Sole trade or company?

Sole trade or company?Up until recently, I was employed in a fairly well-paid job. However, I have left my job and started my own business. Do I need to set up a company? If not, are there any benefits of doing so now?

Alex, Wimbledon

No, you are not obliged to form a company.

However, business owners often chose to set a company up because they can be a more tax efficient vehicle to trade through. Furthermore, being a company makes the business look established and gives it status. And it gives the shareholders (the owners of a company) assurance that their liability is restricted to their investment in the event the company begins to fail to meet its debts.

Having said that, new businesses often generate losses in their early years of trading. If you believe your business will generate losses initially, you ought to consider remaining unincorporated. This would then allow you to carry back any losses against your employment income. If you form a company to trade through from the outset, any losses made by the company are confined to its affairs and cannot be used against your personal affairs.

Setting up in business can be an exciting but daunting time. If you would like some professional advice from your local TaxAssist Accountant, please feel free to contact us.

We provide tax and accountancy services in Wimbledon and throughout the UK - http://www.taxassist.co.uk

Can I Use My Loss?

Q: I paint in my spare time and sometimes, my friends and family buy my paintings from me. Because artist's materials can be expensive and some pieces don't work out and I throw them in the bin, I run at a loss. Luckily, I have a full-time job to keep the money coming in but is there anyway I can declare my painting loss and reduce my tax bill?

Melissa, Ludlow

A: HM Revenue & Customs stipulate that losses may only be offset if the trade is commercial and it aims to generate a profit. Your outline of your circumstances suggests you are not optimistic of ever turning a profit, and therefore, you are unlikely to be able to offset your losses against your employment income. Instead, the losses will be carried forward and can only be offset against any profits your business makes.

It also sounds as if you need to review what constitutes a trade, before you register as self-employed. You need to consider for example, if you have ulterior motives (i.e. it's a hobby), the frequency of the paintings, the turnaround times of the paintings, and (as mentioned above) if you really hope and intend to make a profit etc.

There is no conclusive definition of what constitutes a 'commercial' basis or a 'trade'. And whilst HM Revenue & Customs provides guidance on these areas, it is in-part, a judgment call. Please feel free to contact your local TaxAssist Accountant to discuss this with you, or provide any other start-up advice.

We provide tax accountancy services in Ludlow and throughout the UK.  http://www.taxassist.co.uk

How to Register a Partnership

Q: My business partner and I have decided to carry on trade as a partnership. What are the formalities in registering ourselves and the partnership with the tax authorities?

Mandeep, Peterborough

A: When you become self employed you should register with HMRC. There are three ways you can register these are either online, telephone or post.

Details on how to register online or telephone are on the HMRC website.

If registering by post, HMRC have issued new forms from 25 October 2010 to use for partners and partnerships.

Form SA400 should be completed on behalf of the partnership by the nominated partner and will enable HMRC to issue the partnership with a unique taxpayer reference (UTR) number. This number should be quoted on the partnership self assessment tax return.

Form SA401 should be completed by each partner and will enable HMRC to issue them with a UTR, if they do not already have one. This form will also register the partners for class 2 national insurance contributions.

If you need assistance on registering with HMRC or starting a business please contact your local TaxAssist Accountant.

We provide tax accountancy services in Peterborough and throughout the UK.  http://www.taxassist.co.uk 

Business Start Up Grants & Benefits

Q: I am about to start up my own business, but I am worried about the amount of money I will need to get started. I have approached my bank to try to get a business loan, but are there any grants I can claim to help me with the start up costs?

Jane, Wolverhampton

A: You will need to approach your local council to find about about grants for new businesses in your area.  Grants typically range from £500 to £1,000 but some businesses will be eligible for more than one grant.  The amount you will be able to claim will be determined by the area in which you will operate your business and the trade sector you are involved in.

In addition to local council grants, the Prince's Trust has new business schemes for individuals aged between 18 and 30 years of age who are either currently unemployed or work less than 16 hours per week.  The Trust runs business training schemes and can provide a start up loan of up to £4,000 (or £5,000 if you are in partnership with somebody else).  The loan is provided at an interest rate of 3%, with only £20 to repay in the first six months and the balance being repayable over two to five years.

If you will be purchasing energy efficient equipment for your new business, you may qualify for an interest free loan from The Carbon Trust.  Loans are given for qualifying euipment between £3,000 and £4,000 and repayments can be spread over a four year period.

If your business makes losses in the first period of trade, you may be entitled to certain state benefits such as tax credits and if you live in rented accommodation, you could be entitled to housing benefit.

To discuss all aspects of starting your own business and which benefits and grants you may be eligible to apply for, please speak to your local TaxAssist Accountant.

We provide tax accountancy services in Wolverhampton and throughout the UK.  http://www.taxassist.co.uk

Community Interest Companies

Q: I want to start a new business which benefits the schools in my local community, and recently read an article regarding Community Interest Companies. Can you provide further information?

Andrew, Waltham Abbey.

A: Community Interest Companies (CIC’s) are a new type of company set up for the benefit of the community, not to make profit and therefore recognised as Social Enterprises. They’re regulated by the Community Interest Company Regulations 2005 and are different to most limited companies which are set up to make a profit for the shareholders.

Despite being particularly attractive to those who wish to establish their business as a benefit to the community there may be a significant tax disadvantage in operating a CIC. CIC’s cannot pay dividends in the same way as a normal limited company because the director’s salary and shareholder dividends are restricted by legislation thus ensuring the assets and profits are retained for community purposes.

Also, CICs do not have any special tax status, and are generally in the same position as any other organisation in obtaining any tax concessions and are required to submit tax returns and make accounts available for public record.

In summary Community Interest Companies are a good concept but those setting them up should be aware of the tax consequences and ensure seek advice from a local TaxAssist Accountant before proceeding.

We provide tax accountancy services in Waltham Abbey and throughout the UK.  http://www.taxassist.co.uk