This article was written by David Colom of D J Colom an accounting service for contractors.
Introduction
Some contractors are keen to diversify their business interests and start other ventures that are unrelated to their contracting profession.
Some contractors might think that using the existing company to start another unrelated venture would result in tax advantages, since money would be invested before company and personal taxes are applied.
However, as this article explains, the issues are not that simple.
What is feasible?
This situation only arises if you are outside IR35, since you can choose not to declare dividends but instead invest money in another business.
It is important to realise any investments would be after Corporation Tax on profits, and are therefore a direct alternative to a dividend distribution, which would also be made after Corporation Tax has been paid.
Another consideration is whether the new business is permitted under the Memorandum & Articles of Association of the company. Most permit a wide range of business trades so this should not present problems. However, if the business is not permitted under the articles, the company would be trading “Ultra Vires”. I.e. any contract signed would be non-enforceable in law.
Treatment of losses
If losses arise they may be taxed differently.
Losses from one source of income can be offset against profits from another source of business in the same year.
However, losses which cannot be offset in the year they incur can only be carried forward against income from the same type of business.
Capital Gains Tax issues
If the business is kept within your limited company and a capital gain arises, it will be subject to Capital Gains Tax.
However, if the business is held personally, the gains could be offset by personal Capital Gains Tax allowances at the rate of £8,200 per individual. Other Capital Gains Tax issues could affect your decision to use company money (which implies company ownership) including possibility of transferring assets between spouses/partners, Business Asset Taper Relief, etc.
If significant amounts are involved it is important to take professional advice to consider the scenarios/situations which could arise in the event that the business is later sold for a profit.
Summary
In general terms, it is preferable to keep your contracting activities in a separate limited company used exclusively for that purpose.
This is particularly relevant in the current climate of aggressive HMRC tactics against service companies, in particular arguments regarding IR35, Section 660, etc.
In the event of an investigation, any settlement could potentially be funded by the profits/assets of your unrelated business if it is held within the limited company.
The relative risks undertaken by each separate class of business should therefore be considered when deciding whether or not to carry out two businesses in one company.