Should I trade as a Limited Company, umbrella or composite

[philip@wellwoodhoyle]

I certainly wouldn't rely on GB leaving taper relief or the concessionary treatment as is in the current climate. You could end up leaving money in the company on which you end up paying far more in tax in the future.

Take the money out as you earn it!

Sorry, can't agree. The relief/concession are there to be used and should be used whilst they exist.

But, I can agree to the extent that such reliefs/concessions shouldn't be relied on to the detriment of other options - for example taking as much money out each year as possible without higher rate tax kicking in. It really would be folly for someone who has not used up all his/her (and spouse's) basic rate band to leave money in the company in the hope of taper relief in the future.

[Bradley]

Ncd

That is terrible advice. I agree the concession may not last for ever, but that is no reason to take the cash out as you go. If nothing else, by leaving cash in the Company you defer the potantial higher rate tax payable on the dividends.

I depends on how you take the cash out of course. You don't have to take dividends e.g. pensions/loans.

I also note that you make no comment about taper relief. Are you so sure that it's going to last in it's current form for at least the next two years? I suspect not.

As for building up funds in the company, the last time Gordon decided to change the rules he brought in the NCD rate and effectively penalised those who had built up reserves before the rule change. What's to say he won't do something similar in the future like putting NIC on dividends? The government review into small business is still ongoing isn't it?

[simondolan]

I depends on how you take the cash out of course. You don't have to take dividends e.g. pensions/loans.

Pensions are an idea of course, provided you don't mind tying your cash up for the next several years. Loans are a non starter because of S419. Any loan not repaid with 9 months of the Company year end get hit with a 25% tax charge.

I also note that you make no comment about taper relief. Are you so sure that it's going to last in it's current form for at least the next two years? I suspect not.

I doubt very much that taper relief is likely to be fiddled with to any great extent. Capital Gains Tax collects (relatively speaking anyway) an extremely small amount of tax so any adjustments to taper relief would have almost zero effect on the overall tax take.

As for building up funds in the company, the last time Gordon decided to change the rules he brought in the NCD rate and effectively penalised those who had built up reserves before the rule change.?

No, the NCD hit profits made in the year, not accumulated reserves.

What's to say he won't do something similar in the future like putting NIC on dividends? The government review into small business is still ongoing isn't it?

NIC's are a slight possibility I suppose - all the more reason not to distribute the funds as a dividend surely??

Tax planning can only be undertaken based on rules that exist at the current time. It would be foolish to plan on what might be. You cannot second guess what the Govt will do.

[Bradley]

Rattled?

Pensions are an idea of course, provided you don't mind tying your cash up for the next several years. Loans are a non starter because of S419. Any loan not repaid with 9 months of the Company year end get hit with a 25% tax charge.

It's still a cash flow advantage and you could of course repay the loan with a dividend and start again after a decent interval. Pensions - 25% tax-free plus income draw-down and no need to retire.

I doubt very much that taper relief is likely to be fiddled with to any great extent. Capital Gains Tax collects (relatively speaking anyway) an extremely small amount of tax so any adjustments to taper relief would have almost zero effect on the overall tax take.

It's a small amount of tax because of the availability of taper relief! If you look at the Budget statements you'll see how much the government reckon that taper relief costs it - it is not insignificant. I think the chances are exceedingly high that it will be fiddled with.

No, the NCD hit profits made in the year, not accumulated reserves.

I think you are forgetting about the surplus dividends that had to be carried forward thereby setting off the NCD rate until exhausted.

NIC's are a slight possibility I suppose - all the more reason not to distribute the funds as a dividend surely??

I said that they may add NIC to dividends from small companies. Dividends would then be a bad idea presumably.

Tax planning can only be undertaken based on rules that exist at the current time. It would be foolish to plan on what might be. You cannot second guess what the Govt will do.

The point of what I was saying about taper is that Gordon could change the rules now and say that no-one is affected. Whenever the rates have changed in the past there's been no transitional help. The taper relief applies to actual disposals not with what may happen.

Someone could have started trading two years ago and have taper available at 75%. Gordon Brown stands up next March and says - we withdraw relief for all disposals after Budget day. What's going to happen then? It'd be too late to apply for the ESC C16 concessionary treatment so that you could treat the disposal as capital so you'd be fecked.

