New Limited Company or Not?

Setup up new business under existing Ltd company with significant director loan or not...

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Hello,

I've asked my accountant this one but he's been a bit vague and I'm not really sure what is best so I am seeking a second opinion. I am the joint director of a tuition company which over time now owes the directors around £28,000 in director's loans. I expect it to make a net profit of around £10k or so this year and would like to keep it going. We are starting a new mobile catering business and I initially had thought it would be better to run this under the current limited company. We would need to extend the director's loan by £20,000 for startup costs. My thought was that if I ran it through the existing company then it would allow me to hopefully withdraw the director's loan more quickly and tax free. 

My accountant seems to accept this but has also said that as they are very different I should consider opening a new company. This way I could concentrate on increasing profitability in both which would be good if I wanted to sell at any point. He has also said that if I did this then the original company could charge the new company a management charge to shift profits and cash to it to make it healthier. Having looked a bit at management charges I'm not really clear what amount could be charged here.

Any views would be much appreciated. 

Thanks

 

 

Replies (17)

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RLI
By lionofludesch
17th Apr 2019 09:57

It's never a good idea to have such varied activities in the same company.

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By punkt
17th Apr 2019 10:00

Thanks for your response. What is the reason for not wanting varied activities going under the same company with different trading names? And more importantly with respect to my question do these outweigh any advantage or not with respect to director's loan/tax of running them under the existing company.

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Replying to punkt:
By johngroganjga
17th Apr 2019 10:07

Because you will never be able to sell the company without moving one of the businesses out of it.

Having two businesses in two different companies has no effect for better or worse on your ability to use their cashflow to repay your existing loan.

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By punkt
17th Apr 2019 10:51

Thanks. So your saying that I can via this management charge transfer profits to the current company and hence be able to withdraw my director's loan? Or is there another way of withdrawing the loan say if original company makes no profit but new company makes significant profit.

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Replying to punkt:
By johngroganjga
17th Apr 2019 11:25

What you need to transfer to the current company to enable it to repay your loan is cash, not profits.

By all means consider management charges at a later stage as a way of repaying the inter-company loan, if you want to.

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Replying to johngroganjga:
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By punkt
17th Apr 2019 11:45

Thanks. So it is perfectly legitimate for new company to loan old company cash for any reason which can then be used to pay off loan. In which case setting up a new company seems like the right way to go.

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By punkt
17th Apr 2019 11:02

Or can new company with profit make a loan to original company which can then pay off DLA?

Thanks

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By Accountant A
17th Apr 2019 11:08

punkt wrote:

He has also said that if I did this then the original company could charge the new company a management charge to shift profits and cash to it to make it healthier.

I think the technical term for that is b****cks.

Get yourself another accountant..

Don't rely on 'professional advice' that comes free from anonymous people you have never met and who know next to nothing about your and your circumstances.

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By punkt
17th Apr 2019 11:18

Thanks Accountant A. This is why I came here to query it as I didn't think this was legitimate. So if I start a new company as johngroganjga suggests then will I be able to use any profits from new company to be able to withdraw the director's loan from the old company? If not then it seems sensible to have the two businesses under one ltd company.

I will look to engage a new accountant I think but any help in the meantime would be very useful.

Cheers

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By Duggimon
17th Apr 2019 12:32

The problem you have that you need to address is not the one in your post, it's that for whatever reason you don't trust your accountant.

Either trust their guidance or get a new accountant, don't keep paying for advice you don't intend to use.

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Replying to Duggimon:
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By Tax Dragon
17th Apr 2019 13:39

To which I would add... everyone so far has talked about the legitimacy of the transactions - which is what the OP asked for, after all. It's hardly complete and rounded advice; it's just an answer to an (incomplete) question.

OP, don't act based on what you have been told here, other than to run it past your accountant. Whether that is you current or your next accountant is your choice.

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Replying to Tax Dragon:
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By Tax Dragon
17th Apr 2019 14:16

Actually I take that back (in part). The OP has asked about tax; it's the answers that don't mention it.

I stand by my comment (in fact, that observation underscores my comment) about not acting on advice obtained from Aweb.

Not that you would anyway, given to the disclaimers you saw when you registered.

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Replying to Tax Dragon:
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By punkt
17th Apr 2019 16:16

Thanks for the advice which I take onboard. Clearly all situations are different although I suspect my situation is fairly common place and I'm always surprised how many answers you get to the same question from professionals.

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Replying to punkt:
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By Tax Dragon
17th Apr 2019 16:59

Point 1) If you use free-for-all internet forums, you may have no idea who is answering, professional or otherwise.
Point 2) Professionals have different specialisms and will answer accordingly.
Point 3) Professionals (such as your current accountant) that know something about you will use that knowledge in providing advice. Professionals (and others) that know nothing about you will rely only on what you say, which, with respect, is open to interpretation. Some will also make some working assumptions that they may or may not tell you.

Having said all that, the range of answers above is quite narrow. The general consensus seems to be that you are likely to be best served starting a second company. However, following changes to tax law a couple of years ago, I am not convinced that I agree with the old logic – it’s certainly not automatic, based on the limited information you have supplied.

And if you are proposing moving money between two companies, whether by loan or payment, there are very likely further tax considerations, none of which has yet been discussed.

Decent advice on such issues will not cost that much. Failing to take that advice could cost a lot more.

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Replying to Tax Dragon:
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By punkt
17th Apr 2019 17:19

Thanks. The consensus does seem to be two companies although as you say I will take advice. It seems very unclear whether a transfer between companies to enable me to extract the director's loan, would be possible or more to the point wise. It seems that it may get caught by s455 if a loan is made to the company and then this is used to reimburse a director in an associated company.

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Replying to punkt:
RLI
By lionofludesch
17th Apr 2019 17:26

punkt wrote:

It seems that it may get caught by s455 if a loan is made to the company and then this is used to reimburse a director in an associated company.

Rubbish.

Never heard such nonsense.

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Replying to lionofludesch:
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By Tax Dragon
17th Apr 2019 19:05

lionofludesch wrote:

Rubbish.

Never heard such nonsense.

I'm really not going to be drawn into the tax discussion. Although the OP believes his/her circumstance to be commonplace, I for one don't act for any joint directors of tuition companies owing the directors £28,000, but which are expected to make a net profit of £10k or so this year and who are starting a new mobile catering business with the help of further director funding of £20,000.

The OP needs an advisor s/he can trust, end of.

But Lion, for your own good, you should read up on the rules referred to.

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