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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4715
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Hello. My name is Tim. I own a small business as a sole trader

Customer Question

Hello.
My name is Tim.
I own a small business as a sole trader established 27 years (Business in Classic Vehicles). Turnover approx £75K, not VAT registered. The last few years I have employed a Book keeper and submitted my own accounts to hmrc.

This coming year expect to turnover 76K, have drawings of £27,500 and have a surplus of £8-10,000 profit.

I would like to register as a Ltd Co, put into the business all my stock (£20K)/business name and trading history/goodwill etc and then possibly take a partner to help expand the business.

My Question is - Would it be a financial advantage for me to be a Ltd Co and are there any benefits I can have from putting my whole established business into the Ltd Co. Any other thoughts would be very welcome.

Thank you.
Tim
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.
Hello and welcome to the site. Thank you for your question.

Please advise what your medium-long term plans are
Confirm that you are basic rate tax payer.

Many thanks
Customer: replied 2 years ago.

Hello,


Thank you for the reply.


 


I have started an online part of by business that has been going one year and is proving successful, I think that it will create it,s own pressure to expand my business. I am making plans to do that in 2015.


 


I am a basic rate tax payer.


 


Thank you

Expert:  taxadvisor.uk replied 2 years ago.
Tim, thank you for your reply.

I will revert to you with my thoughts and recommendation shortly.

Many thanks
Customer: replied 2 years ago.

Thank you

Expert:  taxadvisor.uk replied 2 years ago.

Tim, thank you for your patience.

There may be financial advantages in running the business as a LTD company. There are some additional administrative costs (albeit not that significant) associated with running the business as LTD company

Your profits would be taxed at your top slice rate.

Income tax on income after allowances using 2013-14 rates....

first £32,010 at 20%, £32,011-£150,000 at 40% and over £150,000 at 45%

Profits would also be liable to NIC Class 4. Here are NIC rates for tax year 2013-14

Profits between £7,755 and £41,450 at 9%

Profits above £41,450 at 2%

In addition, you would be paying NIC Class 2 at a flat rate of £2.70 per week.

You file personal tax return and report your self employment profits on supplementary page SA103.

Accounting reporting requirements are not governed by Companies Act legislation and are not that strict.

The other option would be to operate as a LTD company.

The accounting and reporting requirements are governed by Companies Act 2006 and Financial reporting Statements (Accounting standards).

Company accounts are prepared on an annual basis. You pay Corporation tax at 20% on profits up to £300,000. Tax is due nine months and a day after accounting period end. CT return is due 12 months after end of accounting period. Say the company was formed in Feb 2014 and the year end is Jan 2015 and annually thereafter, your first CT would be payable no later than 1 NovXXXXXreturns due by 31 Apr 2016. You have flexibility on salary/dividend mix and you don't have to distribute all taxed profits as dividends.

Dividends are taxed at 10%, 32.5% or 42.5% as the top slice of your total income.

There are other HMRC requirements e.g PAYE and you still have to file a personal tax return.

Some other considerations:

Extraction of profits

Self employed - you may withdraw cash from the business without tax effect as profits are taxed and not drawings.

LTD company – you are taxed on any income withdrawn from the company. If it is a distribution it is taxed as dividend. If it is earnings it is taxed under PAYE and subject to NI contributions.

Borrowing

Self employed – you are free to borrow from the business bank account as it is your account.

LTD company – You can borrow from your company but there are limits set by Companies Act 2006 and also there are tax consequences.

Pension

Self employed – you can only have a personal pension.

LTD company – company pension schemes may be far more generous in terms of benefits and limits than personal pension.

Insolvency

Self employed – you will be personally or jointly with your partners liable to its debts if teh business fails. You may go bankrupt.

LTD company – if the company fails, your liability is limited to the amount unpaid on your shares unless you have made a personal guarantee against business loans. Also, if you continue to trade when your company is insolvent and it causes financial loss to the creditors, as a director you can be held personally accountable.

I have explained to you the two alternatives.

You would be best advised to seek consultation with a good accountant before you decide which route to adopt. He would be able to also advise you on costs associated with accountancy services and other associated regulatory costs.

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

 

 

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