pay
  • the acquisition of goodwill is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.

 

In Summary

These considerations all show that incorporating a sole trader business is not only straightforward but can also greatly benefit the sole trader client both financially and in the potential  flexibility it can provide for their business.

steve@bicknells.net

What are the Pros and Cons of Limited Companies? 1

Comparison Calculator

Click here to access the spreadsheet

What is a Limited Company?

A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.

Any profit it makes is owned by the company, after it pays Corporation Tax. The company can then share its profits.

What is a Sole Trader?

If you start working for yourself, you’re classed as a self-employed sole trader – even if you’ve not yet told HM Revenue and Customs (HMRC).

As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.

You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.

You’re personally responsible for any losses your business makes.

The key Advantages and Disadvantages of Companies are shown below.

Companies

How do you form a Limited Company?

You can form your company directly with Companies House for £15, it normally takes 24 hours

You’ll need:

  • the company’s name and registered address
  • names and addresses of directors (and company secretary if you have one)
  • details of shareholders and share capital

Personally, I find it easier to use a formation agent such as Company Wizard for £16.99

Often using an agent will mean the company is formed quickly, sometime within a couple of hours.

What are the next steps?

Once your company has been formed you need to:

  1. Open a bank account for the Company, this can often take a couple of weeks
  2. Register for Corporation Tax
  3. Register for other taxes (if they apply to your business) – VAT, PAYE, CIS
  4. Appoint an accountant (recommended but not compulsory) – Form 64-8
  5. Set up your accounting software
  6. Create shareholder agreements, contracts and other legal documents (if required)

 

steve@bicknells.net

Contact Us

How do you become self employed? 2

businesswoman is very multitasking

The UK saw the fastest growth in self-employment in Western Europe in 2014, according to the Institute for Public Policy Research (IPPR).

The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.

The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If this growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.

Your responsibilities

You’re responsible for:

Naming your business

You can use your own name or trade under a business name – read the rules for naming your business.

You must include your own name and business name (if you have one) on any official paperwork, like invoices and letters.

When should you get help from an Accountant?

Often business owners wait too long before they realise that they need help from an accountant.

Key reasons are:

– not understanding the difference between a book keeper and an accountant
– thinking that an accountant will just be an extra cost – the reality is that most accountants will save the business many times their cost
– thinking that accountants are just bean counters.

But if you choose a qualified and experienced accountant they can bring huge benefits: management tools to improve profitability, cost controls, tax savings, growth strategies, business planning, business structures and much more. So don’t wait too long – getting an accountant should be a priority for all businesses!

Common Mistakes

First off – not having a separate bank accounts. Many start ups try mixing business and personal transactions in their personal bank accounts, its a total nightmare, don’t do it, get a business bank account. Mixing things up will almost certainly have tax implications.

Not registering for tax or filing returns is another one. Getting things right at the beginning is extremely important and a CIMA Accountant can make sure that you choose the right business structure and will help you register for VAT, PAYE, CIS and other taxes. Choosing the right VAT scheme will save you tax. Not registering and filing returns will have severe consequences and lead to fines and penalties.

Also – contract mistakes. Ask your Accountant to review your contracts, they will be able to give you lots of useful tips.

Running out of cash: draw up a Budget and Cashflow and forecast how much cash you will need to run the business, looking at your cash cycle and managing it will be vital. If you need funding ask your Accountant for help, they will be able to look at all the options and help you choose the option that’s best for your business.

Accounting – many start ups fail to keep control of their accounting, by working with an accountant and using Debitoor or Sage One you can avoid this problem.

 

 

steve@bicknells.net

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What is Overlap Profit? Reply

what

Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080

Example 1 – one overlap period

A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.

The basis periods for the first three tax years are:

2010-2011 Year 1 1 October 2010 to 5 April 2011
2011-2012 Year 2 12 months to 30 September 2011
2012-2013 Year 3 12 months to 30 September 2012

 

The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.

Example 2 – more than one overlap period

The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).

