This note sets out possible practical changes or opportunities in respect of a business’s tax position or structures that may be available.
Any business should consider the use of cash accounting for VAT if business turnover is less than £1.35 million (although it is disapplied if turnover is over £1.6 million). This can have significant cash flow advantages where late payment of sales invoices means that VAT will be due to HMRC, potentially before the business actually receives payment. If cash accounting is used output tax is not declared on a VAT return until payment has been made by a customer.
Even if cash accounting is not used it is important to take full advantage of bad debt relief for VAT purposes.
For individuals concerned about personal liability for the future debts of a business held as a sole trader or partnership, incorporation can be a straightforward way of gaining commercial protection. It is possible to incorporate as either a limited company or a limited liability partnership (LLP) in order to achieve limited liability for its members. Which structure is most tax efficient and commercially suitable will depend on the circumstances.
It may also be possible to hold any property outside the company or LLP in order protect it in the case of insolvency, in which case the individual may extract value relatively tax efficiently from the company or LLP by way of rents. However, entrepreneur’s relief will be restricted on a disposal of the property if rent is charged.
Another possibility if chargeable assets or directors loans have become of negligible value i.e. less than 5% of original cost, is making a negligible value claim. Capital gains tax relief for losses can normally be claimed even if there has been no actual disposal. Consideration should be given as to the timing of the claim in order to take full advantage the relief.
If the chargeable asset that has become of negligible value is an individuals equity in a qualifying trading company then losses arising on the disposal (or deemed disposal) may be claimed against income if that equity is in the form of ordinary shares which the individual has subscribed for.
There may also be certain accounting changes that allow a business to take advantage of the downturn. For example, if short term cash flow is a problem, it may be possible to amend the accounting reference date of a business in order to crystallise trading losses. These losses may then be carried back one year with a view to reducing the previous year’s profits and possibly reclaiming any tax paid in this year. The Government has introduced a temporary measure for accounting periods ending in the period 24 November 2008 to 23 November 2010 extending the current one year entitlement to a period of three years (subject a maximum of £50,000).
For further information regarding this article, please contact Julian Moran.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.