Income tax
	Capital gains tax
	Stamp duty
	Inheritance tax

We can advise you on all these issues and make the transition from sole trader or partnership to limited company smooth and straightforward for you.

Anne Hutchings wrote two articles for Chemist & Druggist on the tax benefits of a limited company. These articles are reproduced below.

 

Maximising the tax benefits of a Limited company - Part 1 June 2003 There has been a lot of publicity in the last couple of years about businesses benefiting from changing their trading structure from a sole trader or partnership to a limited company. Many of the pharmacists I speak to are unsure about whether a company structure can really save them tax and whether it will be worthwhile for them to incorporate their business. In this series of articles I aim to demonstrate that there are real and genuine tax savings to be had.   The difference in tax rates   A tax saving can be achieved by using a limited company because of the difference in tax rates for individuals and companies. In addition national insurance for the self employed can be as high as £1,910 whereas this can sometimes be totally avoided in a limited company.   Individuals     Companies   First £1,920 taxed at 10%   First £10,000 0% Next £27,980 taxed at 22%   Next £40,000 23.75% Over £29,900 taxed at 40%   Next £250,000 19% Dividends basic rate taxpayers 10%   Next £1,200,000 32.75% Dividends higher rate tax payers 32.5%   Over £1,500,000 30%   In summary, individuals with profits over £29,900 (after deducting any personal allowances) will pay tax at 40%, whereas a company can have a profit of up to £300,000 with an average tax rate of only 19%. By running the business through a company and only drawing out income up to the higher rate tax limit a pharmacist can make a substantial tax saving.   There are two problems with this. Firstly, if pharmacists pay themselves a salary from the company this will be liable to employees and employers national insurance which will largely erode the tax savings. Secondly many pharmacists will wish to draw out most of their profits putting themselves back into the 40% tax bracket, again eroding much of the potential tax savings.   Overcoming the problems   National Insurance   National insurance can be avoided completely by paying a low salary and taking the balance in the form of dividends. For example, a salary of around £4,600 will use up the pharmacists personal tax allowance so no tax will be payable on this and it will be just under the national insurance limit. Dividends are not liable to national insurance. This simple structure allows pharmacists to draw substantial sums out of their companies without incurring any national insurance contributions. Where pharmacists are making pension contributions it may be necessary to vary the salary level to justify the pension contributions and professional advice should be sought so that the optimum figures can be calculated.   Drawing out the profits   Pharmacists wishing to draw out most of the company profits may consider making a spouse and or other family members shareholders in the company. This way they can also receive dividends. For this to be effective the shareholders other taxable income needs to be fairly low. In addition anyone assisting in the business can have a salary. For example, a pharmacist has a spouse who has no taxable income. The spouse helps out in the shop occasionally, makes some deliveries, or perhaps does the bookkeeping. It should not be too difficult to justify a salary of around £4,600 per annum (just under the tax threshold) in addition they could receive a dividend of around £26,900 without paying a penny in tax or national insurance. When this is added to similar amounts which the pharmacist can draw out of the business the total comes to £63,000.   An example of how this works and the tax position of the company is as follows:   Mr Jacobs pharmacy has a taxable profit of £70,000,for the year ended 31/3/03. His wife helps him in the shop part time but has not received any payment. As a sole trader Mr Jacobs tax bill would be:   Tax £     20,450 National Insurance 1,910 Total 22,450     If he had paid his wife a salary of £4,600, his tax   bill would be reduced by £4,600 x 40% (1,840)     Net tax 20,610 Net income after tax 49,390   If instead Mr Jacobs was trading through a limited company with his wife as a shareholder his tax position would be:   Company profits £     70,000 Less salaries for Mr & Mrs Jacobs @ £4,600 (9,200) Taxable profit 60,800     Less corporation tax @ 19% (11,552)     Cash dividends to Mr & Mrs Jacobs 49,248   The tax position of Mr & Mrs Jacobs as individuals is as follows:   Salaries £     9,200 Dividends - treated as being paid after deduction of tax at 10%. (although the company does not actually have to pay this tax) 49,248 Net income after tax 58,448     Net income as a sole trader (49,390)     Tax saving achieved by limited company 9,058   The above type of saving can be repeated each year.     Incorporation   There are a number of ways in which a pharmacy can be transferred to a company. There are two big tax issues, which must be considered, which are capital gains tax and stamp duty. The business can be incorporated without incurring either of these taxes. However, in the last year it has become popular to sell the business to the company and incur some capital gains tax. The reason for this is that it is now possible to sell business assets which have been owned for two years or more and pay capital gains tax at a rate of just 10%. In this article I am going to focus on this particular method.   The main pharmacy asset is normally goodwill and this can now be sold without stamp duty, which just leaves the capital gains issue. It can make sense to pay a little capital gains tax in exchange for accumulating a substantial directors loan account in the company.   This is how it works:   Goodwill market value £     300,000 Bought originally for 50,000 Capital gain 250,000     Capital gains tax 25,000   The £300,000 value is transferred to the pharmacists directors account in the company, which means that the company owes him that amount of money. In exchange for the tax payment of £25,000, the £300,000 can be withdrawn (cash flow permitting) at any time without the pharmacist incurring any further tax liabilities. The pharmacist may choose to draw the money over a period of years to supplement his annual salary and dividends and so avoid tax at 40%. The company will be treated as having paid £300,000 for the goodwill and this will be allowed against any subsequent gain the company makes if it sells the goodwill. The company profits are taxed in the normal way i.e. ignoring the cost of the goodwill. Having said this it is now sometimes possible to get a tax deduction for goodwill spread over a number of years and I will have covered this in my next article, below.   Other items which can be added to the directors account are the values for fixtures, fittings and equipment. Motor vehicles are a big issue which will be covered in the next article but generally it can be better to keep these outside the company. Where the freehold premises are owned by the pharmacist I generally advise keeping this outside the company. The reasons for this are stamp duty and flexibility. If the premises remain in the personal ownership of the pharmacist the company can pay a rent to the pharmacist. This could be very useful if the government ever clamp down on the dividend route for extracting money cheaply from the company. In addition if the company is sold in the future the pharmacist may want to retain the property as a source of future rental income.

