I had a telephone call this week from a chap who said “I am phoning because I want to start a company”. My immediate reaction after thanking him for the call was to ask why he needed a company, if he meant a limited company. This is because from the tax point of view it is not necessarily a good idea to have a company, and there needs to be a commercial reason if profits are going to be limited initially or there might be trading losses which would be useful to an individual who is a current taxpayer-employee, or has recently been one.
It turned out that there was a commercial reason for having a company. The guy is going to do outsourced work for a Government department which insists on contracting its labour through a company. That in itself is laughable in an era in which HMRC has tried to crack down on such arrangements through IR35, attacked umbrella company arrangements, and whined, actually quite unreasonably, about “false self-employment” in the construction industry. One wonders whether the different branches of Government in Whitehall ever speak to each other.
My caller earned himself some “Brownie points” in my book by actually asking a professional adviser. So often people do not when they should, and I am not talking about the pensioners I mentioned in my previous piece, who frankly should not have to seek professional help.
As I said, my caller had a commercial reason for incorporating which was good to know. He had asked for help. However, many people spurn professional advice and just go ahead. A few months ago I came across an instance where two ladies had gone into business. They had formed a company but were struggling to get their business concept off the ground. I could understand why they wanted limited liability. However they had given personal guarantees in respect of borrowings so were not protected from their largest creditors. I felt that with early substantial losses and both having decent full time jobs as well, they could have done with having their losses set off against their personal income, so surely should have formed a partnership, though not necessarily a limited liability partnership where losses may be harder to relieve. They were right to consider commercial reasons first but those commercial reasons should include protecting cash flow through proper management of tax losses
There are lots of people who need help but will not pay to save tax, which will far outweigh the professional fees. Even this year's Finance Act (2009) and the loss carry-back provisions are a minefield, with incorrect loss claims likely to be quite costly for someone who does not understand the pitfalls. There are other tax reasons not to incorporate quite apart from the issue of early trading losses. If the business owner wants maximum tax relief on an expensive car, again he or she should consider operating as a sole trader or through a partnership. In the end, it is essential and cheaper to obtain professional tax advice. Of course I would say that, but then I am in a position to know.
One thing I had drummed into me on sales courses is that prospects don't know what they don't know. In tax or anything else, it is our job to help them, and it's for their own good, not to line our pockets.
© Jon Stow 2009