The existing business (for P6 (UK))
Part 2 of 4
This is the Finance Act 2015 version of this article. It is relevant for candidates sitting the P6 (UK) exam in the period 1 September 2016 to 31 March 2017.
Candidates sitting P6 (UK) after 31 March 2017 should refer to the Finance Act 2016 version of this article (to be published on the ACCA website in 2017).
In the first part of this article we looked at some fundamental issues relating to unincorporated traders.
The remaining parts of this article compare the total tax paid on the profits of a business depending on the business vehicle used, the implications of a change of accounting date and the cessation of a business.
TOTAL TAX – COMPARISON WITH COMPANY
The total tax paid on the profits generated by a business will vary depending on whether the business is unincorporated or is owned by a company. This is a significant issue and will be considered, together with legal and commercial issues, when deciding on a business vehicle prior to commencing to trade and also when considering the desirability of transferring an existing unincorporated business to a company.
The calculations necessary to compare the alternative business structures must be performed with care if they are to be accurate. They require a sound knowledge of income tax, national insurance and corporation tax.
Sammy’s business has an annual tax adjusted profit of £46,000. This figure is prior to any payments being made to Sammy. Sammy is considering three strategies: Strategy A, where the business is unincorporated, and Strategies B and C, where the business is incorporated.
Under Strategy A, where the business is unincorporated, the net income available to Sammy for the year ended 31 March 2016 is calculated as follows.