Business Life Cycle tax

Company vs sole trader

	Sole Trader	Company
Tax on profit	All profits assessed to income tax 22% or 40% over £32,400	Taxable profits at co marginal rate 30% max
Withdraw	Not taxed	Salary/bonus taxed PAYE & NI
National Insurance	Employers NI n/a Class 2 (£2.10 per week)and 4 (8% and 1%) on profits	Employer’s NI 12.8% over £4,895 Employee’s NI Class I £4,895 – £32,760 @ 11% >£32,760 @ 1%
Pension	Personal	Occupational
Losses	3 year opening year carry back against all income Terminal loss on incorporation 3 year carry back of profits in last 12 months	Losses c/fwd against D1 or cy trade loss can be converted to a cap loss; group loss relief
Capital Gains	AE & business asset taper on assets	Relieved on shares
Inheritance tax	Business property relief on assets	Relieved on shares

Commercial

It is easier to transfer shares than assets.

Limited liability.

Warranties against hidden contingent liabilities on shares when sold.

Personal guarantees will be needed to raise co finance in opening years.

Incorporation

On cessation of trade:

1. Tax profit less overlap relief

2. Losses are c/fwd against future salary/dividend, not co profit

3. Taxes on assets transferred:

i. Balancing adjustments if election to trf at TWDV between connected persons not claimed;

ii. Capital gains reduced by:

1. annual exemption

2. business assets taper (£34k of gain can be taken in cash)

3. Incorporation relief

4. Gift relief

iii. If company close and individual is a participator, intangibles are dealt with under ‘old regime’ and no tax deduction is given for amortisation of goodwill and intangibles

iv. Start of new taper period for assets and shares

Incorporation relief	Gift relief
Conditions: Trf as a going concern Trf to a company Trf all assets except cash (not liabilities) Wholly or partly for shares	Sell non chargeable assets to company. Gift chargeable assets to company.
Defer gain against base cost of shares which is MV of assets and goodwill	Defer gain against base cost of assets which is market value of the non chargeable assets; base cost of shares are lowered by MV of assets gifted
Taxed when shares are sold on shareholder (lower base cost)	Taxed when assets sold on company due to lower base cost
Double tax charge: on sale of assets and shares	Double tax effect: lower base cost of shares and assets.

Withdraw profit

	Salary	Dividend	Pension
NIC	Yes	No	No
Trade expense	Deduct	Disallowed	Deduct
Discriminate	Yes	No	Yes
Cost to Co	Gross + Ers NI less CT relief	Gross dividend or 19% on profits drawn as dividend (compare to effective tax rate)	Gross paid less CT relief Spread special contribution: £999,999 = 2 y £1,999,999 = 3 y £2m = 4 y
Rates on Ind	10%, 22%, 40%	0%, 25%	Taxed when retired
Benefits	Eer’s NI on all except childcare; no ee’s NI on benefits, no tax on parking, canteen and recreational
Bonus	EE’s NI capped at 11% but not for directors

Share Option Schemes

Approved Schemes

(a) exercise 3 to 10 years from the date of grant

(b) exercise 0 to 3 years if injured, disabled, redundant or retired

(d) limit to £30,000 options unexercised per individual

(e) not issued to close company employees who own more than 25% of the OSC

Tax on individuals: - No tax on grant or exercise; Capital gain less AE and BA taper

Tax deduction for companies:- MV less exercise price is tax deductible

Unapproved Scemes

Share options granted after 1/9/2003: no income tax

Other security options granted after 16/4/2003: no income tax

Options excercisable after more than 10 years: Income tax charged before 1/9/03 and 16/4/03:

1. Value of shares at grant less exercise price less payment for options

2. MV at exercise less price paid less tax on grant

3. Capital gain on further increase at sale less tax paid

4. AE available

EMI	SAYE	SIP (free shares)
Exercise 0 – 10 years	Exercise at end of scheme (3-10 years)	N/A
Key employees, work for co substantial amount of time, not owning >30% issued share capital	Key employees, not owning more than 25% of issued share capital	Invite all employees (can include condition to work at least 18months in co or use performance targets) not owning more than 25% of ISC if co close
Up to £3m per individual £100k at a time	£250 per month	N/A
Option price must be MV at the date of grant	Option price must be 80% of MV @ date of grant
Quoted or unquoted trading co with Gross assets up to £30m	Co deduction for cost of establishing the scheme
Capital gain less business asset taper from date of grant	Cap gain on disposal	Hold 0-3 years: PAYE & NIC at mv of sale; Hold 3-5 years: PAYE & NIC at mv of grant; Dividends up to £1,500 tax free if used to buy more shares.

