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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4940
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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I'm thinking about changing employment, from a PAYE

Resolved Question:

Hello
I'm thinking about changing employment, from a PAYE employee to a sole trader.
To start up the business I am being loaned from a friend the equivalent to one year's salary, which I will pay back between 1 and 2 years thereafter.
This loan will go into a dedicated business bank account and I am intending to arrange a standing order for my monthly salary to be transferred to my personal bank account.
Please can you advise me of my tax status and including answers to the following -
Due to the fact that the initial funds are a loan am I required to pay tax on the monthly payments?
Is the above the optimal way of setting up as a sole trader, or would you recommend an alternative way?
Regards
Tony
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.
Hello and welcome to the site. Thank you for your question.

Please clarify for me..

You say you ar thinking about changing employment from PAYE to a sole trader.
- will you be working for the same employer as self employed or will you be totally independent?
- what is the nature of business?
- do you file a tax return?

Many thanks
Customer: replied 2 years ago.
Totally independent.
Nature of business is Residential developer / consultant
Real estate and construction.
Yes I currently filemamyearly tax return.
Expert:  taxadvisor.uk replied 2 years ago.
Tony, thank you for your prompt reply.

General -
As you are already filing your tax return, I presume you have a unique tax reference number (UTR).

As you start self employment as a sole trader, you should register for Class 2 NI and set up a dierct debit to pay your monthly Class 2 NI contributions. For tax year 2015-16 it is a flat rate of £2.80. More information on NIC rates and thresholds for self employed can be found under section 5 here

https://www.gov.uk/government/publications/tax-and-tax-credit-rates-and-thresholds-for-2015-16/tax-and-tax-credit-rates-and-thresholds-for-2015-16


Now we come to specific points raised..
[q]
Due to the fact that the initial funds are a loan am I required to pay tax on the monthly payments?

[a]
Loans and repayments of loans are outside the scope of taxation as it is return of capital. If you were to make a payment that included interst on the loan then it has tax implications. Repaying loan that has no interest levied has no tax consequences.

[q]
Is the above the optimal way of setting up as a sole trader, or would you recommend an alternative way?

There is no right or wrong way of setting up as a sole trader. You appear to be doing the correct thing.. securing funds for working capital and running costs during start-up period.

What is important as far as initial loan is concerned .. you have it properly documented to alleviate any potential issues from HMRC or anyone in the future. As the sum is significant, I would advise you to alert your bank of impending inflow of funds to comply with money laundering regulations.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 2 years ago.

Hi

Thanks for your initial answer, but please can you clarify the following -

Am I correct in my understanding that if I use the loan as my sole income for the next tax year 2015/2016 (Year 1), then I am not eligible to pay any tax for that year?

Is there a financial limit on what this loan income can be?

In Year 2 my business will yield its first income, and of this I will be able to pay back the loan in full, plus also thereafter receive a regular income, which I will pay the correct amount of tax for going forward.

Are there any implications relating to my intentions?

Kind Regards

Tony

Expert:  taxadvisor.uk replied 2 years ago.
Tony, thank you for your reply.

[q]

Am I correct in my understanding that if I use the loan as my sole income for the next tax year 2015/2016 (Year 1), then I am not eligible to pay any tax for that year?


Is there a financial limit on what this loan income can be?


[a]
Loan is not income. Income is what you earn once you stat your self employed and even then you are only taxed on what profit you make and not the turnover. If you did not have any income from work done etc then there will be no tax payable.

There is no limit on drawdown of funds out of an account as what you would be consuming is part of loan given to you .

[q]

In Year 2 my business will yield its first income, and of this I will be able to pay back the loan in full, plus also thereafter receive a regular income, which I will pay the correct amount of tax for going forward.

[a]

Your income in year two would be chargeable to income tax and IT would be based on net profit. Any repayment of loan would not be treated as an expense in arriving atthe profit as it is capital returned.

[q]

Are there any implications relating to my intentions?

[a]

I don't see any implications relating to your intentions. keep them simple and straight forward.

I hope this is helpful.

taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4940
Experience: FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Expert:  taxadvisor.uk replied 2 years ago.
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