Sole trader Vs Partnership


G

Gaz

Hi, recently started trading as a Sole Trader, while keeping alternative
full time employment.

If my business makes a loss of £3,000, and in my full time employment I
earned £13,000, when it comes to tax, am I allowed to offset one against the
other and reduce my tax liability?

MY wife pays a lot more tax then I do, so if the above is true, would it be
worthwhile becoming a partnership, so a larger loss could be offset off the
both of our paid earnings?

Gaz
 
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R

Ronald Raygun

Gaz said:
Hi, recently started trading as a Sole Trader, while keeping alternative
full time employment.

If my business makes a loss of £3,000, and in my full time employment I
earned £13,000, when it comes to tax, am I allowed to offset one against
the other and reduce my tax liability?
Yes, but looking ahead to the future, if there is a possibility
that you might build up the business to go into enough profit for
you to ditch the employment, it may be better to carry forward
the losses so that you will pay less tax when you can least afford
to pay it.
MY wife pays a lot more tax then I do, so if the above is true, would it
be worthwhile becoming a partnership, so a larger loss could be offset off
the both of our paid earnings?
Yes, but it could fall foul of anti-tax-avoidance rules unless she
takes an active part in the business. Also, it's not really a
permanent solution. If the business is going to be making a loss
"forever", there may come a point when the taxman will say it's a
tax-saving scam, an attempt to get him to subsidise what is more
like a hobby than a bona fide business.

If it *is* going to move to profit, it would be better not to be
a partnership if she continues to have largeish other income,
especially if she's a HRTP.
 
G

Gaz

Ronald Raygun said:
Yes, but looking ahead to the future, if there is a possibility
that you might build up the business to go into enough profit for
you to ditch the employment, it may be better to carry forward
the losses so that you will pay less tax when you can least afford
to pay it.
How does this work, how do I carry forward losses? Does it mean I could pay
tax, not on a 12 month basis but on a long term. eg
yr 1 loss of £6000
yr 2 profit £4,000
yr 3 profit £9,000

I get taxed on the average yearly profit??

..
If it *is* going to move to profit, it would be better not to be
a partnership if she continues to have largeish other income,
especially if she's a HRTP.
Although she earns more then I do, she hasnt hit the HRTP yet......

thanks for your help

Gaz
 
J

Jonathan Bryce

Gaz said:
How does this work, how do I carry forward losses? Does it mean I could
pay tax, not on a 12 month basis but on a long term. eg
yr 1 loss of £6000
You pay no tax. Carry forward losses of £6,000
yr 2 profit £4,000
You use £4,000 of the carried forward losses. Pay no tax. £2,000 to carry
forward.

yr 3 profit £9,000
You use the remaining £2,000 of losses, and pay tax on profits of £7,000.
 
R

Ronald Raygun

Gaz said:
How does this work, how do I carry forward losses? Does it mean I could
pay tax, not on a 12 month basis but on a long term. eg
yr 1 loss of £6000
yr 2 profit £4,000
yr 3 profit £9,000

I get taxed on the average yearly profit??
Something like that.

Taking your figures, in year 1 you would have the choice between
setting the £6k loss against your £13k day job income and carrying
it forward (in fact you can split it, set some against other same
year income and carry the rest forward). The choice is basically
between paying less tax now and paying less tax later. You can make
this choice each year. If you decide to carry all available losses
forward, it might work like this:

yr 1:
Carry £6k loss forward to yr 2.

yr 2:
Set £4k of loss from year 1 against your yr 2 profit, and carry the
remaining £2k forward to yr 3.

yr 3:
Suppose you give up the day job this year, so the £9k is your only
income. Suppose personal allowance (currently £4615) by then is £5k
(to keep the arithmetic simple). You could then set the £2k carried
forward loss against the £9k income, giving £7k, minus personal
allowance of £5k giving only £2k taxable income for that year.

yr 4:
Back to normal. Your entire income is from the business.
 
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D

Doug Ramage

Ronald Raygun said:
Something like that.

Taking your figures, in year 1 you would have the choice between
setting the £6k loss against your £13k day job income and carrying
it forward (in fact you can split it, set some against other same
year income and carry the rest forward). The choice is basically
between paying less tax now and paying less tax later. You can make
this choice each year. If you decide to carry all available losses
forward, it might work like this:
<snip>

Some brief comments:

1. You cannot split the loss between different tax years unless the loss is
greater than the income - which it is not in the above example.

2. Assuming a valid partnership exists, then the partners can split the
profits as they see fit, and can change the split from year to year. The
basis for income sharing need not be the same as capital sharing.
 

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