It may be that GB says that surplus cash in company equals non-trading for taper purposes. Fecked again!

[simondolan]

It's still a cash flow advantage and you could of course repay the loan with a dividend and start again after a decent interval. Pensions - 25% tax-free plus income draw-down and no need to retire.

Yes, you could delay the higher rate tax by a year by repaying the loan via way of dividend. Yes, 25% tax free at age 50.

It's a small amount of tax because of the availability of taper relief! If you look at the Budget statements you'll see how much the government reckon that taper relief costs it - it is not insignificant. I think the chances are exceedingly high that it will be fiddled with.

No, it is and always has been a relatively small amount of tax. That is why the have been so generous with taper relief. It is a nice headline and on the face of it shows Labour to be rewarding investment in business, but costs them very little.

I think you are forgetting about the surplus dividends that had to be carried forward thereby setting off the NCD rate until exhausted.

No, surplus dividends kick in from the date the NCD rate came in - they do not hit accumulated reserves which was your original point.

I said that they may add NIC to dividends from small companies. Dividends would then be a bad idea presumably.

Of course - all the more reason to accumulate funds rather than drawing dividends if they do.

The point of what I was saying about taper is that Gordon could change the rules now and say that no-one is affected. Whenever the rates have changed in the past there's been no transitional help. The taper relief applies to actual disposals not with what may happen.

Someone could have started trading two years ago and have taper available at 75%. Gordon Brown stands up next March and says - we withdraw relief for all disposals after Budget day. What's going to happen then? It'd be too late to apply for the ESC C16 concessionary treatment so that you could treat the disposal as capital so you'd be fecked...

Yes, he could of course change the rules - if he does you take the accumulated reserves as dividends then - the point being that you would be no worse off than if you had paid them out as you went along.

Turn the arguement around he might also change the rules to abolish CGT (it costs more to collect than it raises) - in that case you would be ever better off!!

My point is that any tax planning needs to take advantage of the rules that exist at that time. You can of course build contingencies in to your planning, but what you don't do is to ignore what is available just in case it changes.

[Bradley]

Response

No, it is and always has been a relatively small amount of tax. That is why the have been so generous with taper relief. It is a nice headline and on the face of it shows Labour to be rewarding investment in business, but costs them very little.

According to the last Treasury Budget report, taper relief cost Gordon £4.5 Billion in 2005-06. I don't call that very little. The small companies rate costs about £700 million less has been the subject of very close scrutiny by GB.

No, surplus dividends kick in from the date the NCD rate came in - they do not hit accumulated reserves which was your original point.

Company A had brought forward reserves of £50k and current year profits of £20k as at 31/12/2004. It declares a dividend of £50k and pays £3,800 CT on current year profits. In the year to 31/12/2005 it earns profits of £20k but pays no dividends. It expects CT payable of £2375 but pays £3800 because of the surplus dividend payment brought forward. You have been penalised for building up reserves in prior periods.

Of course - all the more reason to accumulate funds rather than drawing dividends if they do.

If you accumulate funds how are you going to get them out? By dividend of course so therefore NIC becomes payable at the point of payment.

Yes, he could of course change the rules - if he does you take the accumulated reserves as dividends then - the point being that you would be no worse off than if you had paid them out as you went along.

Not if you take them as one lump sum. What if the income tax rate on dividends goes up? What if there is NIC on dividends at that point?

Turn the arguement around he might also change the rules to abolish CGT (it costs more to collect than it raises) - in that case you would be ever better off!!

Pull the other one! Do you seriously think that this government is going to reduce taxes and complexity at the same time?

My point is that any tax planning needs to take advantage of the rules that exist at that time. You can of course build contingencies in to your planning, but what you don't do is to ignore what is available just in case it changes.

If you build up reserves you are gambling that taper relief will be around in two years time. You're not really taking advantage of rules but relying on a relief.

[simondolan]

According to the last Treasury Budget report, taper relief cost Gordon £4.5 Billion in 2005-06. I don't call that very little. The small companies rate costs about £700 million less has been the subject of very close scrutiny by GB.

You are mistaken. The total CGT take for 2004/05 was £2.2bn. The projections for 2005/06 are actually higher. To put this amount in perspective, the total tax take in 2004/05 was £293bn.

