- Original Poster
- #1
Hi there,
I was employed full-time until September 2018 when I left to set up my own business as a minibus operator. I am now getting close to actually launching something. One of my first moves will be to make a significant capital investment in vehicles (around £200k) and I'm trying to figure out the most beneficial way to do that from a tax perspective. Here's my understanding so far:
- I believe I should be able to claim the annual investment allowance on the vehicles (to clarify, they are vans that I'll convert to minibuses, rather than cars, so I think they are included) which means I can deduct the full amount of the investment against profits in my first year
- This will result in my business making a signficant loss in Year 1 for tax purposes (since the vehicles will last many years). If I register as a sole trader, I believe I can offset this loss against my previous income when I was employed under "early trade losses relief". Most of my previous income for the past few years was at the 40% tax rate so as I understand it I would effectively get back 40% of whatever I was able to offset against previous income
My questions are:
1) Does the above seem correct? I will get formal advice from an accountant before committing to anything but just want to sense check for now
2) I understand that there is a £50,000 cap on loss relief in any one year. However, I am not clear whether the cap applies to (A) the year in which you make the loss or (B) the year you are offsetting against. This makes a difference for early trade losses relief where you can offset losses against three previous years. To be more concrete, I'm asking which of the following scenarios is correct:
Scenario A: I make a £200k loss in the 2018/19 tax year. I offset this against previous income using early trade losses relief, starting with the 2015/16 tax year (three years prior). My taxable income in that year was £120k but I am capped at offsetting £50k of the loss. This reduces my taxable income in the 2015/16 year to £70k and I get a refund of 40% on the £50k reduction (i.e. £20k). The cap applies to the amount of loss I can offset from my 2018/19 profits so I can't do any further offsetting and the remaining £150k of the loss is kept in the business (where it could be used to offset against future profits).
Scenario B: As before, I make a £200k loss in the 2018/19 tax year which I offset using early trade losses relief. I start with the 2015/16 tax year and offset the maximum of £50k against my £120k income, giving me a £20k rebate. The cap applies to the amount of this loss I can offset against income in the 2015/16 year but I can then continue to offset a further £50k against my income in 2016/17 tax year (say another £20k rebate) and a further £50k against my income in 2017/18 tax year (another £20k rebate). The final £50k of the loss is kept in the business (where it could be used to offset against future profits). Overall, I have offset £150k against previous income for a £60k rebate.
3) As I understand it, I can only get this early trade losses relief if I am registered as a sole trader. Given the scale of the benefit, it seems worth starting as a sole trader rather than a limited company for this reason. However, ultimately I would prefer to end up as a limited company (for various reasons, including issuing shares in future). Could I change from a sole trader to a limited company after having claimed loss relief or would HMRC have a problem with that? For instance, would it fall foul of their rule that the business must have been intending to make a profit, given that the sole trader would only ever have made a loss, or would they recognise that the limited company was just a change in the legal structure and the business had continued?
I apologise for this post being fairly long and technical but would appreciate any advice. Please let me know if you need any clarification.
Thanks,
Pierce
I was employed full-time until September 2018 when I left to set up my own business as a minibus operator. I am now getting close to actually launching something. One of my first moves will be to make a significant capital investment in vehicles (around £200k) and I'm trying to figure out the most beneficial way to do that from a tax perspective. Here's my understanding so far:
- I believe I should be able to claim the annual investment allowance on the vehicles (to clarify, they are vans that I'll convert to minibuses, rather than cars, so I think they are included) which means I can deduct the full amount of the investment against profits in my first year
- This will result in my business making a signficant loss in Year 1 for tax purposes (since the vehicles will last many years). If I register as a sole trader, I believe I can offset this loss against my previous income when I was employed under "early trade losses relief". Most of my previous income for the past few years was at the 40% tax rate so as I understand it I would effectively get back 40% of whatever I was able to offset against previous income
My questions are:
1) Does the above seem correct? I will get formal advice from an accountant before committing to anything but just want to sense check for now
2) I understand that there is a £50,000 cap on loss relief in any one year. However, I am not clear whether the cap applies to (A) the year in which you make the loss or (B) the year you are offsetting against. This makes a difference for early trade losses relief where you can offset losses against three previous years. To be more concrete, I'm asking which of the following scenarios is correct:
Scenario A: I make a £200k loss in the 2018/19 tax year. I offset this against previous income using early trade losses relief, starting with the 2015/16 tax year (three years prior). My taxable income in that year was £120k but I am capped at offsetting £50k of the loss. This reduces my taxable income in the 2015/16 year to £70k and I get a refund of 40% on the £50k reduction (i.e. £20k). The cap applies to the amount of loss I can offset from my 2018/19 profits so I can't do any further offsetting and the remaining £150k of the loss is kept in the business (where it could be used to offset against future profits).
Scenario B: As before, I make a £200k loss in the 2018/19 tax year which I offset using early trade losses relief. I start with the 2015/16 tax year and offset the maximum of £50k against my £120k income, giving me a £20k rebate. The cap applies to the amount of this loss I can offset against income in the 2015/16 year but I can then continue to offset a further £50k against my income in 2016/17 tax year (say another £20k rebate) and a further £50k against my income in 2017/18 tax year (another £20k rebate). The final £50k of the loss is kept in the business (where it could be used to offset against future profits). Overall, I have offset £150k against previous income for a £60k rebate.
3) As I understand it, I can only get this early trade losses relief if I am registered as a sole trader. Given the scale of the benefit, it seems worth starting as a sole trader rather than a limited company for this reason. However, ultimately I would prefer to end up as a limited company (for various reasons, including issuing shares in future). Could I change from a sole trader to a limited company after having claimed loss relief or would HMRC have a problem with that? For instance, would it fall foul of their rule that the business must have been intending to make a profit, given that the sole trader would only ever have made a loss, or would they recognise that the limited company was just a change in the legal structure and the business had continued?
I apologise for this post being fairly long and technical but would appreciate any advice. Please let me know if you need any clarification.
Thanks,
Pierce
