Sole Trader status
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theknifemac
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Frugi
Thats an interesting and well timed post - I am about to make the same enquiries with my tax office. I have spoken briefly with an accountant who said he made enquires about one of his existing clients and they decided to go down the Limited Company route instead of sole trader. Apart from being able to offset data feed / software / hardware costs I'm not sure if there are any advantages of a limited company.
I don't mind doing the ltd thing as I had a ltd company before and running it was fairly easy. I guess there would be no point in being VAT registered as I would not be charging anyone for my services and thus collecting VAT which would offset the VAT I had to pay on data feeds etc.
I will speak with my accountant friend in more depth about this soon and see what the reasoning was behind the decision. I know that the decision to be taxed via CGT or as a sole trader seems to be down to the relevant inspector / tax office decision, but wonder why people would choose to go for a ltd company.
Cheers
Stew
Thats an interesting and well timed post - I am about to make the same enquiries with my tax office. I have spoken briefly with an accountant who said he made enquires about one of his existing clients and they decided to go down the Limited Company route instead of sole trader. Apart from being able to offset data feed / software / hardware costs I'm not sure if there are any advantages of a limited company.
I don't mind doing the ltd thing as I had a ltd company before and running it was fairly easy. I guess there would be no point in being VAT registered as I would not be charging anyone for my services and thus collecting VAT which would offset the VAT I had to pay on data feeds etc.
I will speak with my accountant friend in more depth about this soon and see what the reasoning was behind the decision. I know that the decision to be taxed via CGT or as a sole trader seems to be down to the relevant inspector / tax office decision, but wonder why people would choose to go for a ltd company.
Cheers
Stew
frugi
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Stew,
As far as I know a sole trader can also offset costs incurred wholly and exclusively in the course of running their business, although not capital expenditure, so I could see little advantage in setting up a Ltd Co. Perhaps if profits exceed a certain amount the difference in taxation methods would tip the balance in a company's favour though? Limited liability might be useful too incase of doing an accidental Nick Leeson!
Cheers.
As far as I know a sole trader can also offset costs incurred wholly and exclusively in the course of running their business, although not capital expenditure, so I could see little advantage in setting up a Ltd Co. Perhaps if profits exceed a certain amount the difference in taxation methods would tip the balance in a company's favour though? Limited liability might be useful too incase of doing an accidental Nick Leeson!
Cheers.
theknifemac
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frugi said:
Yes I've never been certain of the differences between sole trader and ltd co, I think I limited company is more impressive to potential clients when working in other areas but would make little difference from a trading perspective, though opening an account as a limited company might prove more tricky - has anyone done this with IB ?
Stew
Frugi, I seem to recall a similar discussion on ' software', 'end of year tax returns' or something similar. Wasn't it you who discovered the link to the IR website regarding futures/options./
If you're only trading futures then it is considered speculative, and profits are only subject to CGT after deduction of trading losses. However if you are hedging your futures position with options then you are classed as a pro trader and subject to income tax and NI.
The wording of the letter from your tax office would seem to imply that if you are only 'speculating' with futures then all net profits are only subject to CGT.
Furthermore for anyone else interested CGT is only payable at your lowest nominal tax rate.
If you have no other income or have a non-working spouse/partner willing to open a futures a/c then you can legitimately pay CGT at only 10%.
No doubt a couple of year's 6 figure CGT return, would result in a review of the current position, but you may have saved yourself 50k tax by then.
Now, Chartman, you make the calls, we'll all trade the YM taxed at 10% and the T2W trading arcade will be open in the BVI before you know it :cheesy:
Alternatively the pro's amongst you may know totally different, in which case i shall blame excessive consumption of red wine 😱
It is the weekend after all 😛
If you're only trading futures then it is considered speculative, and profits are only subject to CGT after deduction of trading losses. However if you are hedging your futures position with options then you are classed as a pro trader and subject to income tax and NI.
The wording of the letter from your tax office would seem to imply that if you are only 'speculating' with futures then all net profits are only subject to CGT.
Furthermore for anyone else interested CGT is only payable at your lowest nominal tax rate.
