Helen Rowe Accountancy  

   Sole  Trader  or  Limited  Company?  

 Helen  Rowe  20th  May  2015  

 

 

Helen Rowe Accountancy  Tax  and  Repor7ng  Summary  

Sole  Trader   Limited  Company  

Income  Sources  

Business  Profits  are  taken  as  personal  income  

Company  pays  you  a  salary  as  an  employee    Excess  profits  can  be  distributed  to  shareholders  as  Dividends  

Tax  

Income  tax  on  taxable  profits  of  your  business    Na:onal  Insurance  Class  2  and  Class  4  

Employees  pay  PAYE  and  NI  on  salary  Higher  rate  taxpayers  pay  addi7onal  tax  on  dividend  income  Corpora:on  tax  on  taxable  profits,  employers  NI  on  salaries  

Repor7ng    

No  requirement  to  prepare  or  file  accounts,  a  simple  tax  return  is  submiNed  to  HMRC    Accounts  are  private  and  only  visible  to  the  owner,  your  accountant  and  HMRC  

File  formal  annual  accounts  as  per  the  Companies  Act  and  an  Annual  Return  at  Companies  House  (public  record)    HMRC  require  a  Company  Tax  Return  and  Tax  Computa7ons  with  full  accounts  which  must  be  submiNed  using  its  own  or  specialist  soRware  Increased  accountancy  fees  

Helen Rowe Accountancy  

Sole  Trader   Limited  Company  Personally  liable  for  all  debts  of  the  business   Shareholders  are  not  personally  liable  for  the  

debts  of  a  Company  

Can  use  a  personal  bank  account   Must  open  a  business  bank  account  (fees)  

Can  offset  any  trading  losses  against  other  income  in  current  or  prior  years  

Can  offset  trading  losses  against  its  other  income  but  not  against  your  income  as  an  individual.  Can  only  carry  forward  any  losses.  

Can  withdraw  cash  without  any  tax  effect   Taxed  on  any  income  withdrawn  from  the  company  and  any  shares  given  at  less  than  market  value  

No  op:ons  on  how  to  extract  profit   Mul:ple  routes  in  which  to  extract  profit  in  a  tax  efficient  manner  including,  salary,  dividends  and  7ming  of  profit  extrac7on  

Other  Financial  Considera7ons  

Helen Rowe Accountancy  

Consider  two  illustra7ons  showing  the  differences  in  tax  due  between  a  sole  trader  and  a  Company  

   

   I  have  assumed  no  other  income  or  any  other  tax  credits  that  an  individual  might  receive.    

 

Financial  Illustra7ons  

1st  Illustra:on    

Business  Profits  of  £25,000  

2nd  Illustra:on    

Business  Profits  of  £50,000  

Helen Rowe Accountancy  1.  Annual  Profits  at  £25,000  

£1,091  Benefit  

Helen Rowe Accountancy  2.  Annual  Profits  at  £50,000  

£3,671  Benefit  

Helen Rowe Accountancy  

May  be  able  to  claim  the  Employment  Allowance  (introduced  in  2014/15)  which  is  a  relief  from  paying  any  Employers  NI  on  the  first  £2,000  of  contribu7on      Can  have  flexibility  to  set  up  Company  schemes  for  any  employees  –  for  example  Company  pension  schemes.      Profits  do  not  have  to  all  be  withdrawn  as  a  dividend,  you  have  the  op7on  to  take  a  dividend  when  you  want  to  so  can  have  more  effec:ve  tax  planning.  

Limited  Company  Considera7ons  

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   You  have  flexibility  to  structure  how  you  withdraw  cash  from  your  Company    

•  In  the  examples  I  have  assumed  salary  equal  to  the  current  Personal  Allowance  which  is  most  tax  efficient  in  these  illustra7ons  (assuming  no  other  income  or  other  employees)  

•  The  beneficial  tax  treatment  of  dividends  is  an  area  that  may  be  looked  at  in  the  future  but  structuring  your  payments  in  this  way  is  very  common  

•  An  accountant  can  advise  you  on  how  best  to  structure  your  payments  

Dividend  vs  Salary  

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     Goodwill  benefit  reduced  

•  Prior  to  December  2014,  a  significant  benefit  of  incorpora7on  was  that  you  could  value  goodwill  in  your  business  on  incorpora7on  and  claim  Entrepreneurs  Relief  on  the  CGT  liability  therefore  reducing  any  tax  due  on  this  amount  to  10%.  The  goodwill  value  could  then  be  drawn  out  of  the  business  as  cash  tax  free.  

•  In  addi7on,  the  goodwill  could  be  amor7sed  through  your  company  accounts  as  a  tax  deduc7ble  allowance.  

•  The  Autumn  Statement  has  now  prevented  this  from  happening  going  forward.  

•  You  can  s7ll  value  goodwill  in  your  business  but  this  will  now  be  subject  to  a  CGT  liability.      

Recent  Changes  

Helen Rowe Accountancy  Capital  Gains  Tax  

     Poten7al  gains  on  incorpora7on  need  to  be  considered  

•  Capital  Gains  Tax  Liability  may  arise  if  you  transfer  certain  assets  (including  goodwill)  into  the  Company.    

•  The  most  likely  assets  that  may  give  rise  to  a  gain  are  freehold  or  leasehold  premises  and  goodwill.  

•  Assets  should  be  transferred  at  market  value  and  a  gain  will  incur  if  this  is  greater  than  cost.  

•  Moveable  assets  will  only  be  subject  to  CGT  if  greater  than  £6,000  but  they  are  unlikely  to  have  a  value  greater  than  cost.  

•  You  may  be  able  to  claim  some  tax  reliefs  to  defer  or  reduce  any  gain  if  above  the  annual  exemp7on  (currently  £11,100)  

•  You  should  talk  to  an  accountant  if  you  think  this  may  be  an  issue  for  you  

Helen Rowe Accountancy  

     As  profits  increase  it  is  more  tax  efficient  to  trade  as  a  Limited  Company  

 

Conclusion  

•  Each  individual  has  different  circumstances  •  There  is  no  ‘magic’  profit  number  which  means  

now  is  the  right  7me  to  Incorporate  •  An  accountant  can  advise  on  when  it  may  begin  

to  be  beneficial  for  you.  

 •  Weigh  up  the  tax  advantages  versus  the  

increased  fees  and  bureaucracy  

When?  

What  Else?  

Helen Rowe Accountancy  

For  more  informa7on  please  contact:    

Helen  Rowe  Accountancy    

helenroweaccountancy@virginmedia.com