Sole trader to Ltd company

--Tony-- · 25 April 2017 at 9:16PM

I have worked for a large company as a contractor for 10 years, all of this time I have been a sole trader, I spend half my time working for them and the other half dealing with my own private customers.

The multinational says I need to become a Ltd company or use and umbrella company if I wish to continue working for them.

My friend who does the accounts for several company's has suggested that rather than change from sole trader to a Ltd company, I could start a separate Ltd company which will deal with the multinational and keep them happy, but that I remain a sole trader and invoice my own Ltd company for the work I complete.

The money goes in and out of the Ltd company ending the year with no profit or loss.

The suggestion being I might want the Ltd company to register for VAT..... but as a sole trader outside of this company I can continue to do my private work for my own customers as a sole trader and non VAT registered.

The thing is I can't find anything about contractors working in this way, everything I see on the net suggests they just register as a Ltd company and become an employee of that Ltd company.

Pennywise · 26 April 2017 at 7:50AM

--Tony-- wrote: »

My friend who does the accounts for several company's has suggested that rather than change from sole trader to a Ltd company, I could start a separate Ltd company which will deal with the multinational and keep them happy, but that I remain a sole trader and invoice my own Ltd company for the work I complete.

The money goes in and out of the Ltd company ending the year with no profit or loss.

The suggestion being I might want the Ltd company to register for VAT..... but as a sole trader outside of this company I can continue to do my private work for my own customers as a sole trader and non VAT registered.

The thing is I can't find anything about contractors working in this way, everything I see on the net suggests they just register as a Ltd company and become an employee of that Ltd company.

Your friend doesn't know what he's talking about.

You can't artificially separate a businesses to avoid vat. Google "Vat disaggregation".

Nor can a director run a sole trader business alongside his own limited company and charge the company to transfer its profits to the sole trader. In fact, seeing as the tax/nic as a sole trader is higher than as a limited company, pretty stupid to do that as it would mean paying a higher rate of tax/nic on those profits. Not to mention, HMRC would almost certainly argue the "profits" were derived from the directorship of the company and liable to payroll taxes. You'd end up with costs and hassles of two different businesses without all the benefits of just being a ltd co.

If your main customer insists on a ltd co. then just do it. You'd probably pay less tax/nic anyway.

But please, before you do anything, engage a proper accountant to give you some proper advice and deal with the conversion for you. It's too complicated for an amateur.

--Tony-- · 26 April 2017 at 8:14AM

Pennywise wrote: »

Your friend doesn't know what he's talking about.

You can't artificially separate a businesses to avoid vat. Google "Vat disaggregation".

Nor can a director run a sole trader business alongside his own limited company and charge the company to transfer its profits to the sole trader. In fact, seeing as the tax/nic as a sole trader is higher than as a limited company, pretty stupid to do that as it would mean paying a higher rate of tax/nic on those profits. Not to mention, HMRC would almost certainly argue the "profits" were derived from the directorship of the company and liable to payroll taxes. You'd end up with costs and hassles of two different businesses without all the benefits of just being a ltd co.

If your main customer insists on a ltd co. then just do it. You'd probably pay less tax/nic anyway.

But please, before you do anything, engage a proper accountant to give you some proper advice and deal with the conversion for you. It's too complicated for an amateur.

Thanks for that, I suspected it could not be rights, I have only just found out about this and will take proper advice once I know more.
They are offering an umbrella company and say there are no fees, I don't know how that is possible (they have to make a profit too), when I know more I can decide which route to take.

Many thanks.

--Tony-- · 26 April 2017 at 9:23AM

Pennywise wrote: »

Your friend doesn't know what he's talking about.

You can't artificially separate a businesses to avoid vat. Google "Vat disaggregation".

