Empower Your Business

Accounting is Just the Beginning



It feels like Look Through Companies (LTC’s) have been around for a while now but of course they only started to operate a year or so ago. So are they useful and an entity to embrace or a nightmare of complexity as some commentators have been saying?

There are a number of issues with Look Through Companies:

  1. Unlike LAQC’s, profits as well as losses MUST be allocated to shareholders. This may not suit, especially as the personal tax rate could be higher than that for a company.

  2. The allocation of the profits to a shareholder will be treated as the payment of a dividend, which means that the allocation will have to pass the Solvency Test. What happens if it doesn’t?

  3. If there a change in shareholding of the company the shareholder is deemed to have disposed of their underlying share of assets in the LTC at market value (subject to some exceptions) which means that there will be a recovery of depreciation and possibly notional profits on loans or investments.

  4. Again unlike with LAQC’s, the losses that can be offset against shareholder’s income is finite, limited to the amount that the shareholder has at risk. Unfortunately, this is not as simple as it seems and there are a number of complications that arise necessitating the maintenance of an ongoing record of losses utilised on the one hand and on the other, adding together borrowing facilities guaranteed with the shareholder’s advance account to determine the amount at risk.

  5. Supposing the plan was to use a LTC when you were making losses but revoke LTC status when the company turned around and started to make a profit? Unfortunately this is not as straightforward as it used to be since when LTC status is revoked, again the shareholders are deemed to have disposed of their underlying assets in the LTC at market value (and the company is then deemed to have immediately reacquired those assets at market value).

  6. If you want to receive wages or a salary under PAYE from the LTC you will need a written contract of service, which is unwelcome cost and hassle and cuts down on flexibility.

  7. From the ACC point of view, the LTC is tricky, since it depends on whether the shareholder is a “working” or “non-working” owner or a passive investor. A working owner (not one who necessarily works but who is under PAYE) is treated as an employee whilst a non-working owner (no not someone who is lazy but someone who works in the business of the LTC but not under PAYE) is treated as self-employed for ACC purposes. A passive investor who plays no active part in the LTC’s business is not subject to ACC levies. What would you rather be?

Confused and lost already? You’re not alone. Even professionals are complaining about how difficult the LTC rules have been set and think that it’s unrealistic that clients are going to want to pay their advisers to work through all these tricky issues!

If you need down-to-earth and sound practical help with your LTC (or your ex-LAQC) why not join the A+BAC community on Facebook. You’ll be able to get real-time, practical answers to all your questions as well as let others benefit from your experience. A;ternatively, you can contact Nick by email.