If you have no other income or have a non-working spouse/partner willing to open a futures a/c then you can legitimately pay CGT at only 10%.
No doubt a couple of year's 6 figure CGT return, would result in a review of the current position, but you may have saved yourself 50k tax by then.
Now, Chartman, you make the calls, we'll all trade the YM taxed at 10% and the T2W trading arcade will be open in the BVI before you know it :cheesy:
Alternatively the pro's amongst you may know totally different, in which case i shall blame excessive consumption of red wine 😱
It is the weekend after all 😛
frugi
I believe a sole trader can offset capital costs, but it is based on a percentage of the item cost and is over time. It may take a few years to 'recover' the outlay.
If any accountants are reading this, can you give us the correct answer?
happy trading
I believe a sole trader can offset capital costs, but it is based on a percentage of the item cost and is over time. It may take a few years to 'recover' the outlay.
If any accountants are reading this, can you give us the correct answer?
happy trading
frugi
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I rather hope you're right about their position on unhedged speculative futures trading and CGT Hampy! It would make me a happy Clanger 🙂
Obviously I do exercise tight risk control and trade according to a sound 'business model'' but nevertheless there is still a reasonable chance these precautions fall on the borders of their CGT definitions. I will certainly be sure to emphasize "unhedged" and "purely speculative" in my next letter. It will be interesting to see what they decide and I will post the result (another three months' wait then!).
I've had a good read of the official IR documentation that u mention, I think it's been posted by a few of us, the LIFFE brochure etc. but there's nothing like actually asking the fella what he wants to do with my earnings 🙂
I thought CGT was taxed as if it were your top slice of income? Therefore if you have no other income at all apart from CGs you are granted your personal allowance tax free (mmm 8k 🙂 then taxed at 10% for the next c2k, then at 20% up to c30k, above this 40%.
Have a good weekend any road (Hoegaarden being imbibed here so the wild yeasts may have gone to my head!)
Jaison, yes I may as well give up now, stay in my day job and open a spread betting account LOL ;-) Every career must start somewhere...
Obviously I do exercise tight risk control and trade according to a sound 'business model'' but nevertheless there is still a reasonable chance these precautions fall on the borders of their CGT definitions. I will certainly be sure to emphasize "unhedged" and "purely speculative" in my next letter. It will be interesting to see what they decide and I will post the result (another three months' wait then!).
I've had a good read of the official IR documentation that u mention, I think it's been posted by a few of us, the LIFFE brochure etc. but there's nothing like actually asking the fella what he wants to do with my earnings 🙂
I thought CGT was taxed as if it were your top slice of income? Therefore if you have no other income at all apart from CGs you are granted your personal allowance tax free (mmm 8k 🙂 then taxed at 10% for the next c2k, then at 20% up to c30k, above this 40%.
Have a good weekend any road (Hoegaarden being imbibed here so the wild yeasts may have gone to my head!)
Jaison, yes I may as well give up now, stay in my day job and open a spread betting account LOL ;-) Every career must start somewhere...
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theknifemac said:
One of my IB accounts is in the name of a Ltd company. If you think that it is a hassle providing all the documentation/validations for a personal account, then just triple it. That's because you have to provide all that documentation for the company itself to prove it is an active and legal entity in its country of incorporation, then all that documentation for the director(s), and then all the documentation for each of the people who will be trading the corporate account. And copies of board resolutions authorising the trader to trade the corporate account, etc. So three times the work, basically, but remember that this is not an IB requirement, but federal government requirements following Sept 11 and money laundering issues. So it doesn't matter whether you are using PFG or IB or any other broker - same requirements.
And then of course at the end of the year you have all the fun and frolics of corporation tax. 🙄
theknifemac
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Skim
That sounds good then - corporation tax was not that difficult so maybe I will open a IB Ltd Co account after all - its nice to hear that it is doable after all !
Stew
That sounds good then - corporation tax was not that difficult so maybe I will open a IB Ltd Co account after all - its nice to hear that it is doable after all !
Stew
Frugi, Re CGT your version of tiered rates would seem to be most likely.
