|
Incorporated |
Unincorporated |
Trading profits |
Subject to corporation tax. Corporation tax is currently 28%. Companies with profits less than £300k pa are taxable at a ‘small companies rate’, currently 21%. |
Profits are included in the sole trader/partner’s personal income tax calculation along with any personal income (such as bank interest/dividends/rental income). Trading profits are also liable to Class 4 National Insurance. |
Trading losses |
Losses may only be used against the profits of the same company in the current or preceding year or, if the company has a group or consortium, of other members of that group or consortium. Unused loss may be carried forward but only offset against future trading income from the same trade. |
Losses may set off against the sole trader/partner’s other income or capital gains of the current tax year and/or the preceding tax year. Losses made in the first four years of a business may be set against personal income of the three preceding years taking the earlier years first Unused loss may be carried forward but only offset against future trading income from the same trade. |
Remuneration of business owners |
Director’s salaries are subject to income tax and National Insurance. Salaries also subject to Employers National Insurance contributions. Salaries and the ER’s NIC should be deductable against trading profits for tax purposes. Dividends received by shareholders are subject to income tax but not National Insurance. The company is not liable to EE’s NIC but is not entitled to offset the dividend payment against taxable profits. The value of any non-cash assets extracted from the company may be deemed a dividend distribution if the recipient is a shareholder but not a director, or subject to income tax if the recipient is a director. |
As any trading profits are taxed directly on the sole trader/partner at the time they are earned no further tax liability should arise on actual distribution of profits from the business. |
Pensions |
Pension contributions by a company, whether to a personal pension of the employee or to a registered company pension plan (both within specified limits) obtain corporation tax relief in the company and are not liable to tax as benefits in the hands of the director/shareholder. Having the company make the pension contribution avoids significant National Insurance cost. Further tax saving opportunities exist within the ‘tax free’ pension zone e.g. the use of SIPP’s. |
Pension contributions are made personally by each member and are tax deductable. Personal pension contributions do not avoid National Insurance cost. Further tax saving opportunities exist within the ‘tax free’ pension zone e.g. the use of SIPP’s. |
Finance costs |
Tax relief is available for interest paid, to the extent that it is wholly and exclusively incurred for the purposes of the trade. |
Interest incurred partly for private purposes, like hire purchase interest on a car used for both business and private use, must be apportioned. The private element is not deductable against taxable profits. |
Disposal of business assets |
A gain on disposal of assets is subject to corporation tax. Stamp duty may also be payable on assets transferred by deed i.e. land |
A gain on disposal of assets (generally apportioned between members of a partnership in proportion to the profit-sharing ratio) is subject to capital gains tax. A reduced rate of tax may be available for certain qualifying disposals of business assets. Stamp duty may also be payable on assets transferred by deed i.e. land |
Disposal of an interest in the business by shareholders/members |
A gain on disposal of shares by a shareholder is subject to capital gains tax. Relief may be available for certain qualifying disposals. Stamp duty is also payable at 0.5% of total consideration. |
A disposal of an interest in the business is a disposal of the underlying assets (see above) |
Related parties |
The company is connected with a person if that person has control of it or he has control of it with persons connected with him. Also any two or more persons acting together to secure or exercise control of a company are, in relation to that company, connected with each other and with any person acting on their instructions to secure or exercise control |
Partners/members are connected persons not only with their fellow partners but also with the spouses and relatives of their partners |
Inheritance tax |
100 per cent business property relief applies to unquoted shares in a ‘trading company’, and unquoted securities in a company which with other such securities or unquoted shares gave the transferor control immediately before the transfer. 50 per cent business property relief applies to quoted shares if they, with other shares, etc gave the transferor control immediately before the transfer. |
100 per cent business property relief applies property consisting of a ‘trading business’ or an interest in a business (which can extend even to cash or deposit holdings if they are shown to be held for business use either currently or in the near future). 50 per cent business property relief applies to property held outside a partnership |
Problem areas |
A capital gain by a company may be chargeable twice – once to corporation tax in the company and again to income tax or capital gains tax on extraction of proceeds from the company. Income splitting through the use of companies and shares (‘husband and wife’ companies) is ineffective unless the arrangement stands up to scrutiny on an arm's length basis or, it does not involve the ‘diversion of income’ from one individual to another, or does not give rise to an overall tax saving. |
A change in profit share ratio may trigger a part or whole disposal from one partner to another of the share in the business assets. This may or may not be a chargeable disposal and would need to be reviewed on a case by case basis. |