The Touche Ross Tax Guide for the Self-Employed

The Touche Ross Tax Guide for the Self-Employed

Also available in Papermac: The Touche Ross Tax Guide to Pay and Perks by Bill Packer and Elaine Baker

The Touche Ross Tax Guide for the Self-Employed BILL PACKER, MA, FCA National Tax Technical Director Touche Ross & Co and COLIN SANDY, ATII Tax Manager Touche Ross & Co M MACMILLAN

Copyright Touche Ross & Co. 1985 Softcover reprint of the hardcover 1st edition 1985 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright Act 1956 (as amended). Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1985 by PAPERMAC (paperback) and THE MACMILLAN PRESS LTD both divisions of Macmillan Publishers Limited 4 Little Essex Street London WC2R 3LF and Basingstoke Associated companies in Auckland, Delhi, Dublin, Gaborone, Hamburg, Harare, Hong Kong, Johannesburg, Kuala Lumpur, Lagos, Manzini, Melbourne, Mexico City, Nairobi, New York, Singapore and Tokyo British Library Cataloguing in Publication Data Packer, Bill The Touche Ross tax guide for the self -employed. 1. Self-employed-Taxation-Great Britain I. Title II. Sandy, Colin 336.2'07 HJ4707.Z7 ISBN 978-0-333-39059-7 ISBN 978-1-349-16977-1 (ebook) DOI 10.1007/978-1-349-16977-1 Typeset by Filmtype Services Ltd., Scarborough Neither Macmillan Publishers, nor the authors, nor Touche Ross & Co. can assume legal responsibility for the accuracy of any particular statement in this work. No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this publication can be accepted by the authors or publishers or Touche Ross & Co.

Contents Preface xi 1. SO YOU WANT TO BE SELF-EMPLOYED 1.1 Introduction 1 1.2 The advantages and disadvantages of being self-employed 2 1.3 National insurance contributions- past and future 6 1.4 Past contributions to the employer's pension scheme 8 1.5 Paying tax - how and when 9 1.6 Taxable element- salary v. profit 12 2. THE EARLY YEARS 2.1 Advising the Revenue 14 2.2 Recovery of tax paid under P AYE 15 2.3 Books and records 16 2.4 Taxation of the early years' profits 18 2.5 Choosing the accounting date 26 2.6 Making a loss 27 2.7 Value added tax 29 2.7.1 Taxable persons 30 2.7.2 Taxable supplies 30 v

vi Contents 2.8 2.7.3 Business 2.7.4 Exempt supplies 2.7.5 Tax rates 2.7.6 The standard rate 2.7.7 Registration 2.7.8 Tax invoices 2.7.9 Books, records and control visits Government assistance 2.8.1 Development Agencies 2.8.2 Local Enterprise Agencies 2.8.3 Enterprise Allowance scheme 2.8.4 'Burdens on business' 31 32 32 33 33 36 38 39 42 42 43 43 3. CAPITAL EXPENDITURE AND ALLOWANCES 3.1 Capital expenditure 44 3.2 Plant and machinery 47 3.3 First-year and writing-down allowances 49 3.4 Industrial buildings 54 3.5 Agricultural buildings 58 3.6 Grants 59 3.7 Value added tax 59 4. WHEN THE BUSINESS IS IN BUSINESS 4.1 Raising finance for expansion 60 4.2 Change of accounting date 62 4.3 Rollover relief 64 4.4 Taking on employees 68 4.4.1 Staff requirements 68 4.4.2 Employment law 70 4.4.3 Salary package 71 4.4.4 Bonus schemes 71 4.4.5 Cars 72

Contents Vll 4.4.6 Pension schemes 72 4.4.7 Keyman insurance 75 4.4.8 The proprietor's wife 76 4.4.9 PAYE 78 4.4.10 National insurance contributions 81 4.4.11 Statutory sick pay 82 5. PREPARING FOR RETIREMENT 5.1 Retirement annuities 85 5.2 Loan back facilities 90 5.3 Self-administered schemes 91 6. THE FINAL YEARS 6.1 When does a business cease? 93 6.2 Post-cessation receipts and expenses 94 6.3 Closing years' rules of assessment 95 6.4 Losses in the final years 98 6.5 Retirement relief (capital gains tax) 99 6.6 Deregistration for VAT purposes 104 7. THE BUSINESS PARTNERSHIP 7.1 Definition of a partnership 106 7.2 Assessment for tax purposes 107 7.2.1 Normal basis 107 7.2.2 On a change of partner 108 7.2.3 Capital allowances 110 7.2.4 Work in progress 111 7.2.5 Partnership losses 113 7.3 Investment income 116 7.4 Annual charges 116 7.5 Annuities 117 7.6 Tax relief on borrowing 118 7.7 Partnership agreements 120