Nor can a director run a sole trader business alongside his own limited company and charge the company to transfer its profits to the sole trader. In fact, seeing as the tax/nic as a sole trader is higher than as a limited company, pretty stupid to do that as it would mean paying a higher rate of tax/nic on those profits. Not to mention, HMRC would almost certainly argue the "profits" were derived from the directorship of the company and liable to payroll taxes. You'd end up with costs and hassles of two different businesses without all the benefits of just being a ltd co.

If your main customer insists on a ltd co. then just do it. You'd probably pay less tax/nic anyway.

But please, before you do anything, engage a proper accountant to give you some proper advice and deal with the conversion for you. It's too complicated for an amateur.

Would this scenario be OK?

I would keep operating as a sole trader and as I don't do much of this my earnings would be below my personal allowance, I would continue to pay NI, I want to pay NI for 5 more years to reach my full contribution for a full pension.

Then...
I have a Ltd company to keep the multinational happy and have no link in any way between the two companies, the Ltd company would be VAT registered so I can reclaim all my VAT on fuel, I use a lot of fuel driving for the multinational.
I would charge VAT and pass that to HMRC but could be considerably better off by reclaiming 20% of my fuel (I drive to at least 8 properties a day across the county for the multinational)

Different company accounts, different bank accounts and no cross over of work or billing between the companies.

I cant see I'm avoiding VAT as, I'm really not, the companies will be very different sole trading for private home owners in their homes, Ltd company which is VAT registered for contracting to the multinational to be professional for them and only them. As a sole trader I wont be able to reclaim VAT on that fuel or other things but that's OK because I drive a lot less privately and don't want to have to charge my private customers VAT.

I just asked my friend again and he said the VAT is the only reason to keep the companies separate, if I choose not to register for VAT for the Ltd company he said there is no point keeping it separate.

Does this not work?

TheCyclingProgrammer · 26 April 2017 at 9:40AM

There is a link between the two businesses - you.

lovinituk · 26 April 2017 at 9:55AM

--Tony-- wrote: »

Does this not work?

HMRC will see it as artificial separation. You said yourself the only reason for the split is because of the VAT.

Pennywise · 26 April 2017 at 11:39AM

eggha wrote: »

a) the vehicle is owned by the company and the company pays all the costs. The vehicle is therefore a taxable benefit for you personally and so likely to cost you more personally than not having a "company" car. The increased personal tax could far outweigh the "value" of your company providing a car to you, its employee.

There is also the VAT fuel scale charge to pay if you do a single mile of private journey using the company car that the company has paid for fuel.

So not only scale charges for income tax and NIC on the benefit in kind on use of company car and car fuel, but also VAT scale charge for the fuel.

Not as rosy as you think.

Pennywise · 26 April 2017 at 11:42AM

--Tony-- wrote: »

I cant see I'm avoiding VAT as, I'm really not

If the combined turnover of both businesses breaches the VAT threshold, then you really are trying to avoid VAT.

If you're only doing it so you can reclaim VAT you incur on one business but not on the other, then, yes, you really are trying to avoid VAT.

As said above, "you" are the common factor. Not only that, but it's more than common customers etc. Presumably you use your car for both businesses, use your home office for both businesses, use your mobile phone and computer for both businesses. Basically the "management" and "operation" of both businesses are exactly the same - you.

chrismac1 · 26 April 2017 at 1:07PM

In fact I think you have a fair shout in justifying a separate economic reason for the separation and hence the VAT treratment you desire.

Unless I have misunderstood the post, we will have a separate legal entity here with separate year-end accounts, bank accounts, trading styles and customers. Possibly also different suppliers. That scores about 80% on my "VAT separation" scorecard which is based on the very many tax cases in this area since VAT went up to 20%.

As Pennywise says, you are losing a few marks on the scorecard because of the aspects of the 2 businesses which will be in common.

Across my client base of 145 clients, I reckon roughly £500k to £1m in VAT has been legally saved over the past 5 years by setting up exactly the sort of setup you are suggesting in your post here. Total VAT enquiries zero.

--Tony-- · 26 April 2017 at 5:49PM

chrismac1 wrote: »

In fact I think you have a fair shout in justifying a separate economic reason for the separation and hence the VAT treratment you desire.

