a few questions
Discussion
Hi,
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Edited by david87M3 on Tuesday 13th February 21:52
david87M3 said:
Hi,
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Edited by david87M3 on Tuesday 13th February 21:52
Quick and dirty answers assuming a Limited Company:
£40,000 would be taxed at 30% Corporation tax
The interest from a loan is deductible from the £40,000. Capital repayment is not deductible.
Sale and leaseback would need more analysis.
If the profit is £40,000, you don't have any other sources of income and you don't want to reinvest all of your post tax profits you would be mad not to pay yourself £5,035 tax and NI free.
eyebeebe said:
david87M3 said:
Hi,
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Edited by david87M3 on Tuesday 13th February 21:52
Quick and dirty answers assuming a Limited Company:
£40,000 would be taxed at 30% Corporation tax
The interest from a loan is deductible from the £40,000. Capital repayment is not deductible.
Sale and leaseback would need more analysis.
If the profit is £40,000, you don't have any other sources of income and you don't want to reinvest all of your post tax profits you would be mad not to pay yourself £5,035 tax and NI free.
Why would the £40k be taxed at 30%? If it is incorporated, and there are no associated companies, surely £40k less allowable deductions is within the lower marginal rate band?
With a limited company you also need to factor in the PAYE and NI costs of paying yourself a salary - although there would be tax and NI savings if dividends are used as the method of payment (and as long as the restrictions on dividend payments are observed).
Sole traders pay Income Tax and Class 4 NI on the profits of the business (NOT what they personally draw from the business).
Sole traders pay Income Tax and Class 4 NI on the profits of the business (NOT what they personally draw from the business).
Eric Mc said:
With a limited company you also need to factor in the PAYE and NI costs of paying yourself a salary - although there would be tax and NI savings if dividends are used as the method of payment (and as long as the restrictions on dividend payments are observed).
What are these restrictions please Eric?
stumartin said:
eyebeebe said:
david87M3 said:
Hi,
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Not a business man myself but I have a few questions. Numbers rounded up to make things simple!
say I buy a business for £100,000 (included free hold building)
Its yearly turn over is £80,000 of that £80,000 £40,000 is operating costs (staff wages, materials, gas&electric ect ect) at this point I have not taken anything myself.
What happens to that £40,000 thats left over? would the business pay any tax on that?
If so whats the percentage and could the cost of buying the business ie a business loan be put against the operating costs? so that may take the operating costs upto £50,000 leaving £30,000
Is it a good idea to sell the building to a 3rd party company and rent it back? thus being able to pay back a chunk of the loan?
Edited by david87M3 on Tuesday 13th February 21:52
Quick and dirty answers assuming a Limited Company:
£40,000 would be taxed at 30% Corporation tax
The interest from a loan is deductible from the £40,000. Capital repayment is not deductible.
Sale and leaseback would need more analysis.
If the profit is £40,000, you don't have any other sources of income and you don't want to reinvest all of your post tax profits you would be mad not to pay yourself £5,035 tax and NI free.
Why would the £40k be taxed at 30%? If it is incorporated, and there are no associated companies, surely £40k less allowable deductions is within the lower marginal rate band?
And what do you mean if there are no associated companies?
Dividend payment restrictions -
Dividends cannot be paid if the company is insolvent or has insufficient reserves out of which to pay the dividends.
For IR35 affected companies (personal service companies) the payment of dividends is ignored when calculating PAYE and NI on Directors' income - in other words, the directors cannot avail themselves of the more generous tax and NI rates applicable to dividends.
Making use of non-partcipating shareholders (e.g. share-owning spouses)to split a proprietor's income to optimise allowances and tax bands is currently under attack by the Revenue - see The Arctic Systems case).
Associated companies - the various profit thresholds where the rates of Corporation Tax change are split between associated companies.