viii Contents 7.8 Salaried partners 121 7.9 Value added tax 122 7.10 Capital tax aspects and tax planning 123 7.10.1 Capital transfer tax 123 7.10.2 Capital gains tax 124 7.10.3 Practical effect of variation of terms of partnership agreement 126 8. AND CO. LTD 8.1 Advantages and disadvantages of corporate structure 131 8.1.1 Limited liability 131 8.1.2 Borrowing and attracting finance 132 8.1.3 Retirement benefits 135 8.1.4 Statutory requirements 136 8.2 The taxation of companies 137 8.2.1 The scheme of corporation tax 137 8.2.2 Advance corporation tax 8.2.3 Dividends received by a 138 company 141 8.2.4 Capital gains of companies 141 8.2.5 Double taxation of capital gains 142 8.2.6 Close companies 142 8.2.7 Losses 143 8.2.8 Remuneration or dividends 143 8.3 Transfer of a business to a limited company 146 8.3.1 Assessments on transferor business 146 8.3.2 Valuation of trading stock 146 8.3.3 Transfers of fixed assets 147 8.3.4 Losses 148

Contents ix 8.4 8.5 8.3.5 Capital gains tax 8.3.6 Value added tax 8.3.7 Stamp duty 8.3.8 Capital duty 8.3.9 Employees Capital transfer tax 8.4.1 Benefits of planning 8.4.2 Valuation of shares 8.4.3 Business property relief The use of trusts 8.5.1 The discretionary settlement 8.5.2 The personal settlement 8.5.3 The accumulation and 149 153 154 155 155 155 155 156 158 159 160 163 maintenance settlement 163 8.6 Use of life insurance 164 8.7 Getting cash out 165 APPENDIX A Income tax rates and allowances 1985/86 168 APPENDIX B Corporation tax rates 1984 to 1987 170 APPENDIX C National insurance contributions 1985/86 Period 6 April to 5 October 1985 171 APPENDIX D National insurance contributions 1985/86 Period 6 October 1985 to 5 April1986 172 APPENDIX E Capital taxes 1985/86 174 APPENDIX F Trading expenses- tax-deductible items 175 APPENDIX G Trading expenses- non-allowable items 177 APPENDIX H Capital allowances - plant and machinery 178

Preface For generations, people have been fired with enthusiasm to run their own business and in spite of the hard work and the financial risks involved to 'do their own thing'. It is not for nothing (as he may well have had cause to reflect somewhat ruefully in the years of exile) that Napoleon condemned the British as 'a nation of shopkeepers'. It is perhaps ironical that income tax was introduced (only as a temporary tax!) into the United Kingdom at just about the same time as that remark was made, as taxation in all its forms represents one of the major challenges that the modem businessman or businesswoman has to face. This book sets out to identify and illuminate those areas of the tax legislation which need to be recognized by individuals in setting up and developing their own business and how the legislation can in many cases be turned to their advantage. Instead of approaching the subject by considering the legislation as it applies to specific aspects, the book follows the development of an imaginary business from its inception, through development and expansion, to its close. It also looks at the effects of going into partnership and of incorporation, as well as at some of the other issues that may be encountered, such as the obtaining of grants and the impact of employment law. xi

xii Preface For simplicity the book sets out the authors' understanding of tax law and practice applicable at the time of writing, including the changes introduced in the Finance Act 1985. In general it does not deal with earlier provisions except where these may be helpful in appreciating the current position. While the book seeks to be as informative and comprehensive on these matters as possible, within the constraints of space, its application to any particular set of circumstances does require care and full appreciation of the relevant facts. In considering a specific situation relating to their affairs, readers should always seek competent professional advice. The authors would like to record their thanks to Elaine Baker who provided much of the original inspiration for this book. London 1985 WRP CTS