Sole trader to Partnership

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Poodle
Poodle Registered Posts: 711 Epic contributor 🐘
Hi

Just taken over some new clients. Previous accountant did not offer payroll and when they challenged him about the size of their tax bill he went "very much on the defensive", should I say.

Background:
They have been working at the same business for years and submitting SA'a as two separate sole traders. Sole Trader 1 taking all income to the business and then paying Sole Trader 2 a monthly wage >£700.

Basis perods have been 01/10 - 30/09 so 2007 return based on 01/10/05 - 30/09/06.

Both in BR tax bracket.

We explored two options

1 ST 1 to take ST 2 as PAYE
2 Form a proper partnership.

We elected for option 2.

Now I obviously want to back date the partnership as far as possible without penalty.

What would you suggest?

A - Go back and cease the sole trader at 31/03/07 and then amend the 2007 tax return for the extra 6 months. Starting the partnership on the 1st April 2007?

or

B - Cease the sole trader at 30/04/07 and start the partnership at 01/05/07.

C - something else

Thanking you all in anticipation

Poodle

Comments

  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    Quite an involved tax case you have here Poodle.
    Poodle wrote: »
    Background:
    They have been working at the same business for years and submitting SA'a as two separate sole traders. Sole Trader 1 taking all income to the business and then paying Sole Trader 2 a monthly wage >£700.

    Firstly, where is the commercialality in this? Isn't this just unlawful avoidance? Isn't it really just PAYE for ST1? What is it that ST2 does for ST1?

    Start from here and see why we go :laugh:

    Regards

    Dean
  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
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    Dean wrote: »
    Quite an involved tax case you have here Poodle.

    I Know, it came through recommendation and I am trying to do the best that I can for two victims:001_smile:

    Firstly, where is the commercialality in this? What do you mean? Isn't this just unlawful avoidance? Isn't it really just PAYE for ST1? What is it that ST2 does for ST1? Well not really because they are husband and wife involved 50/50 in the business taking the same responsibility and peforming the same duties as each other so they should have been a partnership years ago. From what I gather the previous accountant was about 90 and wasn't this how sole traders used to deal with a wifes involvement into a business, in the good old days?
    Start from here and see why we go :laugh:

    Regards

    Dean

    There are other people being paid out of the PAYE scheme but that's stage 2!!

    Poodle
  • Dean
    Dean Registered Posts: 646 Epic contributor 🐘
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    By commercialality, I mean what is it that ST2 does for ST1? Would ST2 make parts or the like that ST1 would use in its final product?

    By the sounds of it, it is just one business that has two sets of accounts prepared to utilise both PA. Maybe it's before my day but I can't see how or why you would structure a business like this! It's either ST or P'ship.

    I don't think you should worry too much about what has happened in the past (I was starting to go down that route and on reflection it's not necessary). I would explain that to the client and just look to move forward.

    My next questions would be; what sector do they fall in? What is there turnover? Etc. etc.

    Would they benefit from Incorporation? If they are in say the construction industry they might benefit from the veil of incorporation. If they have high turnover and generate good taxable profits a company would essentailly save them the class 4 NIC charged as a ST.

    Do you have a record of the overlap profits being carried forward?

    Regards

    Dean
  • Poodle
    Poodle Registered Posts: 711 Epic contributor 🐘
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    By the sounds of it, it is just one business that has two sets of accounts prepared to utilise both PA. Maybe it's before my day but I can't see how or why you would structure a business like this! It's either ST or P'ship.Agreed

    I don't think you should worry too much about what has happened in the past (I was starting to go down that route and on reflection it's not necessary). I would explain that to the client and just look to move forward.
    I sort of had this set in my mind as well.
    My next questions would be; what sector do they fall in? What is there turnover? Etc. etc. will send this privately

    Would they benefit from Incorporation? If they are in say the construction industry they might benefit from the veil of incorporation. If they have high turnover and generate good taxable profits a company would essentailly save them the class 4 NIC charged as a ST.
    We did discuss this but with the sector that they work in and the fact that they could be deemed employees themselves then to incorporate would remove any chance of recourse
    Do you have a record of the overlap profits being carried forward? I need to find this out. I will be sending the usual clearance letter to the previous accountant that includes this question and hope that he has retained the record. I am not sure if HMR&C keep this on their files, as I will be ging back 15years +?


    Poodle
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