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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I am a Sole Trader and have been so months.

Resolved Question:

Hello,
I am a Sole Trader and have been so for 16 months. I wish to go incorporated (private limited) shortly in the next few weeks, which will be around half way into this years tax year.
Previously I have been running my business as a Sole Trader on the Cash Basis system and all my books at present have been recorded to support this. As I can not use this system as a Ltd company I will need to revert to tradition taxation methods and adjust my books accordingly.
For various reasons, I wish to keep my income to £11,000 a year by becoming incorporated and use my business to accumulate profits of which I will pay corporate tax on. I pay myself on a monthly basis (£916 per month) into my personal account and leave the remaining profit sums in business account to accumulate. I have transferred around £5000 into my personal account and have accumulated £5000 in my business account as of now since April 2015. I know as a sole trader that these are all considered as profits regardless of what account they are in and are all taxable.
I like to maintain a float in my business and I wish to use the £5000.00 in my business account as a "start-up" (basically continue it as a float) for newly formed company (the business will remain the same), as once registered I will be changing the bank details etc over to a Ltd company. I do not wish this taxable profit I have so fat accumulated this year to be classed as personal income and taxed accordingly, plus as already mentioned, I wish to keep my earnings to £11,000 for the year. From this point forward I will continue to pay myself a wage of £11,000 on a PAYE basis and accumulate funds in the business account and pay corporation tax on this. The idea is to accumulate a set figure before I start to pay myself dividends periodically.
What I want to know is, is this possible? If so how would I go about recording this on my tax returns and book keeping? If not, what are my options and what do I need to do? I am happy to stay as a Sole trader until April 2016 so long as I can keep my declared income to £11,000 for the year. I expect to have accumulated £30,000-£40,000, possibly more in taxable profits be time April 2016 arrives if I remain as a Sole Trader.
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Can you tell to what date you currently draw up your sole trader acounts please. Has that date always been your accounting date?
Customer: replied 1 year ago.

Hello,

I run my accounts April to April, however the first year as I started in June was run from from then.

My accounts will be up-to-date (April - Sep 2015) by the end of this weekend as I am currently in the process of doing August and September.

Thanks,

Expert:  TonyTax replied 1 year ago.

Thanks.

Do you mean to 5 April? What date did you start the business?

Customer: replied 1 year ago.

Hello,

Yes, the tax year.

Thanks

Expert:  TonyTax replied 1 year ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 1 year ago.

Ok, thanks for your help.

Expert:  TonyTax replied 1 year ago.

Hi.

If you cease as a sole-trader during the current tax year, you will need to draw up your final accounts from the start date of the current accounting period which would appear to be 6 April 2015 to the date of cessation. Those accounts should include all your business income and expenses to the date of cessation.

If you have a balance in your sole trader account, some or all of which you wish to transfer to the new limited company account, then you can do that and it won't be taxed as income of the company because it will have been accounted for and taxed through the sole trader business final accounts which you will disclose to HMRC in your 2015/16 tax return. As far as the company is concerned, the cash injection will be treated as capital introduced or as a loan to the company which you can withdraw with no tax implications as and when you see fit.

Once you have completed your final sole trader accounts, you will know what the taxable profit is for the final accounting period which will all be taxable in 2015/16. That will tell you if you can draw income from the company up to 5 April 2016 and pay no tax. Dividends would allow you to do that because, until 6 April 2016, they will be treated as basic rate tax paid.and provided your total income is no more than £42,385, you will have no personal tax liability on the dividends.

Take a look here for information on incorporation relief.

I hope this helps but let me know if you have any further questions.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15849
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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