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bigduckontax
bigduckontax, Accountant
Category: Tax
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Hi I am after a bit of guidance on the most tax effective way

Customer Question

Hi I am after a bit of guidance on the most tax effective way of starting a second company.

I am a director of a marketing services agency and we are now considering starting a second business manufacturing and selling a clothing range.

Am I able to use profits from my Existing ltd company to start the second company. Is this done by an inter company loan? What if the second Company then doesn't survive, how would this effect the debt? Is it worth creating a parent company and have the two different company's as subsidiaries - is this more tax effective in terms of corporation tax, or is it then easier to use/borrow funds from either company when needed?

Thanks for your time and guidance
A.P.
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello AP, I'm Keith and happy to help you with your question.

Starting a second company is really the best option as if you use your existing company each activity is separate and you cannot offset for Corporation Tax (CT) purposes a profit on one bit against a loss on the other. You can create a company group, effectively two linked companies or as you suggest two trading companies with a holding company, and then tax losses on one company can be set against the gains in another, in fact up, down or sideways throughout the group. The group turnover has to be in the 7M and balance sheet totals about 3.5M areas to get a group involved in compulsory audit.

You can certainly fund the second company by means of inter company loans. However, if the second company goes to the wall so does the loan too very possibly and the first company will have to write off the amount lent against the profit and loss account. The real money will, however, likely to have gone down the drain, sorry.

The only time CT will get involved with these inter company loans, apart from going bust already mentioned, is if interest is paid by the borrower to the lender. This will be allowable against CT in the borrowing company and inflate the profit level in the lending organisation.

There you are, a quick canter through the basic possibilities. I do hope I have thrown some light on your conundrum.
Customer: replied 3 years ago.
Hi Keith, that all sounds great thanks, XXXXX XXXXX companies definitely sounds like the way to go to ensure early start losses can offset profits in the original company.

So in terms of the lending to fund the second operation... Can I simply use reserves from our existing company to layout for research, stock, marketing and all other start up costs of the new business and just keep a track of the inter company balance? And in terms of timing is it better to start the second company now and allocate all new activity transactions
through the new company to keep it all official and totally separate, or perhaps could we start the ball rolling (with the new activity) and just keep in the same books until things take off then transfer to the new company entity?

Many thanks for your help, much appreciated
AP
Expert:  bigduckontax replied 3 years ago.

I think it better to start the new company immediately so you have a clean sheet so to speak and no mixed up activities save for the funding by means of inter company loans. I would advise a simple inter company loan agreement be entered into between the companies covering such matters as repayment schedules and interest as a future safeguard.

bigduckontax and other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Sounds like the way to go, game on! Thanks for your help Keith
Expert:  bigduckontax replied 3 years ago.
Pleased to be of assistance. Thank you for your support.

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