Meeting objectives – Review the ongoing suitability of the company structure for Joshua’s business.

Question 1

Outline to Joshua and Amina the advantages and disadvantages of closing the company down and operating on a self-employed basis. (11 points)

Answer 1

Advantages:
* Simplified administration/not required to file with Companies House/no legal reporting requirements.
* Likely to be less costs involved/lower overheads.
* Could potentially claim CGT business asset disposal relief.
* Potential for simplified expenses.

Disadvantages:
* Unlimited liability/no personal protection against claims.
* Company can potentially pay for benefits.
* Less tax efficient to draw income from, all profit subject to Income Tax/cannot take dividends/use DA.
* As a sole trader will pay class 2 NICs (albeit only in tax year 2023/24) and class 4 NICs/can arrange salary within a company structure to avoid NICs.
* Cannot make employer pension contributions/tax deductible pension contributions/save employer and employee NICs.
* Cannot provide pension/benefits for Amina.
* Cannot split income/keep reserve for bad trading years.

Question 2

Explain to Joshua and Amina the steps they can take to improve the tax efficiency of the income from Joshua’s building company. (9 points)

Answer 2

• Maintain company structure/as the owner of the business, he has the right to set his own salary/dividends.
• Income can be taken as mix of dividends and salary to maximise net take home pay.
• Salary reduces Corporation Tax liability.
• Minimum salary level can be set at Joshua’s personal allowance/no Income Tax due.
• Still entitled to State benefits/State pension.
• Use dividends to top up salary/no NICs on dividends .
• Dividends taxed at lower rate than salary/8.75% basic-rate, 33.75% higher rate.
• Can use DA of £1,000 (he is not using currently)
• Can also pay Amina a salary in dividends, uses her DA.

Question 3

Recommend and justify a range of actions that Joshua could take in order to ensure his business structure is most suitable for his needs now and in the future. (6 points)

Answer 3

Rec:
* Keep the limited company structure currently.
Just:
* The structure allows much more flexibility over their financial affairs (see question above for justifications on how it can improve tax efficiency of income).
* Facility to hold a float in case of ill health, a bad trading year etc…
* Joshua can hire a professional company secretary/use an accountant to reduce the administration burden.
* Tax efficient way to make pension contributions for Joshua and potentially Amina

Rec:
* Annual reviews.
Just:
* Ensure this decision is monitored annually in line with Joshuas views, objectives and turnover.