Due to pandemic Covid-19, the businesses have faced financial difficulty globally. Since the easing of the lock down and when people are returning to work many businesses are looking for ways in which they can restructure their businesses to keep their businesses going.
A client approached me who is running a retail shop as a sole trader. Recently, he has faced loss in the business. While he is looking for ways as how to utilise these losses to reduce the tax bill he can definitely consider incorporating his business.
As a sole trader what can he do with the losses if he is doing his accounting on the accruals basis?
Claim the loss in the same year: he can claim the loss same year, but if he has no tax to pay in that year there won't be much benefit. However, if he has a salary or any other income as well from any and he is paying 20 % on the income he can claim the loss in the same year in order to reduce the taxable income. It should be noted however, that in a limited company the losses cannot be offset against any other income.
Claiming loss in the final 12 months of trading: If a sole trader is suffering a loss in the last 12 months of trading they can use this loss and offset it against the profits made from the same trade in the last three years.
Carry forward losses: he can carry the losses forward if you think there is no advantage in claiming the loss against the previous profits.
If the sole trader decide to incorporate the business he will have the following advantages:
When a business is incorporated you and the business become 2 separate legal entities.
Investment: A company attracts more investment. For example, in case you are in a retail business and you want some financing to buy goods you will be able to raise money more easily. And you won`t be personally liable for all the debt. This means your company will be incur debt and if the company is not able to return the debt on time the personal assets cannot be seized.
Tax: you can save on tax as well. For example, the sole trader will have to pay income tax on profits and NI Class 2 as well as NI Class 4. Limited companies will only pay corporation tax on profits and there is no national insurance to pay.
However, in case of a limited company the director can withdraw money as salary and dividends which are subject to tax. And any other money withdrawn will be considered a loan which is taxed according to the rules under director loan account. You will need to use numbers to analyse which option would be better for you.
If you want us to do advise you we can provide you will the necessary information and calculations so you can make an informed decision. We can also help you with setting up a limited company at please contact Taxaccolega at 020 8127 0728 or email us atinfo@taxaccolega.co.uk our expert help will be happy to help you.