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TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15979
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I had always been a PAYE employee until giving that up in March

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I had always been a PAYE employee until giving that up in March this year. Since April I have been selling goods via Amazon. Things are going better than anticipated so I'm considering forming a limited company. How do I approach this with HMRC in mind, as probably in their eyes for the past few months I have been self-employed? I've purchased a lot of stock in that time and would obviously want that expenditure to be taken into account for tax purposes.


If you have been looking at the tax rules around companies as opposed to sole traders then I'll leave that area alone save to say that most people trade as sole traders for a year or two before going the limited company route, not least becausde of the more onerous and costly compliance responsibilities that company owners have that sole traders don't have.

If you have been selling already then that income and the associated expenses will need to be disclosed as income and expenditure of a sole trader. You cannot turn back the clock. However, if you now want to use a limited company, then you can transfer the stock you still have into the company at the lower of its cost or market value. There probably won't be much difference. As I intimated in the previous paragraph, many sole traders transfer their business including stock and assets to a limited company at some point so its a common practice. Take a look here for information on incorporation relief. Just keep a record of the changeover point and what was transferred.

You should have registered as self-employed within three months of starting out so if you haven't done that yet, take a look here on how to do so even if you are only self-employed for a short period from April.

I hope this helps but let me know if you have any further questions.

Customer: replied 3 years ago.


Thanks for answering my question. One of the reasons I'm considering going Ltd is that I estimate first year turnover to be gbp 90k, which from what I've read suggests I should register for VAT also. Is this correct or would a sole trader not be required to register in their first year?

You need to register for VAT when your turnover is more than £81,000 id the previous 12 months whether you are acting as a sole trader or trading through a limited company. Take a look here for more information on VAT registration.

The more profit you make, the more tax efficient it can be to operate through a limited company. As a sole trader, you are taxed on what ever profit you make. A company will pay corporation tax at 20% on profits up to £300,000. The director/shareholder will only be taxed on what they take out in salary and or dividends. Read about dividends here.

Whilst dividends are not a tax deductible expense for the company (salary is) they are treated as basic rate tax paid in the shareholder's hands and you can withdraw up to £37,678.50 in dividends (assuming you have that much or more post corporation tax profit) and pay no personal tax unless you have other income. Dividends are not liable to national insurance contributions whereas salary above a certain level is. Try plugging some profit figures into the comparison calculator here.

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