Business Structuring

TAP INTO TAX Iss. 3

The purpose of this series of blogs is to highlight innovative tax planning ideas, which you can ‘TAP’ into; we hope you find them useful.

There are many possibilities when considering how to structure a new business venture. These can range from a sole trader or simple general partnership, with only two or three partners, to complex structures involving groups of companies or Limited Liability Partnerships, with corporate members, where a company is also a partner in the LLP.

By way of illustration, it is well understood that operating as a partnership, which is transparent for UK tax purposes of course, is significantly more cost effective in terms of tax and national insurance contributions, than operating as a limited company through which the owners of the business are paid as employees. The greater the level of remuneration, the bigger this difference becomes. It is true that a company can pay dividends to its shareholders and this can bring the effective tax and NIC rate back down again. It is also true that corporation tax rates are lower than income tax rates, which can have an impact where profits are to be retained rather than distributed.

The permutations and comparisons can be complicated and it is difficult to know which structure will be the most tax efficient for your business when comparing income tax and corporation tax rates.

In cases where there is a commercial reason to restructure your business it may be possible to have the best of both worlds, benefitting from the tax breaks available to sole-traders/ partners and the lower rates of corporation tax. This can be achieved through the use of a limited liability partnership with a corporate member. This structure can produce significant tax savings, however the tax breaks although welcome cannot be the only commercial factor driving the business restructure. We can of course consider why a decision to restructure for your business is appropriate and the commercial factors which drive the decision to do so.

If you believe your business would benefit from a business structuring review to ascertain what tax and other cost savings could be achieved, or if you are about to invest in a new start-up business please contact us.