Many business organisations have been forced to let the ’top layer‘ of expensive staff go and replace this hefty operation growth from internal promotion or from recruiting the ‘hungry’ young graduates and apprentices so keen for work experience.
The result has been that many previous high earners are looking to invest their savings, knowledge and redundancy monies into their own new self-employed businesses. There is a lot of associated tax planning considerations. The search for self-employment can result in the perfect storm of exactly what the Government are trying to promote – employing the young and generating new enterprises to keep the British business engine throbbing.
The range of self-employed businesses is immense - from simple consultancy to replace the lost employment, to entrepreneurial schemes that hope to produce the next ‘Body Shop’ or ‘IPad’! Some of the businesses can follow a personal passion and might be deemed by some to be a ‘hobby’ as opposed to a commercial operation with all the badges of trade in place.
It is essential for all those determined ‘never to be employed again’ or with the entrepreneurial dream to take timely and detailed advice. Many businesses incur early year trading losses until income streams are established. Early year tax losses need to be reviewed to see how they can be used effectively. The advantage of the unincorporated business route to commence the initial trading vehicle is that the tax losses can be carried back against earlier income for the taxpayer. There is a lot of tax planning around the choice of trading vehicle, for example the protection of limited liability (e.g. for companies) against the efficient utilisation of opening year tax losses.
One problem of the carry back of losses is the question of commerciality. HMRC will ask questions over whether the business is of commercial design and structure, i.e. is it capable of making profit? Well thought through business plans will be essential (and some would say obvious!) to present to HMRC should questions be raised over the income tax claims and tax refunds.
Tax planning around small business start ups will be key in the weeks, months and years ahead. The simple registration of a self-employed activity is just a fraction of the depth of understanding that is required. It is not just the choice of trading vehicle, the timing of VAT registration, the commercial image, the protection of limited liability etc. The protection of tax reliefs will be at the root of initial decision making. As mentioned, there is always a temptation for business direction to be in a world that is understood and enjoyed, e.g. the extension of a hobby.
Practical Tip :
An action plan for proposed new business might include:
• Business plans, profit projections, cash flows and a well thought through financial road map;
• Tax planning around raising initial working capital and long term funding;
• Review of markets to support sales projections ;
• Consideration of choice of trading vehicle;
• Protection of tax reliefs ;
• Where an initial loss is predicted ensure that tax relief will be protected with proof of commerciality.
Julie Butler F.C.A.