The first £300,000 profit of a company is taxed at 19%. Profits between £300,000 and £1,200,000 are calculated at 32.5% and profits above £1,200,000 at 30% (weird, isn't it - that's Gordon Brown for you). If companies are associated in any way (share directors, own shares in each other etc) then these thresholds are reduced by a factor equal to the number of associated companies. This prevents multiple snall companies being set up to try and falsely make use of the lower CT rates for small companies.
Dividends cannot be paid if the company is insolvent or has insufficient reserves out of which to pay the dividends.
For IR35 affected companies (personal service companies) the payment of dividends is ignored when calculating PAYE and NI on Directors' income - in other words, the directors cannot avail themselves of the more generous tax and NI rates applicable to dividends.
Making use of non-partcipating shareholders (e.g. share-owning spouses)to split a proprietor's income to optimise allowances and tax bands is currently under attack by the Revenue - see The Arctic Systems case).
Associated companies - the various profit thresholds where the rates of Corporation Tax change are split between associated companies.
The first £300,000 profit of a company is taxed at 19%. Profits between £300,000 and £1,200,000 are calculated at 32.5% and profits above £1,200,000 at 30% (weird, isn't it - that's Gordon Brown for you). If companies are associated in any way (share directors, own shares in each other etc) then these thresholds are reduced by a factor equal to the number of associated companies. This prevents multiple snall companies being set up to try and falsely make use of the lower CT rates for small companies.
Eric Mc said:
Making use of non-partcipating shareholders (e.g. share-owning spouses)to split a proprietor's income to optimise allowances and tax bands is currently under attack by the Revenue - see The Arctic Systems case).
I can't see how the revenue can possibly win this case. I am having an ongoing debate with my accountant on this very subject (for obvious reasons) and I think the general consensus of opinion is that HMRC are unlikely to win (in fact I think they have lost before and keep appealing?). The rules could of course change, but under current legislation I believe that there is no obligation on shareholders to work for the company that issues the dividends?
What are your views?
Edited by david_s on Wednesday 14th February 14:18
That is the strict legal interpretation of what a shareholder is - and certainly the grounds on which I would challenge any attempt by the Revenue to bring Section 660a to bear on dividend payments to a mere shareholder who does not "do" any work for a company.
However, the Revenue are really trying to differentiate between bona-fide shareholders of companies and those who have been merely set up as a ploy to split dividend payments. Let's face it, that is what does go on. They are trying to argue that small, owner managed companies are a special case where the normal strict rules on dividends can be ignored and "special" rules applied.
Whilst they may finally lose the Arctic Systems case, they have already established a successful precedent in having certain types of small companies treated very differently for tax purposes (and effectively blocked dividend payments in them) and that is the case of the IR35/Personal Service companies.
They may lose the battle but my hunch is that the tax rules on dividends will be further tightened and that they will, in the end, win the war.
However, the Revenue are really trying to differentiate between bona-fide shareholders of companies and those who have been merely set up as a ploy to split dividend payments. Let's face it, that is what does go on. They are trying to argue that small, owner managed companies are a special case where the normal strict rules on dividends can be ignored and "special" rules applied.
Whilst they may finally lose the Arctic Systems case, they have already established a successful precedent in having certain types of small companies treated very differently for tax purposes (and effectively blocked dividend payments in them) and that is the case of the IR35/Personal Service companies.
They may lose the battle but my hunch is that the tax rules on dividends will be further tightened and that they will, in the end, win the war.
Edited by Eric Mc on Wednesday 14th February 14:42
It seems the whole basis for looking at 'Employment' as opposed to contract/service companies is becoming based on the real underlying business model as opposed to how it is structurally/contractually arranged.
This covers contractors becoming treated as employees for both financial and employment rights, including through intermediaries, and no doubt the Artic Systems case, whether won or lost, will be another milestone on the way to contractors ending up on full PAYE regardless of setup. (IMHO)
This covers contractors becoming treated as employees for both financial and employment rights, including through intermediaries, and no doubt the Artic Systems case, whether won or lost, will be another milestone on the way to contractors ending up on full PAYE regardless of setup. (IMHO)
no need for night business courses at this rate! Cheers allEric Mc said:
That is the strict legal interpretation of what a shareholder is - and certainly the grounds on which I would challenge any attempt by the Revenue to bring Section 660a to bear on dividend payments to a mere shareholder who does not "do" any work for a company.
