Buttercup Limited is considering moving from its prime site into smaller premises in 2009. Explain the tax position of the company on the sale of the premises and the reliefs which are available provided certain conditions are fulfilled.
In this case, there will be a number of tax considerations that Buttercup will have to take into account. Selling a business generates income which is taxed as per the law. The tax may be in the form of personal tax or capital gains tax. Capital gains tax is usually taxed 10% lower than personal taxes and hence they prove to be more tax advantageous (James 2009, p.65).
The structure of the company as well as the nature of business primarily defines what sort of tax will be imposed on the sale of the business. Since Buttercups Limited is a full-fledged company, the most probable tax that will have to be paid is the capital gains tax. Another consideration besides how the income is taxed is how the income is earned and becomes taxable. Often, the buyers and sellers of businesses can work out a mutually agreeable tax pattern or structure that they will have to pay to the tax authorities. In many cases, the structures of the tax between both the parties have remained quite undecided due to which problems have risen. As a result, it is most beneficial to use a tax advisor at this point to help frame a proper tax structure.
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As for the purchasing of new premises, Buttercup needs to conduct an analysis of whether its decision will be feasible or not. The company needs to check the different types of taxes that will be imposed or taxes that will be eliminated or reduced as a result of changing locations. Types of taxes include property tax, corporation tax, capital gains tax etc. Buttercups need to estimate if the current tax it pays in the large premises is more than the forecasted taxes of all its small premises. Hence, a lot of forecasting has to be done using prediction models of what lies ahead for the company in terms of income, expenses and balance sheet items in order to assess the cost of taxes (Cerioni 2007, p.89).
A thorough review of all the government laws regarding tax structures should also be done to see the pattern of tax imposition on the company. All laws related to the location as well as national and international laws regarding small businesses should be taken into account. Tax differences within different locations should also be judged as commercial locations are often taxed heavier than residential or remote areas. Any tax incentives that have been proposed by the legislative authorities need to be considered as well. In United Kingdom there has been a boom in the startup of small business recently owing to new laws that have been enacted which support the operations of small companies.
One of these laws has been "Small Business Commercial Property Tax Relief Act of 2008" which seems to shed a light on the hardships that small businesses have to go through over their sheer operating costs and building rents (Business and Excise Tax 2010, p.1). As Buttercups is thinking of undergoing this sale process in 2009, this law holds for them various beneficial aspects. In 2009, for properties of value less than $3 million commercial property taxes were reduced by 0.15% from 1.85% and will continue to do so for the next two years at least. For property value of more than $3 million, the reduction in property taxes in 2009 was by 0.1%. Hence in either case, the company can be sure that if it locates it small new premises in a commercial region which will be m the ideal location for a gardening business, it will incur decreasing property taxes for the coming three years. This is a tax relief that can be enjoyed by Buttercups small premises.
Other tax reliefs that Buttercups will experience as a result of opening up smaller premises are:
Capital allowances: this allows the business to write off the cost of their assets purchased during startup against their taxable income. Companies in UK can actually get up to 100% annual investment allowance up to £50,000. These assets include life-long assets, machinery, plant and other essential features such as the installation of electricity, gas or water lines in the business. Amount in excess of £50,000 will have to be rerated similarly as the normal imposition of capital allowances (Schon 2008, p79)..
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100% first year allowance car allowance: companies can take up to 100% car allowance in the first year whose CO2 emissions are 110gm/km or less or that have had expenditures such as natural gas, biogas and hydrogen refueling equipment.
Enhanced Capital allowances: these allowances can actually work real well with Buttercups as those allowance targets companies that have invested in some energy-saving scheme or environment conservation system. The government can give a tax relief of 100% in these cases and Buttercups being an environmentally conscious company can take full advantage of it.
Business Premises Renovation Allowance: if Buttercups has an existing facility where it can start up its small business, it may be able to take advantage of the business premises renovation allowance. The company can get up to 100% tax relief in this area too.
Tax relief for research and development: Buttercups can greatly take advantage of research and development tax cut as their business has a very vast scope for research into new and different gardening species and plants. They can come up with different fertilizers or plant types and hence, this tax relief can prove to be very beneficial for them (Leceister 2006, p.78). And small companies which incur research and development expenditure may claim tax relief on 175% of the amount of that expenditure (Alan 2009, p344).
Enterprise Investment scheme: These is yet gain an important means of tax relief for Buttercups as this allows certain small companies to pool together and raise capital on which they can demand an allowance for the investors.
An unincorporated business is one that does not have its own separate legal entity that is its owners and the business are not recognized as separate entities in the eyes of the law. Hence, the owners are fully liable for any breach of business activity or inactivity. Examples of unincorporated businesses are partnerships, sole traders and family trusts.
On the other hand, a corporation is a business setup which has a separate legal entity. The owners and the company are both seen as distinct entities in the eyes of law. Hence, the owners in case of any default on the part of the company are not liable for the breach, but the name of the company can be sued in the court of law. Example of corporation is the public limited company (Leceister 2006, p.78).
Both of these business types of business enterprise are taxed by the government. However, the pattern and types of taxes that are imposed differ for both. A cost-benefit analysis of the tax structures needs to be done in order to arrive at which business setup will be most beneficial for the startup company in term of the tax considerations.
