Chapter 4Classification and survey of types of business organisationCapital allowances are allowed as deductions from the
profits of the firm for expenditure on, for example, plant
and machinery and motor vehicles.
Salaried partners will normally be regarded as employees
and pay income tax under Schedule E by the PAYE system.
The profits of a limited liability partnership will be
taxed as if the business was carried on by individuals in
an ordinary partnership and not as if the business was
carried on by a company.
Companies
Companies pay what is called corporation tax. The tax
is also levied on unincorporated associations but not
partnerships. It is thus payable by companies which are
limited or unlimited and extends to many clubs. The tax
is payable on profits of a UK resident company whether
these profits arise in the UK or abroad. The tax is there-
fore ‘residence’ based. Relief is given in respect of any
foreign tax paid on profits earned abroad. The tax is
charged on the profits of the company and this includes
income from all sources including capital gains. The
basis of assessment is the accounting period of the com-
pany. Rates of tax are settled for each financial year, i.e.
the 12 months ended 31 March. If a company’s account-
ing period straddles two 31 March periods, profits are
apportioned and the tax is charged on each part of the
year at the rate applicable to that part.
Capital allowances are deducted as part of adjustment
of total business profits but appropriations of profit such
as dividends and transfers to reserves are not allowable as
deductions. Directors’ emoluments are allowed so long
as they appear reasonable.
Large companies pay their corporation tax by quarterly
instalments. Broadly these are companies with profits
of over £1.5 million. For other companies the whole of
the tax is due on the date following the expiry of nine
months from the end of the company’s accounting period
(or year end).
Traders who consider changing from a sole trader or
partnership regime usually do so for tax purposes, but
all the implications should be considered. Corporate status
involves giving more publicity to the affairs of the busi-
ness in terms of the need to file documents, such as the
annual return with the Registrar of Companies, and to
prepare statutory accounts under the Companies Act
- These must be filed, at least in an abbreviated ver-
sion. A small company will not require an audit, as we
have seen, but, since an accountant will normally pre-
pare the business accounts, the trader will find that the
charge will increase for statutory accounts.
The tax advantages depend upon the trader’s circum-
stances. Those who commonly draw all the profits from
the business will find that the company faces higher
national insurance since a charge of 12.8 per cent is levied
on directors’ pay but not on sole traders’ or partners’
drawings. Dividends escape national insurance. However,
dividend income like savings income is always treated as
the highest part of income when deciding what tax rates
apply to it.
If it is intended to leave profits in the business, there
may be an advantage. Corporation tax on company
profits was at a nil rate for the first £50,000. This 0 per
cent rate was abolished from April 2006 and companies
with up to £50,000 of profits will pay tax at 19 per cent.
Companies with profits in excess of £50,000 pay 30 per
cent. This compares with the highest rate of income tax
of 40 per cent. In addition, the transfer of assets from a
sole trader’s or partnership business can result in an
assessment for capital gains tax, though it is possible to
follow methods that allow some deferment of payment
of this tax. These matters are beyond the scope of this
book and are not considered further.Capital gains tax
So far as ‘business’ is concerned, the taxation implica-
tions of this tax are likely to arise in a situation outside
the scope of this book, i.e. business transfers. If we
assume that a sole trader or a partnership is to transfer
the business and its assets to a limited company with the
sole trader or partners becoming the major shareholders
in the new company, then in so far as certain of the
assets may have been purchased some years ago, e.g.
land and buildings, and are now valued at a higher price
than when purchased, a charge to capital gains tax may
arise on the transfer. There are somewhat complicated
provisions called tapering under which account is taken
of the fact that some of the gain may be merely inflation
and this element is deducted from the gain.Planning
One of the features of the operation of a business, no
matter which vehicle is chosen, may be the need to obtain
at some stage planning permission in connection with a
business development.93