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Capital Introduced Sole Traders

Capital Introduced Sole Traders

My colleague wants to set up as a sole trader. He wants to take out a loan in order to aquire assets / stock etc to be used in the business.

Would it be better to take out the loan under his own name, introduce this into the business and the business then repay the loan.Could he charge the business interest on his loan or could he take out drawings from the business to repay the loan? What are the tax implications for the business? Are drawings taken out in addition to any salary taxable under PAYE and NI ?

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24th Apr 2002 10:57

Phil you weren't thinking of VAT 69?

Phil,

Were you thinking of VAT 69 by any chance?

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23rd Apr 2002 17:26

No veil
There is no veil between a sole trader and his business. The fact that we show a sole trader as having a capital account on his balance sheet is pure convention.

He cannot charge any interest to the business because it is owned by him and you cannot make a profit or loss by transacting with yourself. If he charges himself interest then he is claiming to receive unearned income from the sole trade. That would be NIC avoidance. You can't do it.

It doesn't matter if he takes the loan out in his own name or the business name. The business name is just an alias for the man himself. The loan should be shown on the balance sheet and the interest debited in the P&L account in the normal way.

Tell him to borrow the money and to make the repayments through the business bank account and to record them as business outgoings. The accountant will then split them into interest and capital so that the balance sheet and P&L a/c show the correct figures. You could use the "rule of 79" or "SoD" method. That is for discussion with the accountant.

There can be no PAYE applicable to the sole trader. He is taxable on the business profits as returned and is liable to Class 4 NICs at the same time. He must however register for Class 2 NICs within three months from the month of commencement or a £100 penalty will be due. Sole traders are not taxed on their drawings; they are taxed on the profits of the trade as adjusted for tax purposes. Drawings are irrelevant (unless they exceed profits, in which case there could be an Inland Revenue attempt to disallow part of the loan interest as a non-business expense).

You are confusing this with a private company situation and thence thinking it to be a far more complicated issue than it is. It is no issue at all; the man and his business are indivisible.

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23rd Apr 2002 17:51

Phil the age is catching up

It is rule of 78 (not 79). this made up of, you guessed it, the sum total of all months from 1 to 12.

And for completeness, SoD is not some rude word. It stands for Sum of Digits method.

Otherwise, my learned friend has said it all.

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24th Apr 2002 10:29

Thanks, Jay,

It is indeed the rule of 78. I was so busy making sure that I did not call it "the rule of soixante neuf et neuf" (as I was taught it by a rude lecturer) that I lost the plot

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24th Apr 2002 11:06

Your teacher should have taught you ....

Phil,

It is soixante dix huit as I was taught correctly by a very nice long haired teacher!.

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By Anonymous
24th Jan 2010 18:57

??

So what happens if the loan is taken out to buy a franchise from another soletrader for example. If someone borrowed £20K - would you still show this on the balance sheet? And where would the debit side go, drawings? And can u still put the interest though p and l?

 

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25th Jan 2010 03:10

Bank

Dr Bank

Cr Loan

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