How to arrange business/businesses for tax purposes?

dsss91

Hello. I run a small partnership business with my wife (Business A), which is so far is still in its startup phase; we invest money into it but we never take any income.
In order to make more money to invest into the business I am starting a business with a more reliable income (Business . This business is related enough to the partnership that it could easily be considered part of the same business.

My question is: will there be any difference in the  income tax I/we pay if I merge it into the partnership (and therefore not take any income and not pay income tax) compared to if I just run it as a sole trader or a seperate partnership and reinvest profits of Business B directly back into Business A?

Or maybe there's a better way?

I appreciate any advice anyone has

dsss91

That emoji with the sunglasses is meant to be the letter B with a close bracket !

[Deleted User]

I am slightly concerned here that you believe that you will pay no tax as you take no income from the business. This is incorrect. Tax will be paid by both of you on your share of the profits made by the partnership regardless of the income (drawings) that you take. 

For example if the figure for assets (bank balance, assets etc) less liabilities (creditors, overdraft etc) is £50000 more than at the start of the year and you are a 50:50 partnership, both of you will pay tax on £25000 whether you take all of the money out or take absolutely nothing. 

I emphasise - you are taxed on profits made by the business, not what you personally withdraw from the business. 

dsss91

Hi Purdyoaten2 , thank you for your response.

Ah! Good point. I'm a little confused. Instead of saying "therefore not take any income and not pay income tax" I should have said "are making a loss, and therefore do not pay any income tax" - although that substution still won't make sense of it all

At the moment we don't pay any tax for our partnership because it is making a loss. We do fill our tax returns correctly (AFAIK).

So as you explain, each partner in the partnership will pay income tax on their share of the profits. Which would mean in a normal situation where both business are in profit, it doesn't really matter how I arrange the businesses I think.

But if the partnership is perpetually running a loss and I merge a profit making business with it, the net results might still be a loss; in which case I don't pay any tax.

Alternatively if I ran them as seperate businesses, maybe I would pay tax on the profit making business. Or perhaps HMRC would take the loss of the other business into account and it wouldn't make a difference.

Does that make sense or am I really confused?

Jeremy535897

Do you have other taxable income? If you do, and it exceeds personal allowances, you should be looking into whether you can set the losses against it. The profit/loss share between husband and wife may affect the amount of tax recoverable. The business does have to be carried on with a view to profit.

There is a large amount of tax case law on "This business is related enough to the partnership that it could easily be considered part of the same business.". You should look at taking professional advice if the figures are material.

DTucker1983

If you already opened a business, it does not mean that it will immediately bring you an income, develop it, and then you'll get results.  For example, when I opened my beauty salon, I had no idea where to start, or how to run a business and also did not have the leadership skills to organize and more effectively manage the employees. But that is until I discovered bizop, where the articles made me clearly understand everything I needed to work on in order to make an income. I think every aspiring entrepreneur needs to familiarize himself with this site because it helps.

DullGreyGuy

dsss91 said:

Alternatively if I ran them as seperate businesses, maybe I would pay tax on the profit making business. Or perhaps HMRC would take the loss of the other business into account and it wouldn't make a difference.

Does that make sense or am I really confused?

HMRC taxes legal entities not "businesses". As you havent incorporated then its you as individuals that are taxed.

So if A makes a loss of £10,000 and B makes a profit of £7,000 then your wife returns a negative £5,000 return for her share of the loss making partnership, you return a £2,000 profit return (£7k profit - £5k of your loss from the partnership). Obviously this assumes no other income.

If you were to run it through the partnership then you both do a £1,500 loss return.

In all cases you have to remember to do the partnerships own return too (it itself doesnt generate bills)  

[Deleted User]

DullGreyGuy said:

dsss91 said:

Alternatively if I ran them as seperate businesses, maybe I would pay tax on the profit making business. Or perhaps HMRC would take the loss of the other business into account and it wouldn't make a difference.

Does that make sense or am I really confused?

HMRC taxes legal entities not "businesses". As you havent incorporated then its you as individuals that are taxed.

So if A makes a loss of £10,000 and B makes a profit of £7,000 then your wife returns a negative £5,000 return for her share of the loss making partnership, you return a £2,000 profit return (£7k profit - £5k of your loss from the partnership). Obviously this assumes no other income.

If you were to run it through the partnership then you both do a £1,500 loss return.

In all cases you have to remember to do the partnerships own return too (it itself doesnt generate bills)  

A little simplistic. The op would have to declare a profit of £7000 from business B and claim the loss relief of £5000 from A separately. (There would be two partnership (short) forms to complete). That is important as he may wish to carry forward the loss of £5000 rather than utilise it against other income unnecessarily.