I recall looking at the IR CGT pdf document a while back ( unrelated to trading ). I remember it was pretty comprehensive, so I guess the answer is probably there.
Good luck,
hampy
I recall looking at the IR CGT pdf document a while back ( unrelated to trading ). I remember it was pretty comprehensive, so I guess the answer is probably there.
Good luck,
hampy
theknifemac
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hampy said:
Yes I agree with Frugi, I think the CGT levels are
0 - 1,960 10%
1,960 - 30,500 20%
30,500+ 40%
With an initial allowance of £8,200. I think these are the same as the normal IR levels and as the CGT allowance is a lot higher than the personal tax allowance the CGT route would be the most tax efficient. What is the position when trading stocks rather than futures - does this make any difference on the tax mans view ?
Also am interested what the benefits might be of using a Limited Company instead of Sole Trader ?
Cheers
Stew
frugi
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Thanks for the CGT confirmation Stew. I have pitched my letter to the tax man accordingly 😉 and the decision now rests with him.
This is perhaps a touch personal for a public board but if it helps anyone else in their taxation decisions then it will have been worth posting:
1. “How have you anticipated the amount of profit from a year’s activity?”
I created a rule based mechanical system which clearly indicates when I should buy or sell a futures contract. Because the rules are strict I was able to “backtest” this system against two years’ worth of historical futures data to see how it would have performed. My projected annual profit is an estimate based on an average of these results.
However it is of course very possible that the system will perform worse (or indeed better) in the future than the historical results would suggest. In other words my profits are by no means guaranteed and, despite my precautions, to a large extent subject to the vagaries of, and chance inherent in the market.
2. “Is this expected profit based purely on profits from the buying and selling of shares or does it entail other elements such as the turnover of stock?”
The expected profit is based wholly and exclusively on the buying and selling of futures. I do not hedge these speculative positions in any way.
3. “Would you please let me know any ways in which you minimise risk and secure profits?”
To minimise risk I obey the general principle of cutting losses (immediately liquidating positions that show a loss greater than a predetermined amount) while letting profits run until my system indicates closure of said profitable position.
For instance I place predetermined “stop loss orders” in the market that ensure I will not, except perhaps in extreme market conditions, risk more than 3% of my total capital on any one trade. I will not trade more than four times in one day and I will close out any open positions at the end of each day to avoid the risk of holding them overnight.
4. “Please let me have any other information that you may consider relevant to this decision?”
There is a distinct possibility that (despite my earlier letter) I will be earning some income from freelance proof reading in addition to any profits derived from speculation in the futures market.
I am fortunate enough to own my flat outright (no mortgage) and further live with a partner who, in her capacity as a public servant, earns a very reliable salary that is more than sufficient to support both of us in the event that (or indeed while) my speculative activities are not profitable.
It is worth mentioning that, due to the nature of the method used, the profits arising from my system are irregular and unpredictable. For example it would be entirely possible for me to endure three consecutive months of losses followed by one week of large “windfall” profit.
Although I grandly state my occupation as “professional trader” I am still very much in the learning stages of this “profession” and my annual profit may well reflect my inexperience.
Apart from these (possibly irrelevant) points I cannot think of any other detail that might affect your decision.
I hope this letter answers your questions satisfactorily and I look forward to receiving your decision in due course. If you require any further clarification please don’t hesitate to ask.
This is perhaps a touch personal for a public board but if it helps anyone else in their taxation decisions then it will have been worth posting:
1. “How have you anticipated the amount of profit from a year’s activity?”
I created a rule based mechanical system which clearly indicates when I should buy or sell a futures contract. Because the rules are strict I was able to “backtest” this system against two years’ worth of historical futures data to see how it would have performed. My projected annual profit is an estimate based on an average of these results.
However it is of course very possible that the system will perform worse (or indeed better) in the future than the historical results would suggest. In other words my profits are by no means guaranteed and, despite my precautions, to a large extent subject to the vagaries of, and chance inherent in the market.
2. “Is this expected profit based purely on profits from the buying and selling of shares or does it entail other elements such as the turnover of stock?”
The expected profit is based wholly and exclusively on the buying and selling of futures. I do not hedge these speculative positions in any way.