The basis periods are:

2014-2015 Year 5 12 months to 30 September 2014
2015-2016 Year 6 12 months to 30 April 2015
2016-2017 Year 7 12 months to 30 April 2016

 

The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.

If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).

Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.

Tax Cafe point out in their guide ‘Small Business Tax Saving Tactics

Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?

There are two ways to gain access to your overlap relief: cease trading or change your accounting date.

Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.

Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!

There is also some useful advice in Helpsheet HS222

steve@bicknells.net

Can you save tax by transferring your self employed losses to a company? 1

business man in a crisis

If you are self employed and your business makes losses you have the following options to use the losses:

  1. You can reduce your current year tax bill
  2. You can offset it against earlier years (up to 3 years)
  3. You can carry your loss forward

You can’t claim:

  • if you use cash basis
  • where you don’t run your business commercially for profit
  • for part of a loss (you must claim the loss in full) – so it could wipe out your personal allowance
  • if you are part of a limited liability partnership
  • where your losses are tax-generated

If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.

Further details in HS227

What this might mean is that as a sole trader you waste your personal allowance because your profits are offset to zero by losses, however, if you had a company that paid you £10,600 you would keep your personal tax free allowance and be able to use the losses against the remaining profit.

The rules for company losses are noted below.

Trading losses that you’ve not used in any other way will be offset against profits from the same trade in future accounting periods. You don’t have to make any claim for this to happen. It’s done automatically if you fill in your Company Tax Return.

Corporation Tax Act 2010, Section 45

Carry forward of trade loss against subsequent trade profits

(1)This section applies if, in an accounting period, a company carrying on a trade makes a loss in the trade.

(2)Relief for the loss is given to the company under this section.

(3)The relief is given for that part of the loss for which no relief is given under section 37 or 42 (“the unrelieved loss”).

(4)For this purpose—

(a)the unrelieved loss is carried forward to subsequent accounting periods (so long as the company continues to carry on the trade), and

(b)the profits of the trade of any such period are reduced by the unrelieved loss so far as that loss cannot be used under this paragraph to reduce the profits of an earlier period.

(5)In this section and section 46 references to profits of the trade are references to profits of the trade chargeable to corporation tax.

(6)Relief under this section is subject to restriction or modification in accordance with provisions of the Corporation Tax Acts.

 

steve@bicknells.net

Would a Partial Capital Allowance Claim reduce your tax bill? Reply

Businessman get idea

It is not necessary to claim the maximum capital allowances available or even claim them at all, crazy as it might sound there are situations when not claiming capital allowances can reduce your tax bill!

Sole Trader Example

The personal tax allowance is currently £10,600 (2015/16)

Lets assume profits are £15,000 and Capital Allowances available are £5,000, so that would reduce taxable profits to £10,000 which would waste £600 of the personal tax allowance.

It would therefore be better to only claim £4,400 in capital allowances and claim the remaining £600 in the following year.

Company Example

Companies within a Group can only offset losses in corresponding tax periods, so if the the capital allowances increase the loss in one part of the group beyond the profits of the rest of the group then there would be no benefit to claiming them in that period.

Companies can claim capital allowances in any of the following 3 tax years.

There is an excellent example of this in the following blog http://taxnotes.co.uk/a-basic-introduction-to-capital-allowances/

steve@bicknells.net

Is my hobby a business? Reply

Shopping chart on notebook isolated

The criteria used to assess if an activity is a hobby or a business are:

  • The size and commerciality of the activity.
  • The frequency of the activity and transactions
  • The application of business principles.
  • Whether there is a genuine profit motive.
  • The amount of time devoted to the activities.
  • The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).

HMRC have some great examples to help you decided, for example

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.

She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.

You can find more examples at HMRC

Many traders start off in a small way and don’t realise that they need to register with HMRC, they assume their activity will be treated as a hobby, but things can grow quickly.

You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money!

If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you.

Ebay say they work ‘hard to ensure that businesses that trade on the platform are aware of their tax obligations’.

