Sole Trader / Partnership Advice

pinkteapot

MrTeapot and I are both employed in full-time jobs and higher rate tax payers.

MrTeapot is into wildlife photography and I want to set up a website and blog to showcase his photos, and offer prints for sale. We'll probably sell about one a year. If we're lucky and pay for Google Adwords.

Anyway, just pondering how to do this tax-wise. I've been self-employed (sole trader) in my spare time previously so know how HMRC/NI works in that regard.

As and when we have kids (none in the oven yet), I plan to give up work. Therefore it seems logical to have the business in my name as a sole trader so that my tax-free allowance is taken into account on any profit, when hubby is working and I'm not.

Other option is we both register as self-employed and make it a partnership.

I'll be the one running the website, sorting out any orders we do get, etc. Hubby will just be out with his camera as he is anyway at the moment. But the site would say that we're a husband and wife team so if HMRC ever looked at it, surely they would consider us a partnership and not me a sole trader.

So, in this situation should we:

1) Do everything in my name as a sole trader and hubby is just supplying me photos to sell for free. (Seems dodgy?!)

2) Do it as a partnership with agreement to split profits 50/50. In the future, hubby would be 40% tax on his half and I'd pay probably 0% on mine.

3) Do it as a partnership so his name is on there but have the agreement give most of the profit to me, so we pay less tax. However, this also strikes me as dodgy and something HMRC will have closed as far as loop-holes go.

Any advice for how to make this as tax efficient as possible and still keep on the right side of HMRC?

chrismac1

I'm going to guess that the first year there will be a taxable loss on this business - from investing in a decent website, for example. In later years hopefully there will be profits. So you might well want a setup which allows you to allocate losses to the person with the higher marginal tax rate, and profits to the one with lower marginal tax rate.

Whilst HMRC may not like this - and get ready for some posts on this thread to that effect, mentioning "income shifting" and the like, under UK law there is a perfectly legal structure which permits you to do exactly this. One that recognises that you are both taking a commercial risk on this venture. This legal structure is called a partnership.

The most critical issue when registering a partnership is to realise that you are jointly and severally liable for all your worldwide assets. So if someone sued you for £1m because you put a picture of a very fierce tiger on your site and it scared them into having a heart attack, legally there is no way to shelter either of your assets from this £1m.

pinkteapot

Thanks chrismac1, and you are correct. I'm currently working out the budget for the setup costs but we would be looking at a first year loss (not of much; I'm the techie in the team so will be designing the site).

The ongoing running costs will be small (until hubby uses the business as an excuse to buy an even bigger camera lens!). We'll probably break even to make a few quid in the longer run, depending entirely on how much effort we put into it. I work in marketing and have all sorts of ideas for publicising it, building traffic etc. But I'm under no illusion as to the difficulties of trading online and the fact that most online business go nowhere. Mostly I like designing new websites. And this will give me something to keep my brain in shape as and when I do stop FT work.

You did confirm what I thought - partnership seems to be correct rather than sole trader.

I understand the liability issue of both setups. As I said I've been a sole trader before. I'd figured we wouldn't need PL insurance as what possible risk could there be in selling the odd photo print. You've done a good job of finding it. :rotfl:

zygurat789

chrismac1 wrote: »

I'm going to guess that the first year there will be a taxable loss on this business - from investing in a decent website, for example. In later years hopefully there will be profits. So you might well want a setup which allows you to allocate losses to the person with the higher marginal tax rate, and profits to the one with lower marginal tax rate.

Whilst HMRC may not like this - and get ready for some posts on this thread to that effect, mentioning "income shifting" and the like, under UK law there is a perfectly legal structure which permits you to do exactly this. One that recognises that you are both taking a commercial risk on this venture. This legal structure is called a partnership.

The most critical issue when registering a partnership is to realise that you are jointly and severally liable for all your worldwide assets. So if someone sued you for £1m because you put a picture of a very fierce tiger on your site and it scared them into having a heart attack, legally there is no way to shelter either of your assets from this £1m.

Your tax advice is fine but I take it you're not a lawyer. If you are sued the only problem will come if they win the case. I'm not sure that is a cast iron case
Proof heart attack caused by this picture?
Culpability in looking at it.
No negligence on behalf of the web site owner.