Unless I have misunderstood the post, we will have a separate legal entity here with separate year-end accounts, bank accounts, trading styles and customers. Possibly also different suppliers. That scores about 80% on my "VAT separation" scorecard which is based on the very many tax cases in this area since VAT went up to 20%.

As Pennywise says, you are losing a few marks on the scorecard because of the aspects of the 2 businesses which will be in common.

Across my client base of 145 clients, I reckon roughly £500k to £1m in VAT has been legally saved over the past 5 years by setting up exactly the sort of setup you are suggesting in your post here. Total VAT enquiries zero.

You are quite right, the two companies would have no crossover, separate year-end accounts, bank accounts, trading styles and customers the Ltd company would have suppliers.

So not to beat about the bush, I'm a gas engineer and I contract to a well known Gas company (sure you know who) and service their customers boilers for them, the customers are their customers not mine, I am required to wear their uniform and I look like their engineers. I am not allowed to do business with their customers, that would be a dismissable offence.

My turn over last year was not even half that requiring me to register for VAT so once split neither company would make much.

I really don't even want to do this, I have been happy on the CIS scheme for the last 10 years contracting and would rather carry on.

To understand the invoicing, they simply send me a weekly purchase order (based on an hourly rate) and I invoice them for that amount, all materials, consumables, parts and even uniform is provided by them. The accounts therefore will be very simple 52 BACS payments each year, fuel, van costs, insurance, gas registration costs and that's about it.

As a sole trade I do also service boilers but also repair them, fit appliances and boilers, while contracting I only service.

As a sole trader I have my own different uniform, different paperwork etc etc.

The only shared bits, as you say would be me, the van and my business insurance (the insurace company say they can change it so its me trading as both companies).

There is no cross over of work, as a sole trader I can no longer do work as a contractor and the Ltd company would never do work for my private customers, I cant anyway because I'm in another companies uniform.

Where does this leave me, is there a glimmer of hope?

JasonLVC · 26 April 2017 at 6:09PM

Whilst its not illegal to artificially separate two trades (sole trader and Ltd), HMRC have the power to disaggregate split trades where they believe the split is artificial. So its possible to achieve but not without risk.

Taking the above post gas engineer. The shared costs are the van, the business insurance and the person. Problem is, the van can only belong to one - the sole trader or the Ltd. If its the sole trader, how does the Ltd get use of a van it doesn't own? Likewise, if the Ltd buys tools but the sole trader also uses them, how is that possible?

HMRC will look for 3 tests - economic, financial and organisational links. Economic means supplying the same customers and making the same type of supplies.

Financial means are both entities capable of survival without the other (not if they are borrowing tools and vans from each other), financial support given by business to the other. Organisational means common premises, common Directors/employees and common equipment.

Crucially, HMRC must prove all three tests so if you have financial and organisational links but not economic ones, in theory HMRC may still attack it but harder for them to win. Splitting businesses is the common wheeze of those who don't grasp the law. Its not illegal but its got to be done right.

Just having separate bank accounts isn't enough. If I call the business up on the phone, there should be two numbers for the different businesses. If the two trades are sharing a phone number that is confusing for the customer and also means we create an organisational (equipment), economic (shared customer) link and so we're getting close to all three links being met.

The road is strewn with those who split a business but failed to do it properly, there still needs to be a business reason to split the trades too.

Tony, by all means go for it, just do it right. Interesting link here, from 2013 , from some tax advisory firm, but I did some Googling for you and this is a nicely written, easy to understand article which mirrors my post, its worth a read to see the examples here which are all tribunal cases.

Whilst one business might win at tribunal, others will lose, cases, like in any law, are judged on their individual facts so you cannot rely on past judgements, besides, Tier One Tax Tribunals do not set precedent, whereas Upper Tribunals do and there are not many UT cases out there where the tax payer wins.

Sole trader to Ltd company

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