Tax advice of the week: Get a business partner

Oct 30, 2009

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Corporation tax is currently 21% for firms whose profits do not exceed £300,000, says The Schmidt Report. So it follows that if your business makes more than this, "you can't enjoy this favourable tax rate on the excess". Except that you can.

If your business is run as either an actual, or effective, partnership between un-related individuals (and this includes co-habitees), each partner can enjoy the 21% rate. Each needs to set up his or her own limited company and then those firms go into partnership together to run a business. This spreads profits amongst the partners and increases the 21% tax band to £600,000, or £900,000 or £1.2m. 

The key point is that those firms must not be "associated", meaning, broadly, "under common control". This means those who control the firms mustn't be associates of each other for some other reason. The pitfall is if the individuals are also partners (in the business sense), they are then deemed to be 'associated'. "So if you are going to do this, you may need to duck out of a partnership and substitute your company instead."

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