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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15707
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Im currently a Sole Trader running two separate companies,

Customer Question

I'm currently a Sole Trader running two separate companies, one a cleaning company with a turnover of £52,000 and a pest control company with a turnover of £49,000. We are running the businesses from home and have one commercial vehicle which is currently on hire/lease agreement, is it now time to go Limited??
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me what your taxable profit was for each business for the 2012/13 tax year please.
Customer: replied 2 years ago.

£21000 and £17000

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 2 years ago.
Hi again.

In 2012/13, after deduction of the personal allowance of £8,105 you would have paid tax of £5,979 (20%) and Class 4 NIC of £2,736 (9%) on an adjusted profit of £38,000.

If you had been trading through one limited company, on profits of £38,000 you would have paid corporation tax of £7,600 (20%) assuming you drew no salary. You could then have drawn the balance of £30,400 as dividend (£33,778 gross) and you would have had no further liability to personal tax as your income would have been less than the 40% threshold at £42,475. You can read about dividends and tax here.

You would have saved £1,115 in tax and NIC by trading through a company. If you drew some salary at a level at which you would pay no employee NIC or employer NIC, say £7,500, you would have saved 20% of that figure in corporation tax and still paid no personal income tax as it would have been below the personal allowance. Some like to pay some NIC or at least keep their earnings just above the primary threshold which was £107 per week for 2012/13 to ensure some entitlement to state benefits such as state pension.

The tax and NIC savings are greater at higher levels of profit than you are currently making though the compliance burdens for companies are more onerous, time consuming and expensive if you use an accountant. Whereas as a sole trader you pay tax and NIC on whatever your profit is, if you operate through a company, you can time your salary and/or dividend drawings for the best tax effect, eg you might avoid a higher rate tax charge by delaying a dividend until the start of a new tax year.

Another consideration is that if you ran both businesses through one company, you will have to register for VAT as your turnover is more than £77,000. Running two companies to avoid that would double your compliance burden. Two companies would also be associated for corporation tax purposes which would mean that the £300,000 limit for profits taxable at 20% would be divided by two.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Hi,


 


Ok thanks for the info, My wife does all our account to a high level and only passes them over near the end for the accountant to look over and give he verdict on tax/what can be claimed or not. (we use sage instant accoutns to log everything.)


 


I am really ensure what to do, I look and feel the limited liability gives me more security and the I am fed up of coughing up my tax bill plus another half.


 


Would that change if I went ltd?


 


In your experience should I hold of another year and see how we grow again?


 


 


I did want to add in about my personal Landover discovery 3 that I am using in the company on the pest control business.


 


Can I claim for this ?


 


I bought this last year out right last year £12.500.00 and don't know what to do with this, bring this in to the business....or not ?


 


I have been claiming the 40 per mile allowance but wondered if this was worth bringing the vehicle in? and what are the pro's and con's?


 


or can I claim in any other ways for this?


 


Thanks


 


Warren


 


 

Expert:  TonyTax replied 2 years ago.
If you went the limited company route, you would pay corporation tax once a year. There would be no payments on account. The extra half you refer to is a payment on account of the current year's liability and you have already had most of those earnings by the time the first one it isn't an unfair system.

I can't tell you what to do. It's a personal choice and your accountant should have some input into that decision to be honest.

Once you have chosen a method of how to claim for a vehicle used for business purposes, mileage allowance or capital allowances, you cannot change that until you change the vehicle.
Customer: replied 2 years ago.

Hi
I asked you what you thought best as I wanted someone neutral to look at this as I feel my accountant would want me to go the Ltd route as it would mean more work and money for them.
The Landrover is new it was bought in this financial year 2013/2014, how do we best account for this?
Expert:  TonyTax replied 2 years ago.
I'd probably incorporate each of the businesses into separate companies if I thought that they would continue to grow in terms of turnover and profit. If you had paid yourself a small salary in 2012/13 as I described in my earlier post, the total tax and NIC saving would have been around £2,600 for the year. On a profit of £38,000, that's not be sniffed at though the increased compliance costs would eat into that.

If you are already claiming the mileage allowance you cannot change that until you change the vehicle. You can claim business mileage allowance for as long as you have the car and it can be lucrative if you do alot of business mileage. The mileage allowance precludes you from claiming for any of the running costs of the car aparty from parking fees and road toll fees.

If you claim capital allowances, these are based on the cost of the vehicle or the value when it is introduced into the business and the CO2 emissions level. Take a look here for information on capital allowances and cars. What you need to remember is that once you have written off the cost of the car, that's it as far as allowances are concerned. If you sell it for more than its written down value, there will be a clawback of capital allowances. As well as capital allowances, you will be able to claim for the running costs of the car for as long as you use it in the business. Any claims have to be reduced by the private usage percentage.

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