My Blog

Tag: Losses

Losses

  • How To Make Profits And Pay No Tax – Case Study #1

    Imagine you’re a consultancy business with a few staff. After receiving tax efficient investment funds under SEIS (not available to large companies) you purchased top quality computer equipment for £80k for your staff to use and spent £120k on research & development into groundbreaking consultancy software.

    Your profit for last year was made up of:

    Sales             £400,000

    Costs           (£220,000) (£120k R&D + £100k salaries/other costs)

    Depreciation (£20,000)

    PROFIT         £160,000

    If you know the corporation tax rate is 20%, you might expect your company tax bill should be £32,000.

    However, a few adjustments are required to know how much tax you should pay.

    Profit            £160,000

    Depreciation  £20,000 (Ignored for tax purposes)

    AIA                (£80,000) (Capital allowances which replace the Depreciation – 100% of the computer equipment cost)

    R&D             (£156,000) (Tax enhancement available to small businesses)

    TAX LOSS    (£56,000)

    Your profit of £160,000 has become a tax loss of £56,000! You’ve become a tax avoider!

    This and other tax avoidance is perfectly legal. 

  • The Good, The Bad & The Ugly – Autumn Statement 2014

    Public opinion has played a strong role in the Chancellor’s statement today and perhaps his announcements made at the Commons film set today can be summarised into the Good, the Bad and the Ugly.

    The Good – Property Owners, Savers

    At last the stamp duty system has been modernised, so it doesn’t distort the property market with a more logical % being charged in each band rather than on the whole property price.

    Savers can enjoy passing on their ISAs on death to their spouse who can continue to receive interest and dividends free of tax. With the higher cash threshold introduced recently, and previous years’ build up of balances, the tax potentially saved will be very welcome.

    Low and middle income earners enjoying a further £100 tax free personal allowance than previously announced or was that an excuse to repeat the Good news?

    The Bad – Non-Doms, Google/Amazon etc.

    These groups continue to be on the hit list. The charge a Non-Domiciled resident pays for the privilege of living here without paying tax on income kept abroad eg footballers will increase.

    If Google/Amazon etc are found to have moved profits abroad, tax at 25%, higher than the normal 20% charge, will apply. This doesn’t mean the UK will get 25% of what it thinks these profits are. It seems there’s a lot to discuss before that happens.

    The Ugly – Taking ‘Too Much’ Tax Relief

    This isn’t just about aggressive schemes, but now includes routine tax planning and use of reliefs when the government sees them becoming too successful or it’s a good soundbite in an election year.

    Sole traders when incorporating their business into a limited company have often enjoyed a good result all round from little capital gains tax on the sale to their company and the company getting tax relief on the amount paid to the owner. HMRC have presumably pointed out this is wrong and the Chancellor has agreed for all transactions effective from today.

    Banks can’t escape their past wrong doings and although restricting their losses to 50% when offsetting them against future profits sounds good now, I wonder what sort of precedent this sets for an arguably retrospective change because all companies have this expectation at the time they make the loss. Perhaps none of us, if the country’s finances don’t improve sufficiently, can rely on losses being offsettable in the future.

  • Become A Limited Company – Should You, Shouldn’t You? Top 5 Questions To Answer

    Here are the main questions we ask our clients before making a recommendation:

    1. ARE YOU MAKING TAX LOSSES?

    Yes – If you are a Sole Trader in your first 4 tax years of trading you can offset these losses against other taxable income from the previous 3 tax years.

    For example, you might have given up a well paid employment to follow your self employed dream. Let the tax system help you fund that dream by getting a tax refund.

    You can start as a sole trader, and when profitable incorporate your business into a Limited Company.

    Remember that tax losses are different to accounting losses. For example, you might have made a trading profit and invested in some equipment or a van. The capital allowances available are very generous and your trading profit might become a tax loss.

    2. DO YOU NEED LIMITED LIABILITY FOR COMMERCIAL REASONS?

    Or are you a particularly risk-averse person?

    If a sole trader enjoys credit from suppliers, or HMRC, you’re personally liable for these debts. If you don’t settle these debts your personal assets, including your home, are at risk. Many people know they can easily pay their debts and are comfortable with being a sole trader. You should also check that your insurance covers you adequately for other claims.

    With a Limited Company, most trading debts and legal claims stay within the company, so your home is usually protected.

    3. ARE YOU MAKING TAXABLE PROFITS OF CIRCA £25K?

    At this level of profit, you’re paying £1,552 of Class 4 National Insurance, so it becomes more worthwhile to consider paying an accountant to incorporate your business because this is the tax you’re likely to save.

    Running a Limited Company requires more discipline because its cash and assets aren’t yours, so it doesn’t suit everyone.

    4. ARE YOU PLANNING TO EXPAND?

    Expansion is possible through bank funding for a sole trader business, but you will be taken more seriously and have more options available to you through a Limited Company.

    You can grant very tax efficient ‘EMI’ share options to incentivise your staff for no up front costs, or allocate some of your shares to Private Equity funding.

    5. ARE YOU HAPPY FOR THE PUBLIC TO SEE SUMMARY FINANCIALS?

    The Limited Liability of a Limited Company comes with the price of allowing anyone to see the summary numbers you’re obliged to file at companies house. This allows suppliers to get an idea of whether to trade with your company.