Maximising the tax benefits of a limited company - Part 2 July 2003 I am often asked “what are the downsides of trading through a limited company?” I don’t think there are many these days. The tax treatment of company cars can be a minus compared with the deductions which sole traders and partnerships tend to claim for motor expenses. However, this is usually a small disadvantage compared with all the tax advantages of a company.   With company cars, generally, it will be more cost effective for the pharmacist to own the car personally rather than through the company. This is because individuals are now taxed very heavily on company cars. It is simply a question of running the figures through one of the specialist software packages available, your accountant or tax adviser should have access to this type of software.   Where the car is owned personally the company can pay the pharmacist an allowance for business mileage. This allowance is 40p per mile for up to 10,000 miles and 25p per mile for any additional business mileage. The allowance can be claimed in the business accounts for the company as a tax deductible expense but it is tax free in the hands of the pharmacist.   There are some occasions where a company car can be beneficial for example, small cheap cars with low CO2 emissions. Choosing the right car can keep the pharmacists car tax bill as low as £500.   Taking advantage of the tax rules for cars   Pharmacists who like to drive expensive cars with high CO2 emissions should consider owning them personally and claiming business mileage allowance from the company. However, the company can be used to provide cars with a low list price and CO2 emissions for other family members such as the teenage children.   Other tax-free company benefits   There is a whole range of tax free benefits which can be provided to company employees. This includes pharmacists who own the company and are also employees. A few examples of tax free benefits are:   Mobile phones for the pharmacist and also members of his/her family Free parking near the business premises, i.e. season tickets for car parks Various types of insurance i.e. accident, death in service, permanent health Regular health screening   Goodwill   Another tax benefit of operating through a company applies to the acquisition of goodwill. Tax relief can be claimed for the cost of goodwill when it is acquired by a company (note sole traders and partnerships don’t qualify for this tax allowance). Therefore, locums or existing pharmacy owners looking to acquire the goodwill of a pharmacy will find it more tax effective to be operating through a company. The period over which the goodwill is written off in the company accounts is debatable. As this is a new relief introduced in April 2002 it remains to be seen what attitude the Revenue will take if claims are too provocative. Pharmacists may consider a period of between 10 and 20 years reasonable. As business loans for the acquisition of goodwill are frequently over 10 years it may be possible to justify a 10 year write off period in the accounts.   Example   Mr Jackson a locum pharmacist forms a limited company and purchases the goodwill of a pharmacy for £300,000. This is written off in the company’s accounts over the next 10 years giving the company a tax deduction of £30,000 per annum. The net effect of this is to reduce the company’s tax bill by approximately £5,700 each year (assuming a company tax rate of 19%).   If instead Mr Jackson was a sole trader he would not obtain this tax allowance and would pay tax on an additional £30,000 profits each year. In fact as a sole trader he would probably be paying tax on some or all of these profits at a tax rate of 40%.   Where sole traders/partnerships decide to incorporate their existing business sadly tax relief for goodwill is not available if the goodwill was owned prior to 1/4/02. The Revenue anticipated that business owners would be tempted to wildly inflate the goodwill values of existing businesses and then transfer them to a company to claim tax relief, so they introduced legislation to counteract this.   Another frequently asked question is what happens when the business is sold. Won’t more tax be payable than would have been payable as a sole trader? The answer is not necessarily. It is a question of number crunching your way through the various options. As a general guide it will usually be more tax efficient to sell the company rather than the assets in the company. Trading through a limited company is commonplace these days and it should not be difficult to persuade a purchaser to buy the company rather then the assets of the business. If the business is sold the tax position of the vendor would be as follows:   Mrs Diamond operated her pharmacy through a limited company. She has the option of selling the pharmacy by either selling the shares in her company or by selling the goodwill out of the company. She has been offered £500,000.   Option 1 - selling the company shares   Sale proceeds £     500,000 Less original cost of shares - say (100) Capital gain 499,900     Deduct business taper relief (maximum 75%) (374,925) Net gain 124,795 Less annual capital gains exemption (7,900) Taxable capital gain 117,075 Tax payable at say 40% 49,830     Option 2 - selling the goodwill out of company   Sale proceeds £     500,000 Less cost of goodwill in 1996 (200,000) Capital gain 300,000     Deduct indexation allowance - say (35,000) Net gain 265,000 Tax payable at company tax rate - say 19% 50,350   The problem with option 2 is that the proceeds of the sale after company tax are still in the company, if Mrs Diamond wants to extract the money she will have to pay further tax. The cheapest way to extract the funds at this stage would probably be to liquidate the company and pay capital gains tax on the proceeds. Assuming the company funds are say £450,000 the additional tax payable by Mrs Diamond at capital gains rates after taper relief etc would be approximately £41,800, making the overall tax liabilities just over £92,000.   Summary   Taking the above scenario selling the company would save Mrs Diamond just over £45,000 in tax. The key with tax is to use the rules to your advantage. Limited companies are very tax effective for many pharmacists, my advice is to take advantage of the legislation.   As always these are only guidelines and professional advice must be sought before taking any action.