Tax shock for small businesses…

[Brian Hays]

Super more tax, just what most of us need (:) (:)

[John Childs]

Time to register offshore then.

Any suggestions as to where?

[Phill Fenton]

This has come about because of the tax advantages that exist for Limited companies over sole traders/partnerships. We had been advised to change the format of our business to a limited company to take benefit of these tax advantages. However, this is making me think again about changing the trading format of our business 🙄

[John Childs]

Phill….

Don’t forget the other advantages of trading as a limited company.

Unless you are trading as a sole proprietor with no employees (except maybe a wife or partner) it would still be worth it in my opinion.

[magpie]

This is one of the reasons I tossed this item in Phil. I’m wondering which way to go on this
next year. I’m sure the program also mentioned something about husband/wife
partnerships and having to prove that the wife was actually doing enough work within
the business to justify any payments made to her.
Trouble is I’m not sure which business structure this applies to or the full consequences
if you can’t. The best I can recall is that they mentioned something about the husbands tax status.

I guess the FSB may be the best place for advice, not having dealt with them yet, I’m
not best placed to say wether thet’re worth their salt or perhaps your own accountant may
be better placed to advise.

It appears that the main problem here is that nothing has yet been finalised and
so everybody is trying to second guess the Chancelor.

[Nigel Fraser]

This is not good news at all !
I have just finished my 1st year after transfering to a limited company status. As a result of my accountant recommending this as a good option, which he said would be a safe bet for several years to come 👿

I have also had a unpleasantly large tax bill for payment in Jan04 as a result of the same accountant not fully explaining the transfer process to me.

It seems that it is really a major advantage if you pay 40% tax rate as a sole trader, since your limited company would only pay 22% on profit between 10-50K (and 19% if over 50K) and you personally don’t pay tax or NI on the dividends – I think this is correct, but I am still finding me feet a bit with the new system here.

Plus when you start a ltd co. you effectivly “sell” a sole trader/partnership business to it for a value determined by the turnover/profitability and any fixtures/equipment involved. This money can then be draw back from the ltd co. at a later stage and I think is also tax/NI free? I may be wrong about the tax free on this one as you probably have to pay it when the self assessment comes round.

Its a bit of a steep learning curve for an amateur like myself – so lets hope they don’t go and wreck the advantages too soon (!)

[John Childs]

That’s right. The limited company pays less tax. However, if you take it out and spend it then it becomes income and is taxed accordingly. Basically, whatever your set-up, if you spend it you pay tax on it and there is no escape. On the other hand, if you keep the cash in your limited company you can build up a lower taxed nest-egg however, this is only deferring tax and not avoiding it.

That’s an interesting point about a limited company buying a sole proprietorship. I hadn’t thought about that (and neither had my accountant) and I will have to go and think about it.