One of the biggest disadvantages of corporations is that they are double-taxed. This means that corporations are taxed at two levels (Collison, Tiley, Cannon, Barcroft & Arrowsmith 2006, p.99). The reason for this double taxation is due to the shareholders having a separate legal entity as compared to the corporation itself. The first tax imposed is on the annual earnings of the company. This is the net income that is taxed. The second tax is levied on the income that the shareholders individually earn in the form of dividends. Even though the dividends have been taxed at the corporate level once, they are taxed second time at a personal level. This double taxation has been met by many debates on its validity. Compared with the unincorporated businesses, entities like partnerships and sole traders are taxed only one at the corporate level. Hence, double taxation is certainly a disadvantage for a corporation and brings down the benefit of having a big corporation. In spite of the fact that double taxation is a risk all around the world, United Kingdom actually avoids double taxation as dividends are not taxed. Corporations in UK get a relief from the government in the form of expense or credit relief. Expense relief makes overseas taxes tax deductible whereas credit relief is given as a deduction of UK tax liability. In either case, corporations in UK do not have to suffer from the vice of double taxation.
Recently from October 2008 to April 2009, the increase in tax budgets in United Kingdom has made the setup of unincorporated businesses more attractive primarily because of double taxation. Also, the rates of taxes differ and these have posed challenges for the incorporation of a business. However, if we consider other factors in the picture, we can see that unincorporated businesses are actually suffering more than corporations in terms of the tax structures.
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The standard income taxes in UK have hung somewhere between 20% to 41% for companies. However, if a person's income exceeds â‚¬175,000 per annum, then the marginal tax rate that he has to pay is 55%. This is a clear cut disadvantage as sole traders and partners all suffer because of this (Collison, Tiley, Cannon, Barcroft & Arrowsmith 2006, p.99).
The pension contributions are yet another factor of consideration when deciding whether to start an unincorporated business or a corporation. In case of individual earnings, the tax reliefs that a person can claim for premiums for his pension plan is capped in terms of a fixed percentage of their income and an overall deemed earnings cap. This opposed to a corporation has more inflexibility and restrictions as in a corporation, there are no such limitations (Cerioni 2007, p.66).
Capital gains tax is yet another consideration that cannot be overlooked. When an unincorporated business sells transfers its asset of value to a limited company, the difference between the initial cost of the asset at the time of acquisition and the higher of the actual proceeds arising or fair value of the asset in the market will be subjected to capital gains tax. This percentage should be known to the unincorporated business so that later if they want to transfer the assets, they know what tax will be charged. However, if the unincorporated business sells the entire business to a corporation, in that case, certain countries provide a 100% capital gains tax relief (Collison, Tiley, Cannon, Barcroft & Arrowsmith 2006, p.99). Hence, it is a matter of debate as to what exactly comprises of all the assets of the company being transferred.
From an accounting and reporting perspective, a corporation has a clear cut advantage over an unincorporated business. The reason for this is the above mentioned higher tax rates and pension restrictions for unincorporated businesses. Corporations have to present their annual reports to the public and hence disclose their financial statements. Since corporations are taxed lighter than companies like sole trader businesses, they present to the stakeholders of the company a better and more favorable picture of themselves as their profit margins will be higher and more attractive. However, the flip side of preparing and publishing these financial statements is the sheer cost which unincorporated companies do not want to undertake.
Other considerations that need to be thought of as well include the tax in the usage of car that the company owns. Unincorporated business may be able to get a capital allowance on the use of car and the running expenses as they are small startups. Corporations also need to look at any tax deductions that the government may offer for research and development, any environment-friendly investments or over any purchased goodwill during acquisitions. For an unincorporated business, the conversion to a limited company may mean tax deductible goodwill creation which will be of benefit to them. Hence, the prospective company needs to take into account these tax deductible factors based on the tax structure of the location of the company.
Any future changes that can be anticipated in the tax rates or structures also need to be taken in account by the prospective owners of both unincorporated and corporate businesses. For an unincorporated business, the use of family tax relief or allowances can also prove to be a benefit as per the legislation. The company may be given a chance to retain or maybe even extract income through an insight into such measures. The company should also focus on the forecasted profits and losses of the company as to whether they will be able to generate enough cash flow to pay their taxes or will they be left with enough after-tax income after paying off their taxes. This needs to be a grave consideration for unincorporated businesses that have heavy imposition of taxes on them. Similarly, the timing as to when the company can easily pay its taxes should be considered. The creation of deferred tax assets or deferred tax liabilities need also be taken into account from beforehand so that they can help the company in the beneficial manner (Schon 2007, p.88).
All the considerations mentioned above are important for the owners of a prospective company to help them guide as to which type of business entity will best suit their financial position. The current law on the country needs to be studied thoroughly to ensure that the tax rates applicable and the different types of taxes imposed are all in perspective. Any changes that ca be made to the law should be taken into account. Any benefits that may be given to small setups of unincorporated businesses should be taken advantage of and then later the company can be converted into a limited company and then again take advantage of tax deductions like tax relief on goodwill.
Hence, a proper analysis and study is required in terms of the tax aspect to help the company decide which option they should choose right now and what direction to take later on, all to benefit the cause of the owners and other stakeholders.