Owner managed business Flashcards
Which factors must be considered to determine if an individual is employed vs self employed?
Control over how work is done. (select when I work)
Whether provides own equipment.
Whether hires own helpers.
What degree of financial risk is taken. (no holiday and no sick pay)
What degree of responsibility for investment and management worker has.
Whether and how far there is an opportunity for profiting from sound management.
How many people does worker work for? (contractor)
What are tax implications if an individual self employed vs employed?
A self employed individual will pay income tax on trading profits and class 2 and 4 NIC’s
An employed individual will pay income tax on employment income and Class 1 NIC’s
What are the badges of trade?
The badge of trade help determine if you are trading or not.
Subject matter (personal use)
Frequency of transactions
Existence of similar trade transactions or interests
Length of ownership
The organisation of this activity as a trade
Supplementary work and marketing
Profit motive
The way in which the asset sold is acquired (inherited?)
Method of finance
Taxpayers intentions
What are some of the benefits of operating a business as sole trader or partnership?
They are more flexible as there are fewer rules and regulations. They are also more confidential.
What are some of the drawbacks of setting up a business as a sole trader or partnership?
There is no legal separation between the business and the individual so the individual has unlimited liability for the liabilities of the business.
What are the differing tax positions comparing an unincorporated business to an incorporated business?
Unincorporated business:
Profits: Pay income tax and opening year rules which generate overlap profits will apply.
Payments of tax: Payment on account Jan 31st, of tax year, balance due Jul 31st of following tax year.
Timing of tax: Pay tax on tax years.
Losses: Current and prior year relief against general income. Carry forward relief applies as well as early year loss relief (first 4 tax years FIFO basis)
Extract cash: Drawings (no tax implications as profits are taxed before drawings)
NICs: Classes 2 and 4.
Incorporated business:
Profits: Corporation tax at 19%, lower than income tax.
Payments of tax: 9 months and 1 day if small.
Losses: Current year, carry back and carry forward.
Extract cash: salary and dividends.
NIC: Class 1 employee and Class employer 1
Timing of tax: pay tax on period of accounts.
What is the difference between choosing an early year end tax date and a late year end tax date?
An early year end tax date such as the 30th April will delay when the tax needs to be paid as the tax liability will not be due till the next period.
A late year end tax date such as the 31st March will accelerate when the tax liability is needed to be paid as the tax will be due in that same year.
What is a benefit of choosing a 31st Match year end date?
It gives more time for tax planning. For example you now have 12 months to plan pension contributions, whereas will an April year end you wont know your profits in enough time to plan.
What is the benefit of choosing a 31 March or 5th of April year end date?
This means that NO overlap profits will be generated which may be more appropriate for small traders as computation of the tax liability will be less complicated.
What is a drawback of choosing the 30th April as year end date with regards to cessation?
The final accounting period could be based on up to 23 months of profit. Which could lead to abnormally large profits.
How are losses used when comparing a sole trade/partnership to a company?
Sole trade partnership:
Current year against general income before personal allowance.
Prior year against general income before personal allowance.
Have to relieve ALL or NOTHING.
Can to CYB or CARRYBACK in any order.
Losses may be restricted. (Higher of 50k or 25% of Adjusted Total Income)
Company:
Current year against total profits (before QCD’S)
Carry back against total profits (before QCD’S)
All or nothing
Have to do current year 1st
Sole trader/partnership:
Carry forward is automatic and can be against future income from the same trade.
Company:
Carry forward is automatic and a claim must be made to offset some/all of loss against future total profits.
Sole trader: Early trading loss relief. Losses which occur in the first 4 tax years can be offset against general income on a FIFO basis.
Sole trader: Terminal loss relief - loss in the last 12 months + overlap profits (increase the loss) Offset against trading income from the previous 3 tax years on a LIFO basis.
Company: Terminal loss relief - Loss in the last 12 months against total profits before QCD’s and from the previous 3 tax years on a LIFO basis.
What is an advantage of making a loss as a sole trader compared with making loss as a company?
Losses can be allocated against your personal income )property, interest and dividend) which will reduce your income tax liability.
Why should losses be offset as early as possible with regards to a sole trader/partnetrship?
Losses should be offset as early as possible because the refunds generated from the application of the losses will generate a cash flow advantage.
What should we look out for in a loss question relating to sole traders and partnerships?
Offsetting the loss as early as possible to generate a tax refund.
Applying the loss to the year where we pay the highest tax rate so that the most tax will be saved.
Avoid wasting personal allowances and nil rate bands.
What do you do if an employer provides an employee with more mileage allowance than the statutory limit?
You treat the excess mileage as cash earned for the purpose of working out the national insurance contribution.
