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August 2002

TAX OPPORTUNITIES FOR SMALL BUSINESSES GOING UNNOTICED

It is believed that more than 6,000 businesses operating as sole traders and partnerships in the region have failed to recognise the significant financial benefits of incorporation, says Steve Mitchell, project manager of Aberdeen based Acumen Accountants and Advisors.

Changes in tax and pension legislation in this year’s budget have meant that many small companies stand to gain considerable financial advantages if they consider a change in the status of the business, replacing the entity from sole trader or partnership to a limited company. At a time when statistics show that Scotland is in recession, Acumen believes that thousands of pounds are being paid unnecessarily to the Inland Revenue. These monies are essentially "key drivers that could provide a boost to help kick start the economy out of recession".

Currently sole traders and partnerships pay income tax on profits, limited companies pay corporation tax and the starting rate of corporation tax was reduced for the first time in the last budget to zero for the first £10,000 of company profits. Together with the reduction in corporation tax and the forthcoming increase in national insurance contributions, it is now possible for most sole traders and partnerships to reduce their tax bills by becoming limited companies.

Advises Steve Mitchell; "Tax calculations show that sole traders and partnerships may be able to make tax savings at most levels of profits. A sole trader making profits of £20,000 may be able to save up to £3,000 in tax, every year, depending on personal circumstances.

Partnerships could save tax as well. A two-partner business with profits of £50,000 could save up to £4,000, annually by becoming a limited company."

He continues; "Although the exact amount of any tax savings is dependent on individual circumstances, most sole traders and partnerships should at least consider the possibility of becoming a limited company. The economic situation is challenging for many small to medium sized businesses, and any initiative to cut costs should be investigated.

There are, however, many issues to be considered before deciding to become a limited company. Changes in the title of any business property, alterations to the terms of any borrowing and a view taken regarding cars or vehicles in the business are among some of the issues that may need to be considered."

Other issues that relate direct to the business process will also be affected by a change to a limited company. Stationery and signage will have to be altered to show the new trading name, new accounts will require to be opened with suppliers and care should be taken that future receipts from customers are made payable to the limited company.

Many of these issues will have a one-off cost attached, however Steve Mitchell advises that some businesses may receive tax relief if there is a change to a limited company. "Any sole trader or partnership not using the tax year as their accounting year may be due a one-off tax relief, called overlap relief, that will help offset any changeover costs.

Clearly there is much that sole traders and partnerships should take into account before deciding to change to a limited company. Business owners should discuss the issue with professional advisors and investigate the pros and cons.

However, even if you are sure a limited company structure is right for your business, you should be careful how you handle the change to the new structure. Handling the change wrongly can, at best, mean that financial planning opportunities are missed and at worst can trigger extra expense or tax liabilities."

Steve suggests that any changeover to a limited company be project managed by a professional advisor experienced in the process. "Given the broad range of specialist knowledge required to change to a limited company, business owners may not have experience of all of the issues involved. Using a professional advisor to pull the whole thing together will ensure that opportunities are maximised and save the business owner’s time."

To help sole traders and partnerships decide if the limited company route is right for them, Acumen are hosting a series of evening seminars titled "The Pros and Cons of Changing to a Limited Company".

To reflect the broad range of issues involved, representatives from the Royal Bank of Scotland, the Commercial Law Practice, the Grant Smith Law Practice and Gray & Gray Solicitors will share the floor with Acumen. Seminar dates are as follows: Marcliffe Hotel on Tuesday 27th Aug. Pittodrie Stadium on Wednesday 4th September and a seminar in Peterhead on 12th September. Places at these events can be reserved by contacting Erin or Elma at Acumen on 01224 573904.
Companies in the Acumen Group include Acumen Accountants and Advisors Limited, Acumen Financial Planning Limited and Acumen IT Consultancy Limited. Acumen Financial Planning Limited are authorised and regulated by the Financial Services Authority. Acumen Accountants and Advisors Limited are registered to carry out audit work and are regulated for a range of investment business activities by the Association of Chartered Certified Accountants but are not authorised and regulated by the Financial Services Authority. Acumen Financial Planning Limited, Registered in Scotland number 215343, VAT Number 894 6221 94. Acumen Accountants and Advisors Limited, Registered in Scotland number 153885, VAT Number 894 6221 94. Acumen IT Consultancy Limited, Registered in Scotland number 284749, VAT Number 859 474862. Acumen Holdings (Aberdeen) Limited, Registered in Scotland number 215503, VAT Number 894 6221 94. Registered office, Commercial House, 2 Rubislaw Terrace, Aberdeen, AB10 1XE.