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From Ltd Company Back to Sole Trader
Newsletter issue - January 07.
Many small businesses find themselves trading through a limited company, often resulting from the tax advantages of doing so. Many first incorporated when the first £10,000 of company profits was tax free, although this is no longer the case. Incorporating is easy with many reliefs available to ensure there are no adverse tax consequences of doing so. However, going the other way is not quite as simple.
There are still many tax advantages of using a limited company including lower tax rates and avoidance of national insurance by using dividends as well as the benefit of limited liability. However for the very smallest of companies that would prefer the simplicity of a sole trader or partnership set up, the following are just some of the main points needing careful consideration...
- As this is a transaction between connected parties (the company and the individual) any capital assets are transferred at market value for tax purposes and Capital Gains Tax will be applicable to any capital assets including goodwill that have grown in value since incorporation or even prior to that if any gains were deferred when the company was first incorporated. You also need to consider how the assets are transferred. For example, they could be transferred as a dividend which in turn can create another tax charge on any individuals liable to higher rate tax.
- Any losses that are in the company cannot be carried forward to set off against future profits, only set-off against profits of the same previous 3 years.
- Any accumulated profits remaining in the company have to be passed to the individual. This could be by dividend or by capital distribution and the most tax efficient method will vary dependent on your circumstances.
- A formal liquidation process can be used to wind up the company but it can be expensive and a far simpler method is to get the Registrar to use S652 of the Companies Act 1985 to strike off the company. This just involves a £10 application fee although there are various requirements to be met.
- Payment of tax will be brought forward as on the transfer of trade the year end of the company is brought forward to that date.
- Values for transfer of stock and fixed assets will need consideration and there may be a balancing adjustment for capital allowances purposes.
- Now that the shares in the company are worthless, the shareholders may be able to make a claim for a capital loss on the shares using a negligible value claim or for any loans the directors/shareholders have made to the company that are being written off. Additionally, if the shares were subscribed for in the first place a claim for an income tax loss is possible.
In some cases these complications may be minimal and the business owner can literally cease trading as limited company one day and recommence the next day as a sole trader. For further advice in your own situation please contact us.
What our clients say about us...
"Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."
ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT
"I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."
Neil Price - Managing Director at Work Relief Charity Recruitment
"Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"
Lee Westrap MBCS - Director - Bulldog IT Services
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