It added: ‘We do not hesitate to share information with government agencies should there be evidence of wrongdoing. We require all sellers trading as a business on eBay to register for a business account.’

steve@bicknells.net

We love Self Employment in UK….. Reply

Business people group.

The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).

The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.

The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If current growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.

According to Tax Research UK

Something like 80% of all the new jobs created since 2010 are, in fact, self-employments, and there are a number of things that very significantly differentiate self-employments  from jobs.

The first is security:  there is none.

The  second is durability:  vast numbers of new small businesses fail, which is one reason why I doubt the official statistics.  I am sure they record the supposed start-ups  correctly but seriously doubt if they have properly counted the  failures.

Then there is  the issue of pay. The evidence is  overwhelming  that in recent years earnings from self-employment have, on average, declined significantly.

A worker’s employment status, that is whether they are employed or self-employed, is not a matter of choice. Whether someone is employed or self-employed depends upon the terms and conditions of the relevant engagement.

Many workers want to be self-employed because they will pay less tax, this calculator gives you a quick comparison between being employed, self employed or taking dividends in a limited company.

HMRC have a an employment status tool to help you determine whether a worker can be self-employed or should be an employee http://www.hmrc.gov.uk/calcs/esi.htm

In summary, why is it attractive to use Self Employed Freelancers?

  1. Skill is more important than location in many business sectors – we live in world where internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
  2. Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
  3. Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
  4. Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
  5. 110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.

So do you think self employment is good for the UK?

steve@bicknells.net

Business Disclosure – do it right or risk a penalty Reply

Young woman with checklist over shoulder shot

Displaying the right information on the right documents is important, so here is a quick reminder…
LetterheadThe rules for companies are set out in The Companies (Trading Disclosures) Regulations 2008

The key sections is…

6.  (1)  Every company shall disclose its registered name on—

(a)its business letters, notices and other official publications;

(b)its bills of exchange, promissory notes, endorsements and order forms;

(c)cheques purporting to be signed by or on behalf of the company;

(d)orders for money, goods or services purporting to be signed by or on behalf of the company;

(e)its bills of parcels, invoices and other demands for payment, receipts and letters of credit;

(f)its applications for licences to carry on a trade or activity; and

(g)all other forms of its business correspondence and documentation.

(2) Every company shall disclose its registered name on its websites.

Companies House enforce the regulations and can levy penalties of £1000 for non compliance.

Sole Traders can trade under their own name or a “trading as” name provided its not offensive, contains sensitive or resticted words, includes PLC, Limited Company, LLP or is similar to another business (check the internet for potential conflicts).

Partnerships should show all the partners names or if there are more than 20 partners it may keep a list of names at its principle place of business.

steve@bicknells.net

include the terms public limited company (plc), limited (ltd), limited liability partnership (LLP) – See more at: http://www.nibusinessinfo.co.uk/content/names-sole-traders-partnerships-and-limited-partnerships#sthash.7qxBYEey.dpuf
include the terms public limited company (plc), limited (ltd), limited liability partnership (LLP) – See more at: http://www.nibusinessinfo.co.uk/content/names-sole-traders-partnerships-and-limited-partnerships#sthash.7qxBYEey.dpuf

The tax benefits of goodwill on incorporation? 6

Business people

Lets start with a typical scenario:

  • Mr Smith has been running a small garage for a few years
  • he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
  • he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
  • at the time of incorporation, the goodwill of the business is valued at £100,000
  • Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief (note rules changed 3rd December 2014 and ER is no longer available normal rates of CGT now apply)
  • the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.

In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax. (note rules changed 3rd December 2014 and Section 849C CTA2009 prevents this on related party goodwill)

However, please bear the following in mind:

  1. If the business started before 1st April 2002, Corporation Tax Act 2009 s895 prevents the company from claiming a deduction against corporation tax, also refer to HMRC Spotlight 1: Goodwill – companies acquiring businesses carried on prior to 1 April 2002 by a related party
  2. Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
  3. Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
  4. In general it is expected that intangibles will have a useful life of no more than 20 years (note new rules – FRS102 states
    “If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years.”)
  5. Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief

steve@bicknells.net