What to do with my business?

[Tyre Smoke]

I am a sole trader and run a small taxi business. We have ten cars, all owned or on finance by me. The drivers are all employed and paid an hourly rate via PAYE. They get paid holiday and a pension.

I want to take a bit more of a backseat and let my wife run the business day to day, with me helping out as needed and being her mentor if she needs it.

My question is should I or do I need to change the set up of the business? Make her a partner, make it a Ltd Co, LLP? Are there any tax advantages to changing anything, or should I keep things as they are? At the moment I pay myself drawings from the business that I then let her have a weekly allowance for want of a better description (how 1950s!) from my personal account. My wife is not earning anything from anywhere and is quite literally 'a housewife'. Of course she isn't, she has quite a big input daily in the business and I'm not the mysoginist I sound like, it's just the easiest way to describe what is happening.

I guess making it a partnership would double the tax free allowance?

[LeighW]

Tyre Smoke said:

I am a sole trader and run a small taxi business. We have ten cars, all owned or on finance by me. The drivers are all employed and paid an hourly rate via PAYE. They get paid holiday and a pension.

I want to take a bit more of a backseat and let my wife run the business day to day, with me helping out as needed and being her mentor if she needs it.

My question is should I or do I need to change the set up of the business? Make her a partner, make it a Ltd Co, LLP? Are there any tax advantages to changing anything, or should I keep things as they are? At the moment I pay myself drawings from the business that I then let her have a weekly allowance for want of a better description (how 1950s!) from my personal account. My wife is not earning anything from anywhere and is quite literally 'a housewife'. Of course she isn't, she has quite a big input daily in the business and I'm not the mysoginist I sound like, it's just the easiest way to describe what is happening.

I guess making it a partnership would double the tax free allowance?

Certainly could be worth making it a partnership, or (depending on profit levels, whether you withdraw all your profits from the business etc) possibly Ltd Co. You could of course just make her an employee of the sole trader business if you don't want the hassle of changing the business structure?

[Tyre Smoke]

Changing the business structure doesn't bother me, in fact for a long time now I've been thinking there must be a more tax efficient way of running things.

[JonPH]

I'd just work out how much money you make after paying employee salaries & expenses. Decide how much you both want to commit to a pension. Then see the balance. Your tax accountant can then do the sums on partnership vs Ltd Co differences. The key is you have numbers, otherwise the answer from a tax accountant is always "it depends!".

May not be possible to easily move vehicle finance into Ltd Co. Staff would need to transfer + insurance, paperwork etc. so you only want to do this once.

Also, when your wife wants to take it easy (no idea how old you both are!), will the business be saleable/another driver able to step-up?

[hunton69]

You say you wife helps out with the business therefore she must be on the payroll as she has a 12 grand tax free allowance that you should be using

[Tyre Smoke]

That's the thing, she isn't. And I agree, she should be. But simply putting her on the payroll, is that the best option?

[StevieBee]

hunton69 said:

You say you wife helps out with the business therefore she must be on the payroll as she has a 12 grand tax free allowance that you should be using

As do you.

A Ltd company is the most tax efficient way to run a business, It enables you both to benefit from the tax free allowance and you can then pay yourself dividends that carry a lower tax rate than PAYE and no obligation to pay employers NI contribution (I think!).

This of course all assumes that the company is making a profit.

[Tyre Smoke]

The thing is, my accountant told me some years back that as a sole trader I am the business. Therefore the business makes little profit as I was told that if it makes £100k profit, I pay tax on the £100k (less any personal allowances, etc) but if it makes £1 profit but I have drawings of £99,999 then I pay tax on the £1 less any allowances.

These figures are for illustration only obviously, but that's how I've always run things. We also do very little cash work, most of what we do is contract. All cash is meticulously banked or declared as sales and recycled.

Eta: I would speak to my accountant, but I don't think I have confidence in his business advice. He does my tax returns each year, and produces year end accounts, but beyond that I'm sceptical.

Edited by Tyre Smoke on Monday 6th January 21:29

[loafer123]

Tyre Smoke said:

The thing is, my accountant told me some years back that as a sole trader I am the business. Therefore the business makes little profit as I was told that if it makes £100k profit, I pay tax on the £100k (less any personal allowances, etc) but if it makes £1 profit but I have drawings of £99,999 then I pay tax on the £1 less any allowances.

These figures are for illustration only obviously, but that's how I've always run things. We also do very little cash work, most of what we do is contract. All cash is meticulously banked or declared as sales and recycled.

Eta: I would speak to my accountant, but I don't think I have confidence in his business advice. He does my tax returns each year, and produces year end accounts, but beyond that I'm sceptical.