Close company rules

Definition:-

a. Resident in UK

b. Under control of directors who own 20% each (including associates)

c. Under control of 5 or fewer participators

Loans to participators:-

a. charge 25% ct

b. refunded when loan repaid

c. treated as distribution (dividend) when waived

d. Rules do not apply if:

a. loan is made in normal course of business,

b. the participator is a company

c. director or full time employee with less than 5% shares and loan < £15k

d. repaid within 9 months of AP

Loans from participators:-

a. If used to buy shares or make loan to co, interest on personal loans is tax deductible;

b. 5% osc, work full time, general management (not specific area)

c. No relief if used to buy EIS shares as income tax relief already given

Benefits to participators

a. If not employees, treat as a dividend

Close Investment Holding companies

a. Does not hold land or subsidiaries and does not trade

b. Always 30% (full rate) of tax

c. No interest on personal loan income tax relief

d. Emoluments are not NRE for pension

Company Trading Structures

Groups

1. Relief to UK Co’s only

2. >50% VAT group & dividends not FII

3. 75% Group loss relief and transfer assets at NGNL

4. associated for company rate limits

Consortium

1. 75% owned by companies who each own > 5%

2. claim share of losses (can be trapped if not correctly structured)

3. Dividends no FII

Corporate partnership

1. Use CT rules to calculate tax

2. Relieve cy loss or 12m carry back

3. Separate VAT entity

4. Joint and several liability

Limited Liability Partnership

Treated as partnership for tax

Allows limited liability

Anti avoidance if not trading (trapped losses)

Joint Venture

Jointly controlled operation = arises in own tax comps; no VAT registration needed; no liability issues; no restriction on losses; difficult to control.

Jointly controlled assets = corporate partnership

Jointly controlled entity = consortium or group

If two co’s own 50% of a co, treat as consortium

Sale of a company

Sale of shares

1. Capital gain or loss

2. Reduce gain by:

i. Capital losses

ii. Dividend Strip

iii. Defer with paper for paper exchange

iv. Companies: SSE, NGNL transfer, group loss relief, associated companies, degrouping charge

v. Individuals: Reinvestment relief and taper relief

3. ½% stamp duty

4. Sale of shares is outside the scope of VAT

5. See sale proceed rules below

Sale of assets

1. Capital gains on chargeable assets deferred with rollover

2. Allowable debits and credits on intangibles deferred with rollover

3. Balancing adjustments on capital allowances

4. Trade losses lapse and AP ends

5. Stamp duty on property up to 4% payable by purchaser

6. Vat on commercial property sold, but transfer as going concern is outside scope of VAT

7. If not transfer as going concern, Vat charged on sale proceeds irrecoverable

8. Elect to trf at TWDV if buyer connected

9. Removal of proceeds

a. Remove proceeds as co dividend tax free

b. Capital or income route for individual

c. Double tax charge for individual removing dividend or liquidation

10. Future amounts payable known: Include in calculation of gain and do not discount.

11. Future amounts payable unknown: Defer small part of the proceeds called ‘chose in action’ if variable, eg dependent on future profits. Loss on chose in action can be offset against original gain by election. Estimate NPV of chose in action is deducted from proceeds and used as cost when future amount paid. Adjust later if future consideration not paid.

Share sale by company

Capital gain avoided by

SSE
Presale dividend
Income route on share sale back to company
Share for share relief

Sale of more than 10% holding in another company
Exempt for all classes of shares and options of rights over shares
Capital loss not allowable
Company sold must have >20% trading income
Not a NGNL transfer
Seller co and 51% group members must own 10% of OSC, distributable profit and assets on winding up
Must be held for continuous 12 month period during 24 months before sale
If previously a NGNL transfer or share for share exchange, extend ownership period to members of gains group
Seller must be a trading co or member of a trading group
Co sold must be trading co or holding co of a trading group
Must trade before and after sale per i. and j.
If Co sold not trading at date of sale, exemption still applies if sale would have been exempt in last 2 years
Available 12m after holding drops below 10%
Enables series of part disposals to be expemt

Dividend Strip

Reduce value of shares and capital gain before selling
Turns cap gain into income
Tax free between companies
25% effective rate to HR tax paying individuals
Reduces stamp duty at ½%
Company cannot create a capital loss
Value shifting anti avoidance
Distributable profits needed
If 75% taper available, effective rate on gain is 10% vs 25% on dividend
Must be part of normal trading profits which have been taxed
Not out of distributable profit where there is no tax
Two schemes will not work for co’s under value shifting legislation: intra-goup disposal at NGNL to avoid cap gain on appreciating asset by creating a new co with no value = dividend added to proceeds of sale; intra-goup exchange of shares which is treated as a reorganisation of share capital.

Share for share relief

Share buy back by a company

1. Use pre-sale dividend to avoid capital gain if SSE not available

2. Anti-avoidance legislation on value shifting

3. Capital route always applied until recently challenged in court

4. UK dividends to companies are exempt and income route can now apply.

Share sale by an Individual to third party

1. Capital gain

2. Apply matching rules

3. Taper

4. AE

5. Defer gain with Reinvestment relief (subscribe for unquoted shares in trading companies)

6. Pre-sale dividend can convert some gain into income

7. Reduce gains by selling back to company

Share sale by Individual back to the company

1. Comply with CA85, can hold redeemed shares as ‘treasury shares’

2. Cancel shares from tax point of view

3. Sale of treasury shares is new share issue from tax point of view

4. Tax using capital route mandatory if conditions exist:

a. Repurchase for benefit of trade

i. Vendor resident in year of sale

ii. Owned shares > 5 years

iii. Inherited shares > 3 years (add ownership of deceased and personal representatives)

iv. Not connected with co, not > 30% OSC, loan capital or voting rights immediately after sale

v. Not connected to any 51% group co immediately after sale

vi. Shareholding substantially r

Sole Trader