Is a review of your business structure overdue?


Anne Gardner Thorpe, Tax Manager, Shepton Mallet


Many rural businesses are unincorporated family businesses which have grown with the family. There may be many reasons why the business started out as a partnership or sole trade but this structure may now be causing you to pay more tax than is necessary.


The tax consequences of incorporating a business can be complicated, but reliefs are available to mitigate these when used properly, and incorporation can prompt Capital Gains Tax and Inheritance Tax planning opportunities.


A review of the business structure every few years is advisable, to ensure that you maximise tax reliefs available and that medium and long-term planning is up to date. It is particularly useful to undertake a review now however, with the changes to the Capital Allowance Rates on machinery purchases affecting tax rates so considerably, and businesses are being encouraged to produce management accounts to forecast profits and tax rates to plan their spending.


Where the proprietors of a business are paying higher rate Income Tax a company structure could mean they could reduce their tax bill considerably.


An example: A stand-alone company with taxable profits of up to £300,000 will be taxed at 20%. Although all remuneration


taken out of a company is subject to tax again as it is paid out to the proprietor, retained profits are not taxed until then. By contrast, a higher rate sole trader or partner is taxed at 40% whether he chooses to take their share of the profits out of the business or not.


The proprietor can structure how they pay themselves according to what is appropriate for them and for the business year by year. The form of the remuneration can include a mix of dividends, pay, pension contributions and benefits in kind. This is particularly useful in rural businesses where profits can fluctuate from year to year as the proprietor can keep control over the level of personal tax they pay (if any).


Because of the particular rate at which dividends are taxed, and because they are not subject to National Insurance Contributions, they can be highly tax effective. In addition, the proprietors’ state pension credits can be maintained by taking an appropriate level of salary even if no PAYE contributions are payable on that salary.


The longer term intentions of the proprietors must be taken into account when considering incorporation as there are implications for Capital Gains Tax and Inheritance Tax to consider. APR can usually be maintained at 100% on appropriate assets, and BPR is also usually available on the company’s shares.


Even if a change of business structure turns out not to be appropriate, a review of this kind often highlights areas where other savings or planning opportunities are available, providing certainty that the business is as tax efficient as it can be now, and also helps to ensure that any future tax planning issues are identified early.


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