As I said - insignificant.

http://www.hmrc.gov.uk/stats/tax_receipts/menu.htm

Company A had brought forward reserves of £50k and current year profits of £20k as at 31/12/2004. It declares a dividend of £50k and pays £3,800 CT on current year profits. In the year to 31/12/2005 it earns profits of £20k but pays no dividends. It expects CT payable of £2375 but pays £3800 because of the surplus dividend payment brought forward. You have been penalised for building up reserves in prior periods.

Yes - you are being penalised for paying dividends NOT for accumulated reserves.

If you accumulate funds how are you going to get them out? By dividend of course so therefore NIC becomes payable at the point of payment.

Under current legislation when you close the Company you pay the accumuated funds as a capital distribution, not a dividend. Also of course no NIC is payable on dividends.

Not if you take them as one lump sum. What if the income tax rate on dividends goes up? What if there is NIC on dividends at that point?.

What if, what if, what if - you cannot base tax planning on what if's. Even so, any rate changes cannot take effect retrospectively - any announcement would therefore give ample notice to take the funds out before the rate changes.

If you build up reserves you are gambling that taper relief will be around in two years time. You're not really taking advantage of rules but relying on a relief.

No, you are using the current tax rules (or reliefs if you prefer) to put in place a sensible piece of tax planning.

[Bradley]

I was right and you were wrong ...

You are mistaken. The total CGT take for 2004/05 was £2.2bn. The projections for 2005/06 are actually higher. To put this amount in perspective, the total tax take in 2004/05 was £293bn.

As I said - insignificant.

Simon - go to http://www.hm-treasury.gov.uk/media/...06_cha_134.pdf - and look at page 29 of 30. On that page you will see that it is estimated that taper relief will cost Gordon Brown £4.5 Billion in 2005-6. In other words the CGT take would have been tripled if taper relief hadn't existed.

Yes - you are being penalised for paying dividends NOT for accumulated reserves.

Yes but you couldn't have paid them if you hadn't accumulated in the first place. Those that paid dividends as they went along didn't encounter this problem.

Under current legislation when you close the Company you pay the accumuated funds as a capital distribution, not a dividend. Also of course no NIC is payable on dividends.

You are only able to pay the cumulative reserves, excluding share capital, as a capital amount if the Revenue agree under Extra Stat Concession C16 to that treatment; otherwise it's a dividend. There's always a possibility of course that GB instructs the Revenue to deny ESC C16 to small companies with large cash balances on their balance sheet.

What if, what if, what if - you cannot base tax planning on what if's. Even so, any rate changes cannot take effect retrospectively - any announcement would therefore give ample notice to take the funds out before the rate changes.

In one lump sum taxable at the higher rate! Result - you may as well have taken the cash out as you went along. Using the taper relief as a planning tool is a gamble Simon, especially in the current climate. As long as people know that then that's their choice.

No, you are using the current tax rules (or reliefs if you prefer) to put in place a sensible piece of tax planning.

But the point is that you're gambling that taper relief will be available at the point you decide to stop trading and wind up the company. As I've stated above taper could be changed overnight and the change doesn't need to be retrospective to bite.

You could, of course, wind-up every two years to make sure you get full rate of taper and then incorporate again but that's avoidance. Part of getting the ESC C16 clearance is to state that you are ceasing trading.

[simondolan]

It is becoming difficult to read this thread now, so perhaps a summary on this point would help:

1. The most tax efficient way of trading is using your own Ltd Company;

2. Currently, the most tax efficient way of distributing the income is to pay dividends/small salary to take you just under the Higher Rate threshold, and accumulate the balance within the Company

3. Once the Company ceases trading (note the Company, not the individual), you can, as things stand, claim to have the accumulated reserves treated as a capital distribution and therefore take advantage of taper relief.

4. The Govt might change the rules in the future which might mean this advice needs to change.

5. If they do change the rules, and you have to pay out the remaining income as dividend you will be no worse off than if you had paid the dividends out as you went along.

[malvolio]

The only problem being if your monthly net income has to be something over £37k a year. In which case, I assume you take just enough dividends out to cover the shortfall and accept the higher-rate tax bill?