However, the Revenue are really trying to differentiate between bona-fide shareholders of companies and those who have been merely set up as a ploy to split dividend payments. Let's face it, that is what does go on. They are trying to argue that small, owner managed companies are a special case where the normal strict rules on dividends can be ignored and "special" rules applied.
Whilst they may finally lose the Arctic Systems case, they have already established a successful precedent in having certain types of small companies treated very differently for tax purposes (and effectively blocked dividend payments in them) and that is the case of the IR35/Personal Service companies.
They may lose the battle but my hunch is that the tax rules on dividends will be further tightened and that they will, in the end, win the war.
However, the Revenue are really trying to differentiate between bona-fide shareholders of companies and those who have been merely set up as a ploy to split dividend payments. Let's face it, that is what does go on. They are trying to argue that small, owner managed companies are a special case where the normal strict rules on dividends can be ignored and "special" rules applied.
Whilst they may finally lose the Arctic Systems case, they have already established a successful precedent in having certain types of small companies treated very differently for tax purposes (and effectively blocked dividend payments in them) and that is the case of the IR35/Personal Service companies.
They may lose the battle but my hunch is that the tax rules on dividends will be further tightened and that they will, in the end, win the war.
Edited by Eric Mc on Wednesday 14th February 14:42
I have been deliberating the 'sale' of some of my shares to my wife so that I can reward her with approximately £30k per annum in tax free dividends (we easily comply with the other rules concerning dividend payments). It does seem to be too good to be true, but under the current legislation I can't see how HMRC's argument can win, shareholders own the company and are entitled to a dividend and any capital growth in the value of their shares.
They attack under what was Section 660a Taxes Management Act and is now covered in Sections ss 624-627 ITTOIA 2005).
Essentially ANY transaction where it is seen that an individual is "giving" his/her income to someone else in order to reduce his/her own personal tax liability is deemed to be a "settlement" and is prohibited. This is what they say was going on with Arctic Systems Ltd and they challenged the validty of the dividend transactions on this basis.
The Revenue WON their case at the initial Tax Tribunal.
The Revenue WON again when the case was taken to appeal.
But they LOST when the taxpayers went to the High Court.
A final hearing is scheduled for The House of Lords in July this year.
We all await the outcome with bated breath,
Essentially ANY transaction where it is seen that an individual is "giving" his/her income to someone else in order to reduce his/her own personal tax liability is deemed to be a "settlement" and is prohibited. This is what they say was going on with Arctic Systems Ltd and they challenged the validty of the dividend transactions on this basis.
The Revenue WON their case at the initial Tax Tribunal.
The Revenue WON again when the case was taken to appeal.
But they LOST when the taxpayers went to the High Court.
A final hearing is scheduled for The House of Lords in July this year.
We all await the outcome with bated breath,
Edited by Eric Mc on Wednesday 14th February 15:46
Thanks chaps.
Looks like lots to learn
Some intresting stuff to take on board
To cut a long story short.
I am an engineer by trade (deliberately stayed away from the running of the business but wish I hadn't ) But am fed up of working to line someone else's pockets and I am thinking of buying an established small business.
Hopefully next year I will be a millionare........... If not I wont be buying the drinks...
Thanks again
No doubt more questions comming soon if you dont mind
Looks like lots to learn
Some intresting stuff to take on board
To cut a long story short.
I am an engineer by trade (deliberately stayed away from the running of the business but wish I hadn't ) But am fed up of working to line someone else's pockets and I am thinking of buying an established small business.
Hopefully next year I will be a millionare........... If not I wont be buying the drinks...
Thanks again
No doubt more questions comming soon if you dont mind
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