    The summary financials don’t show turnover or profit, but they do show your total bank balance and the accumulated profits after you’ve paid tax and dividends.

  • Sole Traders – Six #Tax Numbers You Must Know

    1. 4 Years – If you are in the first 4 years of your business and make a loss, you can use this loss to reduce your tax bill in the previous 3 years, such as from the job you had before you set up your business. You will receive a tax refund.

    2. £5,725 – If your profits are lower than £5,725, you don’t have to pay the annual £140 Class 2 NI, unless you need a credit towards your state pension. Ask for a repayment for earlier years.

    3. £7,755 – If your profits are higher than £7,755, you will pay 9% Class 4 NI. This gets you no state benefits and effectively increases your tax rate from the 20% income tax rate to a total 29% tax rate.

    4. £25,000 – Because of the Class 4 NI mentioned in 3. above, this is roughly the level of profits you need where it is likely you should consider becoming a limited company. This is penalty wonderland and more complicated than a sole trader, so use a good accountant. At this profit level, their fees shouldn’t outweigh the Class 4 NI saving.

    5. £79,000 – If your TURNOVER in the last 12 MONTHS, reaches £79,000, most businesses must register for VAT. You might be making a loss but it’s irrelevant.

    6. £150,000 – If your turnover has exceeded £79,000, but lower than £150,000, you might benefit from being in the VAT Flat Rate Scheme. This saves administration but can also be very profitable. Even if your turnover is £Nil, you can register for VAT voluntarily and enter the Flat Rate Scheme.

  • #Tax Myth 10 – R&D Tax Payments Should Always Be Claimed

    With its tax reliefs improving over recent years, Research & Development claims should be given more attention.

    For SMEs, when you spend £100 on R&D, your corporation tax is not only reduced by the £100 you’ve spent, but also by an additional £125, taking the total deduction against your company bill to £225.

    If you’re paying 20% corporation tax, you’ve saved additional tax of £25 (£125 @ 20%), taking total tax saved to £45 (£225 @ 20%).

    If you’re making losses (likely in a growth phase) this tax relief is delayed and has no immediate value.

    Fortunately, you have another option. You can decide to forgo the later tax benefit of £45 and trade it in for an earlier cash payment of 11% of the losses. For the total losses of £225, this equates to nearly £25.

    You can see you’ve received nearly one quarter of your R&D spend back in cash to help you grow your business, however, this cashflow improvement has cost you £20 of tax relief (£45 – £25).

    Therefore, if you’re expecting to make profits in the following accounting period, it may be less beneficial to reclaim the cash tax payment and instead wait to save more money against next year’s corporation tax bill.

    The same principles apply where you’ve subcontracted the R&D and your claim is reduced by 65%. The £20 cost of taking cash earlier referred to above becomes £16, or 16% of your spend on R&D.

    Follow us on Twitter for more up to date business tax information.

  • #Tax Myth 6 – Sole Trader Start Ups Don’t Receive Tax Incentives

    You have probably heard of lots of incentives for those who invest in start up companies. This is where individuals pay money to a company in exchange for shares in that company. The tax system helps subsidise the investor’s risk in the new unproven business.

    But what about your own sole trader business?

    It might be small scale and, as there are no shares, it’s probably just your money. Aren’t you taking a risk? Where are the incentives for you? After all, you might have a good idea which in the future trades from a limited company.

    Happily the tax system does assist you.

    It works by offsetting tax losses from your new venture against other taxable income you have earned in the same year or the previous three years. In addition, this relief is available for any tax loss in the first four years of your new venture.

    How does this translate in practice?

    Often you will have left your salaried employment where you have paid 40% income tax. If your start your business in January and before 5 April spend say £5,000 on a website, you will have made a tax loss of £5,000.

    This £5,000 is offset against the salary you earned in the same tax year before January. The PAYE income tax of £1,000 you paid on £5,000 of salary will be refunded to you after you have sent in your income tax return.

    A very helpful addition to your cash flow to invest further in your new business.

  • Tax Relief For Losses

    The short answer is ‘Very Likely’!

    The longer answer involves considering:

    1. Your prior years income and profits
    2. Any other income received in the same year
    3. Your anticipated future income and profit levels

    This will enable you to maximise your tax repayment or reduce your future tax payments. Where different tax rates apply, this will affect your optimum claim.

    Maximum flexibility is available to sole traders/partners, particularly those in the first 4 years of  trading, or when a partner joins a partnership. Tax paid on past salary, redundancy, or rental profits, for example, may be refunded.

    You may arrange the use of your losses to ensure you don’t waste your personal allowance, currently £7,475, and may even be able to offset them against a personal capital gain, such as a property disposal.

    As a sole trader/partner, regardless of your claims for income tax and capital gains tax purposes, your loss will reduce your future Class 4 national insurance contributions. And you may use the same loss to reduce your income for Working Tax Credit purposes potentially increasing the payments made to you.

    If repayment of past tax isn’t available, your loss may always be carried forward indefinitely to reduce the tax you pay in later years, for when those profits return.