My client is starting as a contractor. He has set up a Ltd Co and is planning to trade via this. (Flat rate VAT will save only £800 ish at his income levels not a massive consideration).
He plan to start some R&D work and has a idea that will bring a product to market within 6 months. He will be buying some components from the EU.This isn't massive (10k approx spend).
He wants to use the Ltd Co for both trades.
My questions are:
1. If the R&D made a loss and failed, could HMRC object to the losses being offset against the contracting income?
2. Should these trades be split into separate Ltd Co? (and why?)
Many thanks
Replies (8)
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A company can be any number of trades, but is still just one biz
Hi
It doesn't matter how many different trades or types of business are under the one LtdCo umbrella ... it's still just one company, unlike for sole traders or partnerships where each different sector has to be treated as a different biz. So for tax purposes the company makes a loss or a profit on the whole of its business.
contractor - IR35?
If the contractor's work comes within IR35, those profits will largely be eaten up by salary.
Surely profit loss for each trade
Hi
It doesn't matter how many different trades or types of business are under the one LtdCo umbrella ... it's still just one company, unlike for sole traders or partnerships where each different sector has to be treated as a different biz. So for tax purposes the company makes a loss or a profit on the whole of its business.
Surely it makes a profit or loss for each trade and then has scope to say sideways relieve a loss in same year against a profit from the other trade. If trading losses need to be c/fwd unrelieved then they will usually only apply against future profits of the same trade, or am I missing something obvious here?
Re the OP, is there thought to sell the company R & D in the future but retain the contracting business? I would take a close look at likely future pathways before just making decisions re more immediate tax planning.
One company, one profit ... where's the sideways relief?
Hi
It doesn't matter how many different trades or types of business are under the one LtdCo umbrella ... it's still just one company, unlike for sole traders or partnerships where each different sector has to be treated as a different biz. So for tax purposes the company makes a loss or a profit on the whole of its business.
Surely it makes a profit or loss for each trade and then has scope to say sideways relieve a loss in same year against a profit from the other trade. If trading losses need to be c/fwd unrelieved then they will usually only apply against future profits of the same trade, or am I missing something obvious here?
I tried to find the bit of HMRC guidance on this, but for the life of me can't put my finger on it, but, as far as I know (i.e. pretty damned sure) a company can do whatever it likes, and still be regarded as just one company. So, since it is one company, it doesn't have subsidiaries or other group companies for such things as sideways relief ... the company as a whole makes a profit or a loss, and that is what gets taxed, not the individual strands of that company.
Just found it ...see BIM80540 (with thanks to the previous poster BKD for referening BIM80535) ... but see BIM80555 ... more complex that I at first realised.
Guidance
I tried to find the bit of HMRC guidance on this, but for the life of me can't put my finger on it
Are you thinking of http://www.hmrc.gov.uk/manuals/bimmanual/bim80535.htm?
That would seem to cover it.
EDIT - Sorry crossed with earlier posts from BKD et al. Must type faster!
How closely linked and run are the two trades?
Because HMRC's view is that in most cases separate activities of a company will be treated as undertaken in the course of a separate trade (BIM80535)
KH
Subject to my comment above regarding separate trades treated as a single trade, it is quite possible that a company, doing "whatever it likes", does not - as a whole - make a profit or loss. It is true that offset of certain losses against profits of the same period is mandatory, but not with everything. And it is of course possible, in the appropriate circumstances, for a company to have multiple trades. It is open to the company to decide whether to offset losses in one trade against profits of another or to carry those losses forward.