Sole trader versus Ltd Company

paddypaws101

I am self employed therapist and operate as a sole trader and paying higher rate tax, but not registered for VAT. I have a book keeper to keep my accounts in order and he also does my Tax return for me ( Revenue inquiry about 4 years ago! )

I have a friend in the same line of work who set herself up as a LTD company several years ago and seems to be ( legally) paying a lot less tax than me.

Although I know the actual seeting up is relatively easy and inexpensive....what are the potential pit falls if I choose to go down this route?
When I discussed previously with my book keeper he did not think it was a great idea...but I think the only concrete cons he gave were
a...Having to make my accounts freely available to all and sundry at company House ( well after a tax enquiry I am used to everyone having a nose at my paper work)
b...Provide an invoice to all customers. Again, I give people a receipt, so I just label it as an invoice instead??
Does anyone have experience of this issue either personally or professionally?

olly300

Accounting fees - you have to produce company accounts plus do a tax return therefore you will need to pay accounting fees.

VAT - if you generate enough revenue then you should be VAT registered which will put your prices up.

zenmaster

There is an article here outlining advantages and disadvantages.

There are a number of legal responsibilities placed on a director of a limited company, outlined here.

There is extra work involved but it's not really that difficult though you do have to be careful that you don't break any rules as the penalties can be severe.

PS. Possibly the reason your bookkeeper is not too keen is that it is beyond their skills. You may need to trade up to a proper accountant.

PlutoinCapricorn

The standard advice given on here is to start as a Sole Trader then if and when you start earning enough to get into the higher tax band, consider forming a Limited Company. It seems that you have reached this point.

I think that the higher rate tax will rise from 40% to 50% soon, which is another reason for considering incorporating.

It does involve stricter rules for the accounting, and 'all and sundry' means anyone, not just some HMRC people. No one can look at your sole trader figures, but once you are a Ltd any curious person can check you out.

If you Google "sole trader versus limited company", you will get a lot of useful information, on https://www.ukbusinesslabs.co.uk in particular.

www.businesslink.gov.uk is always worth trying.

Rolo_Tomasi

paddypaws101 wrote: »

I have a friend in the same line of work who set herself up as a LTD company several years ago and seems to be ( legally) paying a lot less tax than me.

I doubt whether there would be that much difference in tax between a Ltd Company and a sole trader unless you are prepared to leave money in the company bank account.

I would also not do anything until the pre budget report as there is talk of corporation tax increasing.

chalkie99

The new 50% tax rate applies only to earnings above £150,000 a year which, presumably, will not affect the OP (as they are not registered for VAT their turnover must be less than £68,000).

The accounts viewable at Companies House are an abbreviated version only - not detailed.

It is possible that your book keeper does not have the skills or inclination to handle your business as a Ltd Co. so perhaps arrange a free inital interview with a qualified accountant to see what their advice is.

olly300

Due to the trouble various people I know personally have had with accountants, I suggest that you ask people you know who run small Ltd companies who their accountant is and would they recommend them.

paddypaws101

Thanks for all of the above.
My turnover IS below vat threshold and I intend to keep it that way.
I will certainly consider consulting an experienced accountant regarding this matter....however I moved away from a very expensive, supposed specialist several years ago after he made a right mess of my books....which led to the Revenue Enquiry.!

MrCarrot

If you go down the LTD company route the company won't pay any National Insurance. You can then withdraw your salary primarily as dividends which again won't attract any National Insurance. This is where the biggest saving will be made.

Although everyone says your accounts will be publically available, for companies under a certain turnover you can submit abreviated accounts which don't reveal quite as much.

Legally you don't have to provide an "invoice" to each customer, but you will have to keep a record (which I assume you are doing at the moment). If you use accounting/book-keeping software you might want to enter each service charge as an invoice but that doesn't mean you have to print it out and give it to the customer.

I would expect your accountancy fees to go up since there will be more work to do. However, for a small business with a modest turnover I would expect these costs to be in the region of £500 - £1,000 per year and this kind of setup should save you a lot more than that in tax.

I would also add that in my experience, book keepers are somewhat different to accountants. I may be wrong, but I would not expect your average book keeper to be able to produce a set of comprehensive accounts for HMRC and Companies House - really that's the job of an accountant.