Analysing the client’s financial situation – Limited company status

Question 1

Explain to Joshua and Amina the factors that they should consider when deciding whether to close his limited company and operate on a self-employed basis. (18 points)

Answer 1

• Limited company structure is more flexible and can be more tax efficient.
• Limited company allows payment via dividends and/or salary.
• Self-employed income taxed as profits.
• Company pays Corporation Tax on profits which is lower rate than Income Tax.
• Able to control earnings.
• No NICs on dividends.
• Dividend tax rates lower than on earned income.
• Ability to make employer pension contributions/employer contributions free of NICs as a limited company.
• Can also make pension contributions for Amina.
• Potential to split income with Amina.
• Potential to claim CGT business asset disposal relief on closure.
• Limited admin when self-employed/sole trader.
• Can hire accountants/professional company secretary to help with administration.
• Company can borrow separately/limited liability.
• A company is a separate legal entity and debts are its own/can’t be enforced against individuals
• As a sole trader Joshua would have unlimited liability for debts.
• Need to publish accounts as a limited company.
• More costs involved with operating as a limited company.

Question 2

Outline to Joshua and Amina the rules regarding business asset disposal relief and why Joshua and Amina may not be eligible for it should they close his limited company. (11 points)

Answer 2

• Must be an employee or office-holder in the company.
• They must dispose of any assets within 3 years of closure.
• It must be a trading company rather than for example an investment company.
• Must have at least 5% of shares or voting rights/entitled to 5% of profits in a close company.
• Must have owned the business for at least 2 years prior to closure.
• Annual exempt amount can be deducted against the gain.
• Special tax rate of 10%/£1m lifetime limit.
• Claimed via self-assessment/deadline 31 January in tax year following the one after sale.
• Relief clawed back if the claimant starts another business carrying out similar activities within 2 years.
• This may apply to Joshua who is considering self-employment.
• Need to show that avoiding tax was not the motivation for closure.