Edited by Tyre Smoke on Monday 6th January 21:29

“drawings”?

As a sole trader, it is all just income, surely, and taxable as such?

[Eric Mc]

How many more years would you expect to be running this business?

[JonPH]

I think your accountant is only saying:

1. You pay tax on profit that the business makes each year.

2. If it's made a profit of £100k for many years, but this year only makes £1, you pay tax on £1, but may have cash sitting in your bank account from which you've paid tax in previous years.

We understandably don't know whether there's a £50k or £500k profit available so difficult to advise (and I'm not a tax expert!).

I still think you need to think whether you and your wife regularly want to make pension contributions and how much. e.g. This could simply allow you to operate under current structure and she becomes an employee, and could save/defer a lot of tax today at least.

I understand nervousness around current accountant, but if you give him the numbers, he can run them through his software of limited company vs partnership vs sole trader and her employee. Also factoring in if business will grow.

Ultimately, if you don't trust the guy, it sounds like you need to move firms. It's even more important then that you have numbers written down, otherwise you go round the houses for what is a simple exam question to them.

[Tyre Smoke]

Eric Mc said:

How many more years would you expect to be running this business?

For the long term. I'm 54, my wife 30. The idea being that ultimately I take it more and more easy and she runs the business more and more until she either has someone employed to run it for her (us) or we sell it.

And yes, drawings. That is what my accountant shows it as on my year end so that is what I've always called it. I try not to blur business and personal stuff. I draw money from the business account and put it in my personal account for household and personal expenses.

[loafer123]

Tyre Smoke said:

And yes, drawings. That is what my accountant shows it as on my year end so that is what I've always called it. I try not to blur business and personal stuff. I draw money from the business account and put it in my personal account for household and personal expenses.

Presumably you are paying tax on that income, or is it repayment of money you have lent to the business (this is what is happening with my wife's business, so I recognise the pattern!)?

[Tyre Smoke]

No, I pay tax on the profit the business makes. That is why I keep the profits low. That is what my accountant told me. I would pay tax on the drawings if it was a Ltd Co as I would be an employee (director).

[loafer123]

Tyre Smoke said:

No, I pay tax on the profit the business makes. That is why I keep the profits low. That is what my accountant told me. I would pay tax on the drawings if it was a Ltd Co as I would be an employee (director).

This doesn't sound right to me - you can't just draw money and say "the profit is lower", because that money is part of your profit.

That being said, EricMc is better placed to comment.

[Tyre Smoke]

loafer123 said:

Tyre Smoke said:

No, I pay tax on the profit the business makes. That is why I keep the profits low. That is what my accountant told me. I would pay tax on the drawings if it was a Ltd Co as I would be an employee (director).

This doesn't sound right to me - you can't just draw money and say "the profit is lower", because that money is part of your profit.

That being said, EricMc is better placed to comment.

I know what you mean, but being a sole trader, I am the business. So if I trade and take money out of the business, as long as I also cover any losses, that's how it works. Like you rightly say, Eric or another decent accountant will be along in a minute to clear this up. My accountant is very much hand in the air waving it about with 'don't worry about it, keep doing what you're doing..' The trouble is, whilst I don't want or need to know the ins and outs of book - keeping (that's what the accountant is for) I do want to know why I'm doing something in a certain way and what for. Hence my original question. I'm not convinced this is right either!

[Simpo Two]

Tyre Smoke said:

No, I pay tax on the profit the business makes. That is why I keep the profits low. That is what my accountant told me. I would pay tax on the drawings if it was a Ltd Co as I would be an employee (director).

You pay tax on the profit YOU make. There is no 'business' in the sense of a separate entity, only in the sense of a separate account with 'business' written on it. Legally it's all the same.

Yes, the less profit you make the less tax you pay, but whether you draw it out or leave it in the business account, it is still all 'your money' and so still subject to tax.

[hunton69]

I’m guessing your investing in vehicles to keep your profits low however you still need to make a profit to afford an income.
The difference between sole trader/ partnership and Ltd is not that much these days
If your profits are over 50 then you need to think of sharing the profit and even greater saving if over 100 grand however in the mean time your wife can get 12,500 a year tax free if you put her on the books.
If you put on the books now the full allowance is still available up until the end of March

[Tyre Smoke]

I see. That makes perfect sense.

So if the business at year end shows a profit of £8500 but the drawings column (what I have taken to live on) shows £30,000 then I am liable for tax on £38,500 less any personal allowances?

Is that right?

[eliot]

Also putting her on the books keeps her NI up to date for state pension