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Any company accountants out there?

Forgive me if this is the wrong place for this post, but it's the most appropriate one I could think of.

I'm currently writing some software applications & services to sell as shareware on my website. Just a few things I'm putting together in my spare time.

Naturally I'd like the site to make some money, but am realistic that it won't be that much, hence I have no intention (at this time anyway) to setup a company for the site. However should it be somewhat successful to the point where I have to start thinking about paying VAT and income tax, what is the tax position?

That is lets say it is released in June and by the end of the tax year has made £100K (yeah right I should be so lucky!) would I then be able to create a company and have the £100K put through the company (as it's still in the same tax year) and be taxed at the corporate rate rather than as income tax?

Hope this all makes sense and thanks in advance for any light anyone can shed.
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Comments

  • JC4LAB
    JC4LAB Posts: 25 Forumite
    Nope..Its possible to form a company and it not to trade until some later date of your choice but you cant allot your income to a period when it did not exist.,so you will be taxed as a self employed indivdual anyway.until it is formed..You just fill in the self employment section of your tax return...My view is money is made by good business,getting deals and salesmanship and all this tax planning and accounting will drain your time energy if you let it..concentrate on sales and worry about this later.when profit is a reality..there are lots on pros and cons to having a company ..and different opinions on it too...All the best
  • chitty
    chitty Posts: 37 Forumite
    Thanks for the info; perhaps you'd be kind enough to offer some further advice following on from your reply.

    If I get taxed as self-employed (keeping in mind I still have a full time job) will this ultimately mean paying at 40%?

    Would it be a more prudent move to buy an "off-the-shelf" company for £70 and rename it with companies house and that way if I achieve some moderate success the company is already there.

    I take your points about it being more important to worry about making the sales first, however this is only a part-time effort, my main concern is with producing fair priced services and applications people find useful and worry about making any decent money further down the line.

    Thanks again for your advice :)
  • cash99
    cash99 Posts: 274 Forumite
    Part of the Furniture 100 Posts Combo Breaker
    JC4LAB wrote:
    My view is money is made by good business,getting deals and salesmanship and all this tax planning and accounting will drain your time energy if you let it..concentrate on sales and worry about this later.when profit is a reality..there are lots on pros and cons to having a company ..and different opinions on it too...All the best

    I agree that should not let the tail wag the dog, but good buisness is about cashflow and profits. Tax is a major factor in how much of the profits you get to keep.

    There are pros and cons to a company and it really depends on how you expect the business to develop. A company is however a good vehicle to assist with tax planning, as opposed to being self employed. If this is a serious business venture then take some advice now on a suitable structure. Tax planning is usually difficult if not impossible to do after the event. Try contacting your local business link.

    A few hours spent now would definitely be worth it.

    chitty - if you operate as self employed the profit is added to your existing income and taxed at your highets rate potentially taking you into 40%.

    With a company the tax will be 19%. However the profit belongs to the company. If you take the profit out of the company as a dividend or salary/bonus then again this is added to to your existing income and taxed at your highest rate potentially taking you into 40%.

    The difference with the company is that you decide when to take the profit out and how much you take. This gives you the opportunity to plan how much personal tax you pay.

    Also if you need to use some of the profits to re-invest in the business eg. computer hardware, web site design etc. then in a company you could have 21% more profit to use.
    if i had known then what i know now
  • So basically either way I end up paying 40% either way unless I'm reinvesting in the company :(

    Sounds like I'd be better off as self employed and take the hit :(

    Thanks for everyone's advice
  • MJSW
    MJSW Posts: 171 Forumite
    Generally you will save tax through a company. The bulk of the saving can often come from reduced National Insurance. I agree with cash99 that you are much better considering at the start what the most appropriate structure is for the business. You will probably save tax by operating through a company, but on the other hand running costs may be slightly higher, and you would need to file the accounts at Companies House where they are publicly available.

    There can be huge differences in the total amount of tax due, particularly as cash99 has suggested where you don't need to draw out all of the profits. Even if you do draw all of the profits, there can still be substantial savings, depending of course on the level of profits and any other sources of income you have. Suppose for example you make £40,000, and have no other personal source of income. If self employed, you would pay £8,208 in Income Tax, £107 in Class 2 National Insurance and £2,241 in Class 4 National Insurance. That leaves you with £29,444 after tax.

    If your company made £40,000, and paid you a salary of £4,745 (personal allowance) and then distributed as much as possible to you as dividend, it would pay Corporation Tax of £6,568 and a dividend of £28,687. You would only just creep into higher rate tax, the additional Income Tax due would be just £107 and NI would be nil. You would be left with £33,325 after tax.

    Total tax as self employed: £10,556
    Total tax through company : £6,675

    Tax saving: £3,881 (per annum)
  • JC4LAB
    JC4LAB Posts: 25 Forumite
    Buying an offshelf company and changing the name is exactly what most do...a word of warning though is that just has there a £100 fine for a late tax return ,so there are many more possible fines for not keeping up to date with conpany returns...eg.annual return to companies house,company tax return,filing of accounts on time at companies house.return of directors benefits to the tax office,personal tax returns all of which can be £100+ and much more fine if late.., Theres extra tax to pay if you have a company car..could be £30 a week on a decent motor..
  • Sounds like I should go self-employed and get it any income just added onto my normal salary. Preseumably there's just a form I can get from the tax office that says I earn £xyz from my full time employer plus £abc from the website and pay the extra tax?!!?!?

    Thanks again for all you advice.
  • Adivce off the website can be only broad brush...you need someone to look at your affairs in their entirety...There is more to companies than just tax..eg..to safeguard your house etc if you go bust

    I think a company may be a good for you thing if you didnt need to take money out of it and have income from elsewhere ....you need to sit down with somweone who can look at your affairs in their entirety before you decide...

    Before going to all this trouble I think its best to see some money coming in first,just to be sure its really happening
  • chitty
    chitty Posts: 37 Forumite
    Agreed. I don't think going bust should be an issue as all I should need (in theory) is to pay for hosting fees and that should be about it.

    I could in theory keep any money in the company - providing it's established in the first place as previously expressed - as I'd still have a full-time job to pay my bills. I don't really want to be paying for an accountants advice as this stage as I don't know if it will make any money at all!

    I think on the breast of what has been said I'd be better off just seeing what happens and get a separate paypal account and savings account for having payments made to just so everything is separate from my own finances and more trackable.

    Thanks once again for all your advice.
  • Interested to read your initial post. We're also in the process of setting up a software business. We've decided to go down the company route because it seperates company assets from personal assets. As you may be aware there is a great deal of debate about introducing US style software patents in the UK and Europe and this potentially makes writing software difficult given the high risk of patent infringement.

    We have seen a solicitor, accountant and Inland Revenue business support advisor, all for free and felt that it was worth our time to gain a better understanding of the issues involved.
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