Starting the business

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Starting the business
  • Trading or investment business
  • Business compliance
  • Personal service companies
  • Special tax rules for the opening years of a business
  • Tax reliefs for business
  • Business planning

The primary consideration when starting in business is the type of entity to choose. For guidance on different types of entity and how to choose the most suitable format for the business, see the Choosing the business vehicle guidance note.

Trading or investment business

The way abusiness is taxed is dependent on whether it is atrading business or an investment business. The majority of owner-managed businesses are likely to be trading businesses.

The difference between carrying on atrading business or an investment business is generally more significant for individuals than for companies. For individuals, the distinction is perhaps more important than ever because of the large difference between the top rate of income tax of 45% and capital gains tax of 20%. Company profits are taxed at the company’s marginal rate of tax regardless of the type of profits, but there are differences in the rules relating to investment and trading businesses, eg loss relief rules.

The interpretation of what is meant by the term ‘trade’ has been left largely to the courts. The courts have developed anumber of tests to determine whether somebody is trading. These tests are known as the ‘badges of trade’.

Property businesses are taxed in the same way as trades and therefore the same tests apply in determining whether property transactions are trading in nature. For more information on determining whether there is atrade, see the Badges of trade guidance note and Simon’s Taxes B1.401 onwards (subscription sensitive).

Business compliance

Regardless of the choice of business vehicle, starting in business imposes anumber of obligations, both one-off and ongoing. For more information, see the Business compliance guidance note.

Personal service companies

Some while ago, HMRC detected agrowing trend for individuals to provide what were essentially employment services through the

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