Starting a new business

[kembljoe]

The director's loan rules do not apply when it is a loan made to another company, irrespective of whether the two companies are associated with each other.

The loan would therefore not ned to be repaid within 9 months of the year end and likewise the company would not be required to pay interest on the loan.

Hope this helps!
Craig

Thanks Craig.

So what you are saying is that if Co2 gets £10K loan from Co1 and uses that as an investment for the online business and starts earning money, let's say after 2 years, Co2 can pay only the loan amount (£10K) back to Co1 without any interest and any tax.

What if Co2 can not make any profit and I decide to dispose Co2, do I have to somehow pay that £10K back to Co1 or can I just wipe that money out?

[Craig at Nixon Williams]

When Co1 lends money to Co2, does it work like director's loan?

As I know, in director's loan, the director has to give the money back within the next 9 months starting from the company's accounting period along with the interest calculated based on the time you hold the money for and along with some NI contributions.

Do the same rules apply when Co1 lends money to Co2 or can Co2 give the loan back, let's say, in 2 years' time without paying any interest/NI contributions?

Sorry for keeping asking questions but I am getting very nice help here and trying to arrive a conclusion and I am nearly there with your precious help and knowledge.

The director's loan rules do not apply when it is a loan made to another company, irrespective of whether the two companies are associated with each other.

The loan would therefore not ned to be repaid within 9 months of the year end and likewise the company would not be required to pay interest on the loan.

Hope this helps!
Craig

[kembljoe]

If you want to avoid this (eg for personal tax reasons) Co 1 can directly lend money to Co 2.

When Co1 lends money to Co2, does it work like director's loan?

As I know, in director's loan, the director has to give the money back within the next 9 months starting from the company's accounting period along with the interest calculated based on the time you hold the money for and along with some NI contributions.

Do the same rules apply when Co1 lends money to Co2 or can Co2 give the loan back, let's say, in 2 years' time without paying any interest/NI contributions?

Sorry for keeping asking questions but I am getting very nice help here and trying to arrive a conclusion and I am nearly there with your precious help and knowledge.

[Maslins]

On the VAT stuff, as these businesses are related you cannot have one which is VAT registered and the other which is not.

Appreciate the OP will likely meet the top two criteria on that link, but I personally think it'd be safe. Providing IT consultancy to businesses and importing goods from abroad to sell to consumers
sound to me like unrelated businesses, hence IMO wouldn't be caught by those rules.

If the OP was providing IT consultancy to businesses through one Co and IT consultancy to consumers through another Co, then it'd be a different kettle of fish.

@kembljoe for simplicity I'd recommend taking more money personally out of Co 1 and loaning it to Co 2 to help it get started. If you want to avoid this (eg for personal tax reasons) Co 1 can directly lend money to Co 2...but I'd strongly recommend you do this as a one off/very occasional lump sum transfers, rather than just getting Co 1 to pay for everything on Co 2's behalf. Otherwise you'll have a bookkeeping nightmare to deal with.

[kembljoe]

If you buy something for (say) £100+VAT = £120 and you know you can sell it for (say) £180, then if you're not VAT registered you can have a gross profit of £60 per sale. If you are VAT registered your sale price would be £150+VAT, so your P&L ends up being £150 - £100 = £50 profit per sale.

The above assumes you're selling to end consumers who couldn't reclaim VAT. If you're selling to businesses it becomes less relevant as they could reclaim VAT you charged them.

I will send these products to end users who could not reclaim VAT, therefore your answer is very smart and yeah, in this case I will lose some money due to the VAT being more in the selling operation than in buying operation.

And it seems like I will not be able to exceed £79K turnover limit in the first year. In this case, creating another non-VAT company makes more sense.

But then the second part of my question arises...

"how can I use the capital from 1st company for the 2nd company with the minimum amount of tax (or may be no tax except the corp tax)?"

[Craig at Nixon Williams]

On the VAT stuff, as these businesses are related you cannot have one which is VAT registered and the other which is not.

See link: HM Revenue & Customs: When to register for UK VAT

Hope this helps!
Craig

[Maslins]

If I am already paying the VAT when I purchase the items from abroad, then in that case is it still worth to have a separate non-VAT company even though my turnover is below £79K?

If you buy something for (say) £100+VAT = £120 and you know you can sell it for (say) £180, then if you're not VAT registered you can have a gross profit of £60 per sale. If you are VAT registered your sale price would be £150+VAT, so your P&L ends up being £150 - £100 = £50 profit per sale.

The above assumes you're selling to end consumers who couldn't reclaim VAT. If you're selling to businesses it becomes less relevant as they could reclaim VAT you charged them.

[VectraMan]

Also, consider what happens if your new business fails. You've effectively have no limited company protection because you'll have to pay the debts of your new business out of your contracting income.

[northernladuk]

If I am already paying the VAT when I purchase the items from abroad, then in that case is it still worth to have a separate non-VAT company even though my turnover is below £79K?

I think a quick chat with your accountant is in order.

[kembljoe]

Like NLUK says, do consider tax implications, mainly VAT. If it's stuff you'll be selling to end consumers, you anticipate a relatively low turnover (ie sub £79k) and your consulting business is VAT registered then you may want to set up a separate entity for that reason (ie not register it for VAT).

If I am already paying the VAT when I purchase the items from abroad, then in that case is it still worth to have a separate non-VAT company even though my turnover is below £79K?

[Maslins]

You can defo do through one company, I'd typically recommend it at least to begin with (in case the new venture doesn't take off).

Like NLUK says, do consider tax implications, mainly VAT. If it's stuff you'll be selling to end consumers, you anticipate a relatively low turnover (ie sub £79k) and your consulting business is VAT registered then you may want to set up a separate entity for that reason (ie not register it for VAT).

Be a little careful with bookkeeping either way. If you do it all through one company, try to keep separate income/expenditure codes for each business so you can easily tell how well each trade is doing.

If it's a separate business, it's all too easy to mix the two up, ie paying for something relating to one business but using the debit card from the other. Try to avoid this at all costs as you'll get in a right mess with intercompany loans.

[northernladuk]

You might want to have a think about breaching the Flat Rate Vat limit though.

[Craig at Nixon Williams]

It is possible to run both trades through the same company - there should be no issues in doing this from HMRC's perspective.

Hope this helps!
Craig

[kembljoe]

Hi,

I am the director of my limited company and working in that company. This is an IT consultancy company in which I do software consultation and implementation for various companies.

I am planning to start a new business in addition to this current business. I will sell products online by importing from abroad. The website will be implemented and all the sales will happen online.

I do not want to open up a new company and would like to use my existing company. The reasons behind this are:

1. I have capital in my current company after all the dividends and the salaries are taken. I do want to use this capital for my new business without paying any other tax except corporation tax.
2. The 2nd business seems to be related with 1st business as this is again an IT project implementing and maintaining a web-site but selling products as well.

Is it convenient not to create another company and to just use my 1st company for this business from the HMRC's point of view?

If not, how can I use the capital from 1st company for the 2nd company with the minimum amount of tax (or may be no tax except the corp tax)?