3. “Would you please let me know any ways in which you minimise risk and secure profits?”
To minimise risk I obey the general principle of cutting losses (immediately liquidating positions that show a loss greater than a predetermined amount) while letting profits run until my system indicates closure of said profitable position.
For instance I place predetermined “stop loss orders” in the market that ensure I will not, except perhaps in extreme market conditions, risk more than 3% of my total capital on any one trade. I will not trade more than four times in one day and I will close out any open positions at the end of each day to avoid the risk of holding them overnight.
4. “Please let me have any other information that you may consider relevant to this decision?”
There is a distinct possibility that (despite my earlier letter) I will be earning some income from freelance proof reading in addition to any profits derived from speculation in the futures market.
I am fortunate enough to own my flat outright (no mortgage) and further live with a partner who, in her capacity as a public servant, earns a very reliable salary that is more than sufficient to support both of us in the event that (or indeed while) my speculative activities are not profitable.
It is worth mentioning that, due to the nature of the method used, the profits arising from my system are irregular and unpredictable. For example it would be entirely possible for me to endure three consecutive months of losses followed by one week of large “windfall” profit.
Although I grandly state my occupation as “professional trader” I am still very much in the learning stages of this “profession” and my annual profit may well reflect my inexperience.
Apart from these (possibly irrelevant) points I cannot think of any other detail that might affect your decision.
I hope this letter answers your questions satisfactorily and I look forward to receiving your decision in due course. If you require any further clarification please don’t hesitate to ask.
trendie
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Hi frugi,
Dont know if this helps, but I just got this ADVFN email which relates to tax etc.
http://www.taxcafe.co.uk/advfn/stockmarket.html
Dont know if this helps, but I just got this ADVFN email which relates to tax etc.
http://www.taxcafe.co.uk/advfn/stockmarket.html
The Beyonder
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Hi Trendie,
That seems like a useful book, but one important question.
I presume it's based on investing/trading UK shares.
Would it make a difference if a person is trading US shares as most of us are?
That seems like a useful book, but one important question.
I presume it's based on investing/trading UK shares.
Would it make a difference if a person is trading US shares as most of us are?
starspacer
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Trading for a Living
Here is a book that is due to be published shortly that might help answer some of your questions related to trading and the tax implications. http://books.global-investor.com/books/19974.htm?ginPtrCode=10170&identifier=4361667b2e6c048fcdacfdd32c677c34
I can't review it as it hasn't been published yet but I have it on order so will update when I have it.
Some people have mentioned offshoring as a way of minimising taxes. My understanding of this is that unless you actually reside offshore, yes all profits will roll up gross of tax. However, when those funds are repatriated onshore, then the usual tax will be payable. So unless you intend to spend long periods out of the country, the benefits are minimal (imho).
The offshore 'loophole' was closed some years ago. It can still have benefits, particularly for mitigating inheritance tax in the form of offshore bonds, which can both save CGT and income tax, but I can't see any benefit for the trader.
Hope this is of some use.
Here is a book that is due to be published shortly that might help answer some of your questions related to trading and the tax implications. http://books.global-investor.com/books/19974.htm?ginPtrCode=10170&identifier=4361667b2e6c048fcdacfdd32c677c34
I can't review it as it hasn't been published yet but I have it on order so will update when I have it.
Some people have mentioned offshoring as a way of minimising taxes. My understanding of this is that unless you actually reside offshore, yes all profits will roll up gross of tax. However, when those funds are repatriated onshore, then the usual tax will be payable. So unless you intend to spend long periods out of the country, the benefits are minimal (imho).
The offshore 'loophole' was closed some years ago. It can still have benefits, particularly for mitigating inheritance tax in the form of offshore bonds, which can both save CGT and income tax, but I can't see any benefit for the trader.
Hope this is of some use.
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for accountants with expertise in trading Mike Boydell of MoneyAM has previously suggested the following;
http://www.trioacc.co.uk/taxconsult/taxtraders.html
Please dont take this as a recommendation from me as I have never personally used them as to date I have managed to handle my own tax affairs.
regards
Neil
http://www.trioacc.co.uk/taxconsult/taxtraders.html
Please dont take this as a recommendation from me as I have never personally used them as to date I have managed to handle my own tax affairs.
regards
Neil
I have had no trouble opening my Company account with several brokers to trade
FX Futures CFD's or shares...