The HSE have got a lot to answer for. What we need is a return of common sense.:rotfl:

chrismac1

zygurat, some accountants have a sense of humour! I was using a silly example to get the OP thinking about the potential legal risks of joint and several liability. In a nutshell, it makes skimping on relevant insurance for the business a riskier proposition than a sole trader / limited company situation.

pinkteapot

Chrismac1 - can I pick your brains a bit:

1) Re jointly and severally liable. I understand, but in the case of a married couple (assuming we don't split up!) who consider all their assets joint, is there any difference in risk than that of one of us being a sole trader? If one of us set up this business as a sole trader and we were successfully sued, we'd have to come up with the money anyway, right?

2) Re. partnership. Do you know of any sample agreement wording that would structure the profit allocation as you described? I'm assuming it's not legal to write on the agreement "If the business makes a net profit it will go to the partner with the lower marginal tax rate. If the business makes a net less it will go to the partner with the higher marginal tax rate."

Due to the small scale of what we're likely to be doing, my experience doing the accounts when I was previously self-employed on a small and simple business and the fact hubby is an accountant by day (a management accountant for a large company; not a small business or tax expert by any means), we'll be doing the books and paperwork ourselves. Therefore I want to be sure we're well and truly on the safe side of the law with any partnership agreement. Neither of us are qualified to tread the line finely.

chrismac1

1. You say you consider all of your assets joint, but is that legally the case? I have several clients who are in business as sole traders where key assets such as the family home are not in their own name, but their spouse's. In this situation creditors from the sole trader - or credit cards for that matter - can forget about their charging orders.

2. A partnership agreement is a good idea where you are going into business with someone you are not married to - just as a shareholders' agreement is a good idea if you are forming a new company with such a person. In this case, however, the typical partnership agreement will tie you down to a 50-50 split. This fixed split year after year is very unlikely to be tax efficient. HMRC staff may not always like a more flexible profit share, but there is nothin in the Partnership Act or the Income Taxes Acts that I am aware of to stop it.

zygurat789

chrismac1 wrote: »

zygurat, some accountants have a sense of humour! I was using a silly example to get the OP thinking about the potential legal risks of joint and several liability. In a nutshell, it makes skimping on relevant insurance for the business a riskier proposition than a sole trader / limited company situation.

John Cleese once tried to be an accountant

pinkteapot

chrismac1 wrote: »

1. You say you consider all of your assets joint, but is that legally the case? I have several clients who are in business as sole traders where key assets such as the family home are not in their own name, but their spouse's. In this situation creditors from the sole trader - or credit cards for that matter - can forget about their charging orders.

The house is in joint names.

Most of our savings accounts and ISAs are in sole names but we split our savings evenly between us (hubby was in hospital once and dangerously ill, this was just before we got married and I realised that most of our savings at that point were in accounts in his names and I'd be scuppered for cash for a while if anything happened! Since then, we've distributed savings evenly).

That's about it for assets. The car is in my name but it's old now and only worth about £1k. Hubby's camera gear is worth more!

So I guess the safest thing to do is transfer the house to a sole name and do the business in the other. But I just don't think we'd want to do that. This is only a small, part-time hobby business. I understand the risk but I don't think we'd want to have that sort of effect.

chrismac1 wrote: »

2. A partnership agreement is a good idea where you are going into business with someone you are not married to - just as a shareholders' agreement is a good idea if you are forming a new company with such a person. In this case, however, the typical partnership agreement will tie you down to a 50-50 split. This fixed split year after year is very unlikely to be tax efficient. HMRC staff may not always like a more flexible profit share, but there is nothin in the Partnership Act or the Income Taxes Acts that I am aware of to stop it.

Hmmm I'll do some further investigation. We could still go down the sole trader in my name route. My concerns were (1) it just feels wrong since hubby will be contributing and (2) if HMRC looked at the business they'd see that he was contributing and think he was dodging tax(?).

Mojisola

You could set up as a sole trader and buy photos from your OH. In the future you may find other photographers you would like to feature on your website so that you can offer a range of subjects.

jonnym

Apologies for seemingly hijacking the thread - I seem to have got most of the answers I was going to post about from this thread already so thanks to all that responded and the OP for starting it.

If I could tack a few questions on the end for those more understanding than me.

I have a venture I run with a friend - we're both employed seperately and neither of us are escalated up a tax bracket by what this brings us in extra income. We're both registered as self employed to put our additional earnings at year end and up to now have just put it through seperately. If possible, we'd both like to keep it that way unless it's turnover develops more, which it is likely to slowly.

So, As there are two of us involved - Are we obligated to declare this as a partnership to HMRC or can we continue to declare our share as additional earnings and if we were obligated, we probably should have done it last year. Then I guess the next natural question is - Do HMRC have the grounds to levy a fine even though we've paid all the tax we're supposed to?