Chapter 17 Choice of business structure

Question 1

1.1 Unincorporated business versus company

Answer 1

Unincorporated business Company
Status: Sole trader or partnership Corporate body, usually a close
company
Taxation of profits:
IT on profits earned. Class 2 and 4 NICs.
No further tax on profits.
CT on profits. Extracted profits subject to
IT and potentially NICs
CA: Standard rates of CA apply.
No allowance for private use
Enhanced first year allowances for
additions made on/before 31 March 2023.
Private use of assets does not affect
calculation of allowance
Loss relief:
S64: against total income of current
and/or previous tax year. S83: c/f against
profits of same trade. S72: loss in first four
tax years, set against net income of three
preceding years FIFO
S37: set against other income and gains
current year, then carry back 12m. S45: c/f
against total profits. No company
equivalent for s72
Disposal of business:
Disposal of business as a going concern.
Disposal of separate assets and cease to
trade. CGT implications. BADR.
Sell shares to third party/back to
company. CGT on shares sold. BADR.
Liquidation.
IHT: 100% BPR 100%/50% BPR
Pensions:
Personal pension scheme
Occupational pension scheme, or personal
pension scheme
Payment of tax:
Payments on account of IT: 31 Jan
during tax year, and 31 July following end
of tax year. Balancing payment 31 Jan following
end of tax year
PAYE on employment income on monthly
basis. CT payable 9 months and one day
after end of accounting period.

Question 2

2.1 Extraction of profit from a business

Answer 2

For an unincorporated business, all trading profits assessed on individual under IT, regardless of drawings. No option to extract profits in most tax efficient way.
For a company, profits can be extracted via salary/bonus. This is employment income for individual taxable at the IT rates. Class 1 primary NICs at 13.25%/3.25%, class 1 secondary NICs for company at 15.05%, salary and employer’s NICs are allowable deductions for the company. Can discriminate who gets it.
Can also be extracted via a dividend. The rates for dividends are 8.75%/33.75%/39.35% and the dividend allowance of £2,000. No NICs payable, dividends is not an allowable deduction for the company, but the company cannot discriminate who gets it.
Pension: employer contribution tax-free benefit, deductible from trading profits on a paid basis. Do not receive the cash until later.
Loan: company likely to be close therefore s455 tax will likely apply. Tax consequences if loan at beneficial interest rate. If loan is written off, further tax consequences will arise.

Question 3

3.1 Corporate structure

Answer 3

Single company Group of companies
Tax on profits:
Single comp, automatic set off of
all results of different divisions in
same period. Funds and other assets can
be moved between divisions with no tax
consequences
Separate comp for each company. Losses
transferred via group relief. Intra-group
dividends ignored for tax purposes. Attempts
to move funds around may be subject to TP
rules
Tax on chargeable gains/profits on IFAs:
Assets moved between divisions on
tax neutral basis. Automatic offsetting
of all gains and losses. Rollover claims can
be made on qualifying assets. Sale of division
is the sale of individual assets which give rise
to individual chargeable gains and profits on IFAs.
Assets transferred between group
companies on a NGNL basis. Election
made to transfer gains and losses to
other group companies and therefore offset.
Rollover claims on a worldwide basis. Sale
of subsidiary is likely to be exempt by virtue
of SSE
Admin:
Single return and single payment of tax
Multiple returns, GPA is possible. Many offsets
achieved by claims and more admin
VAT:
Single VAT return and intra-divisional
supplies ignored. If exempt supplies made,
restriction of input tax recoverable may occur
Group can register as a single entity. Can be
disadvantages and advantages of excluding
exempt members from group VAT registrations.