Choice of business format.

01.01.06

Choice of business format.

In the whole tax system, there is probably no single issue which involves so many variables as the choice of business format - and in which the rules (and the balance of advantage) change so frequently.

In particular, in recent years the rules on that hidden tax National Insurance have changed so much as to affect the choice considerably. National Insurance operates particularly harshly on employees - including the situation where an individual's own company employs that individual. Planning and the use of dividends can mitigate this to some extent, but the superficial financial attraction of using a company may be balanced by the need to get funds into the hands of individuals for day-to-day expenditure.

Cutting across all the normal rules when comparing trading through a company and trading in non-corporate form are the rules which have become known as the "IR 35" regime. Under this, the Inland Revenue can effectively look through what is described as a personal service company; and treat income going to that company as if it had already been paid to the individual who controls it - with the tax and National insurance consequences arising from that payment having been made.

Tax is of course but one factor in considering the medium in which to trade - and the tax tail must never wag the commercial dog. But among the tax considerations which must always be borne in mind when considering how to trade are the following:-

  • The rates of income tax as against corporation tax, in relation to the profits to be made.
  • The allowances available against income, for individuals but not for companies.
  • The different rules and rates for National Insurance, depending on whether one is an employee or self-employed.
  • The tax treatment of dividends as against salaries.
  • Different rules for capital gains tax for companies as opposed to individuals.
  • Different rules for the use of losses, perhaps particularly in the early years of a business.
  • Pension provision and the different tax reliefs available to corporate and non-corporate traders.
  • Special tax incentives available for investment in certain companies.

Of course, it is possible (and indeed common) to start trading in one form and later convert to another. That in itself brings different tax considerations, including the need to consider capital against tax on the disposal of assets to the company and possible stamp duty. And further tax considerations arise where a partnership is under consideration.

Whether starting up a business or considering its conversion to another format, we can advise on the commercial and tax considerations under all of the options available.

For further information please contact:

Alan Barr 0131 656 0103 email alan.barr@brodies.com
Stephen Miller 0131 656 0346 stephen.miller@brodies.com