Payments on account

mastrypuncher

A friend of mine whose accounts I do is going to struggle to pay his income tax bill come end of January. He is a sole trader at the moment & I have calculated he will be a around £500 better off a year if he went LTD. Also he is a builder so LTD status may offer him more protection from a liablity point of view if something went wrong on a job.

My question is though, if he went LTD say end of this year/early next, is that a ligitimate reason to have his payments on account reduced?

Monsoon

mastrypuncher wrote: »

My question is though, if he went LTD say end of this year/early next, is that a ligitimate reason to have his payments on account reduced?

Yes. Cessation of trade means no liability in the next year and so claim to reduce PoA.

If he goes Ltd now though, he will have 6 months of 2011-12 (assuming standard year end) that tax will need paying on, so take that into account.

HMRC charge interest on amounts paid late if PoAs reduced too much (but he might want to take that on the chin if he needs the cashflow!).

Defo go Ltd for liability with a builder, I would say.

mastrypuncher

Monsoon wrote: »

Yes. Cessation of trade means no liability in the next year and so claim to reduce PoA.

If he goes Ltd now though, he will have 6 months of 2011-12 (assuming standard year end) that tax will need paying on, so take that into account.

Thanks for the reply. Yes he has a standard tax year so 6 months of trading already this year. Also I heard that profit extraction by way of dividends would effect tax credits. I know he claims tax credits as single parent for his teenage daughter. Could this adversly effect his tax credits?

Monsoon

Dividends (gross) and salary from a company are considered as income for tax credits.

There was a bit of a hoo har about whether directors need to be paid NMW to qualify for TCs but I think the general consensus now is it's fine, and his remuneration is income to be declared, which means employment income and dividends.