What are the tax implications for incorporated businesses?

Tax issues if you are a sole proprietor

Before you set up in business think about the tax consequences. The right decision early on may have a substantial influence upon later profits.

Unincorporated businesses

A sole proprietor is chargeable to income tax and Class 4 NICs on trading or professional profits. This applies whether or not the profits are withdrawn from the business, and there is no further tax to pay when the profits are withdrawn. The profits are “relevant earnings”, so you can pay a percentage of them into personal pension plans with full tax relief.

If your spouse works in the business, they can be paid at a level appropriate to the work they do. Alternatively, they can be made a partner in the business, with a share of the profits if actually engaged in the conduct of the business. In this way, the profits can be split between you both.

If you use a car for business purposes, you can claim capital allowances on the cost of the car and the running expenses. Both will be restricted to the proportion that business mileage of the car bears to total mileage.

Many businesses are, at least in part, carried on at home. It should be possible to claim a deduction for some of the domestic costs such as electricity, gas, and insurance. It is important to ensure that a claim for a deduction does not adversely affect the private residence exemption.

As long as a part of the property is not used exclusively for business purpose then that should not be a problem. It is also important to consider whether the use would have the effect of requiring business rates to be paid.

If you make a loss that loss can be set off against other income in the current tax year or the preceding year. Losses sustained in the early years of a new business can be carried back to the three tax years preceding the year in which the business commenced. So you can obtain a tax refund.

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