The Company is only me...no VAT registered...and claim back all my
expenses, rent software, trade mags etc.
It is also likely that you have some shores or other long term holdings theses will be deemed by the revenue as liable to CGT if traded outside the company...and the allowance comes in handy for any modest profits made there...
If trading is your full time job, and you do not have a company structure expect a fight with the Revenue to prove you are a trader... (piece of cake if you are a plumber!) then even if you win, as one of the other posters said, expect another fight when you move house to another Tax district ( and the possibility restating income will be back dated!)...
If you want to be sure of the outcome form a Company . There is no such thing as CGT with a corporate structure, so you know where you are, and you can maximise both the CGT allowance and the more generous allowances of your Company status.
The key is not to believe you are 'either or' but both!
Hope that helps
FX Futures CFD's or shares...
The Company is only me...no VAT registered...and claim back all my
expenses, rent software, trade mags etc.
It is also likely that you have some shores or other long term holdings theses will be deemed by the revenue as liable to CGT if traded outside the company...and the allowance comes in handy for any modest profits made there...
If trading is your full time job, and you do not have a company structure expect a fight with the Revenue to prove you are a trader... (piece of cake if you are a plumber!) then even if you win, as one of the other posters said, expect another fight when you move house to another Tax district ( and the possibility restating income will be back dated!)...
If you want to be sure of the outcome form a Company . There is no such thing as CGT with a corporate structure, so you know where you are, and you can maximise both the CGT allowance and the more generous allowances of your Company status.
The key is not to believe you are 'either or' but both!
Hope that helps
theknifemac
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Spoke with an accountant about this today. His view was either CGT or Limited Company. He did not believe that the IR would treat you as a professional trader unless you had FSA registration. He had an article from a tax publication which said pretty much that and included day trading.
We worked through some figures and CGT was better than a Limited Company for lower levels of income. For higher profit levels it all depended on how much capital you would take out of the company via dividends and on the trading expenses you were claiming. E.g. having an office and other expensive expenses which could be offset against profits before tax would make a Ltd co more beneficial. Also depends on the level of existing capital gains.
Stew
We worked through some figures and CGT was better than a Limited Company for lower levels of income. For higher profit levels it all depended on how much capital you would take out of the company via dividends and on the trading expenses you were claiming. E.g. having an office and other expensive expenses which could be offset against profits before tax would make a Ltd co more beneficial. Also depends on the level of existing capital gains.
Stew
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Stew
Would entirely agree with your comments and in particular the FSA comment
The Revenue need to 'hang' what you do around something they feel is concrete...like FSA status,
otherwise you fall into the general buying and selling shares and therefore CGT net..
Its shortsighted of them...but there it is..
Also agree with you regarding the Company versus CGT comment
For me my office is expensive its clear cut, if as most you are at home...the benefit of additional claims might not offset the accountants fees.
A good accountant with knowledge of this type of trading.and who is always at the end of the phone for quieries etc..rather than one who tries to treat you as a greengrocer or something will charge £1000-£1200 & vat..In my case worth every penny, but for many not cost justifiable.
Also there is more hassle with a Company the submissions and hoops to jump through
Would entirely agree with your comments and in particular the FSA comment
The Revenue need to 'hang' what you do around something they feel is concrete...like FSA status,
otherwise you fall into the general buying and selling shares and therefore CGT net..
Its shortsighted of them...but there it is..
Also agree with you regarding the Company versus CGT comment
For me my office is expensive its clear cut, if as most you are at home...the benefit of additional claims might not offset the accountants fees.
A good accountant with knowledge of this type of trading.and who is always at the end of the phone for quieries etc..rather than one who tries to treat you as a greengrocer or something will charge £1000-£1200 & vat..In my case worth every penny, but for many not cost justifiable.
Also there is more hassle with a Company the submissions and hoops to jump through
