Transfer pricing within UK entities

[interestedparty]

Hi, I have a question regarding the following situation, and would welcome your views:

A client has his own sole proprietor (not incorporated) business, but is also the director of a limited company. The unincorporated business is profitable and subject to higher rate tax, whilst the limited company makes losses.

The client would like to move some of the consultancy income he earns from the sole proprietor business to the limited company, i.e. he would invoice for the fees within the limited company instead of thorough his sole proprietor business.

Both entities would qualify as "small", based on their turnover and number of employees.

Would this reallocation of income be compliant with UK tax laws?

[northernladuk]

So you want to move money around to avoid tax but no real business reason?

Google GAAR and read up on that.

[jamesbrown]

HRMC are likely to take a dim view of any scheme that seeks to separate the same trade into different parts to avoid tax, whether in relation to the VAT threshold or anything else. In short, I don’t think that would be compliant; you freely admit it’s the same trade.

Sole proprietor is a weird US-centric term and I presume you mean sole trader.

An incidental/small/ad-hoc amount of income on the side as a sole trader is not likely to be an issue, but anything significant and the view will likely be that it’s avoidance in relation to one trade and the whole lot should be put through the ltd company.

[WTFH]

Out of interest, this small limited company, how many people are part of it?
What are its outgoings that means it is making a loss?

[Lance]

Aside from the obvious 'doing this just for tax' issues.....

There is nothing wrong with a sole trader incorporating his business into a limited liability company. There are multiple reasons for doing it. There are also multiple reasons for not doing it. Tax may be part of that decision.
It's also not necessarily the case that the sole trader consultancy, if moved to a LTD would have any tax advantage anyway. It may well fall inside IR35 once in a LTD, and be worse as expenses are limited.

[WTFH]

Another question:when you say "a client", can you explain what your business is, and what your relationship is with this client -
Is it part of your record store business, you market stall rental business, some other scheme, or are you attempting to pass yourself off as an accountant, then coming on here to find out how to do accounts?

[jamesbrown]

There is nothing wrong with a sole trader incorporating his business into a limited liability company. There are multiple reasons for doing it. There are also multiple reasons for not doing it. Tax may be part of that decision.
It's also not necessarily the case that the sole trader consultancy, if moved to a LTD would have any tax advantage anyway. It may well fall inside IR35 once in a LTD, and be worse as expenses are limited.

Of course, but that is not what the OP is proposing. The question is about doing both simultaneously not either/or. It is perfectly reasonable to choose one or the other, although there are good reasons why sole trading is not common in professional services (personal liability, liability of clients/agents for taxes owed). The problems begin when doing both if the underlying trade is the same because there is almost certainly no commercial reason for this and there is almost certainly a tax avoidance motivation for it.

Context matters too. If it's ad-hoc/minor or there is a motivation unrelated to tax, it should be fine. For example, I personally do some expert reviews on the side occasionally whereby the income is placed on my SATR directly, but this amounts to a day or two a year for organisations that are looking for my services personally as an expert reviewer of other experts, plus they are typically not set-up to pay companies. These are relatively trivial sums and they aren't part of my normal trading activities, so it's a non-issue. I don't think the OP is talking about this...

[interestedparty]

Another question:when you say "a client", can you explain what your business is, and what your relationship is with this client -
Is it part of your record store business, you market stall rental business, some other scheme, or are you attempting to pass yourself off as an accountant, then coming on here to find out how to do accounts?

I do many different things badly ;-)

I have recently returned to the world of accountancy, and I am ACCA qualified. I have worked for public quoted companies, and with/for many small traders, but have to admit that I am quite rusty due to various career changes over the years.

The client in question is prospective, not current, and I have already raised the potential issues with GAAR but wanted to invite advice to confirm my understanding.

Both entities have less than 20 employees, but I do not believe this impacts on the determination of whether GAAR applies.

Thanks to everyone for their feedback.

[northernladuk]

The client in question is prospective, not current, and I have already raised the potential issues with GAAR but wanted to invite advice to confirm my understanding.

Both entities have less than 20 employees, but I do not believe this impacts on the determination of whether GAAR applies.
.

Nope. The only focus is on the aggressive avoidance of tax for no real commercial reason. The middle sentence of the opening post outlines the plan and it falls squarely in to this from what we've been told.

The client would like to move some of the consultancy income he earns from the sole proprietor business to the limited company, i.e. he would invoice for the fees within the limited company instead of thorough his sole proprietor business.

Invoicing for work done by a profitable entity through a loss making one clearly falls in to GAAR regardless of the details around the entities. It's such a complex area I am sure there maybe less risky or more opaque ways of doing it and I am sure many people do it but we (or maybe me) are not interested in giving advice how to avoid GAAR when it clearly applies I am afraid.

[WTFH]

Both entities have less than 20 employees, but I do not believe this impacts on the determination of whether GAAR applies.

OK, so you've not really answered the question.
Is the LTD losing money because him and his wife are drawing funds out of it, or is it losing money for some other reason?
Why is an accountant asking contractors how accountancy works?