The chancellor delivered to the nation his Autumn statement and unlike the last budget statement which left him with uncomfortable memories of pre budget information leakage and tax u- turns like the pasty tax and the so called ‘raid on charities’ as some professional colleagues called it.
The Chancellor even has a better reason to smile all the way as he sets a greater purpose to rebuild the nation’s infrastructure with a £5 billion squeeze on welfare and other departmental expenditures to finance these projects. What a God send, Starbucks is re writing corporation tax principles by paying up to £20Millions to HMRC. Who wouldn’t smile at such a wind fall even if it’s just a droplet in an ocean of debt? Its like a story of an African frog that celebrates thankfull to the wind for blowing so hard so that a sorghum stem breaks to provide it with food.
Yesterday, the Prime Minister wrote a piece on LinkedIn reaffirming his earlier commitment to Tech City on Old street, a vision of making it the hub for technology on a global competitive level like Silicon Valley in Carlifornia. A commitment of up to £50million in investments, who says the UK is not open for business?
While Starbucks has written a new chapter in corporation taxation with their £20million payment, would that be a donation to HMRC? I find it very hard to classify the expense since even they themselves say they will pay but are not considering it as payment of a tax expense. I will leave the subject to my professional colleagues to help classify such a cost.
At Proactive Consult, we believe that SMEs and Start-ups are the future of our economy, a belief that makes us go to extra length in supporting both their advisory and compliance in relation to their general business and tax requirements.
We are currently partnering with financial institutions and other service providers in supporting this group of entities work better during these challenging times.
A couple of weeks ago, we were honoured to be invited by Barclays Bank to their business seminar from which we have now advised close to a dozen SMEs and business start ups, We must say, we are proud to be part of growing Britain.
Having been questioned about what would be the best choice of a trading entity by some of the attendants, we thought it would be good to highlight a few reasons why it’s a ‘cool thing’ to start as a sole trader at an early stage then grow the business to a corporate status.
The biggest challenge to sole proprietorship is in being jointly and severally held as one with the business on repaying the business liabilities on liquidation or closure. The limited liability status that corporates enjoy comes at a cost of high level of compliance which is absent at the sole proprietorship level.
The beauty of sole proprietorship includes;
- Only if the business generates a sales turnover of 77K or if it reasonably expects to go over the threshold limit, there is no requirement to register for VAT hence reducing the cost of compliance and eliminating the risk of cost escalation due to erroneous or complete non compliance with VAT accounting requirements.
- Unless the business starts employing staff and paying above £5,564/Year, the requirement to comply with PAYE taxes is nonexistent. This is the most challenging part for SMEs and start ups as we move into the overhauled PAYE/Payroll version called Real Time Information (RTI), that requires employers to report to HMRC employee payments either before or when they are made. Worse still, complete non compliance attracts penalties within the first year of a change over.
- The compliance burden on sole proprietors is to prepare the business tax returns which requires proper keeping of invoices and receipts for bookkeeping and financial statements preparation so as to undertake a self assessment of the sole trader. The complexity will need a professional undertaking if the sole trader has other sources of income like from employment, other investments, properties and foreign income.
At Proactive Consult, we believe like most entrepreneurs that we are our ‘brothers’ keeper’, hence our encouragement others to give back to society either in terms of time spent in undertaking good causes or donations to society. The tax implication is that good causes get supported in society while the business gets a tax relief that lowers the effective tax rate that a tax liability is calculated.
Depending on the business’s taxable income, the effective rate will be lower with a donation to charity. Thanks to the Chancellor, the 50% top tax rate will reduce to 45% this next tax year though the sliding scale of personal allowance and the reduction in basic rate threshold brings a new dimension to the tax advantage of the reduced rate.
The icing on the cake for sole traders is in the investment allowance available to them, this allows such traders to build and grow their businesses by purchasing plant and machinery whose 100% cost up to £25K are given a tax relief through annual investment allowance .
The power of team work sometimes is manifested in sole traders combining resources to form one single business entity which legally becomes a Partnership.
Partnership profits are not taxable on the partnership as a business entity but on the partners in relation to their share of the partnership profit. This does not change the basic taxation principle on the partners as individuals hence subject to personal taxation. To raise the tempo of the game, it’s possible to have a limited liability partnership (LLP), which introduces the limited liability advantage to the business though with it comes some compliance requirements mostly at Companies House. It’s good to note that it does not change the tax requirements in addition to the requirements an ordinary partnership is required to fulfil.
To those thinking of what choice of business entity to operate through, we hope that with more information, a proper analysis of your business plan may actually dictate you consider being a sole proprietor or team up to form a partnership.
For most SMEs, our strategy is simple, in the words of Stephen Covey,’ the main thing is to keep the main thing the main thing’.
Proactive Consult is a Business and Tax consultancy firm. We work with individuals, SMEs and multinationals in supporting their Business & tax planning and compliance requirements.
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