becoming a company/ VAT negatives?

valedictus

Hi there,

Recently taken the plunge and gone full time self employed, my current turnover is far beyond the VAT threshold and im after a little advice please!

I currently have a family friend accountant who has mentioned about becoming a PLC/VAT registered etc etc, but havent broached the subject any further. After looking online im now becoming slightly concerned for either getting a huge tax bill without realising or not being able to claim for expenditures already made.

Am i better off turning clients away to lower my income, or becoming a full blown (1 person) company and paying huge bills. I've never charged VAT on the service i provide, but always paid VAT on purchases made.

Anyone able to help, or point in the right directions?


Many thanks

Pennywise

I think you're getting confused here. VAT registration and becomming a limited company are completely different things and you don't have to be one to be the other. Also you'd probably be thinking about becomming a limited company, not a PLC which is usually for the largest of businesses.

You say your turnover is "beyond" the VAT threshold. If you really mean that, i.e. your turnover is above the limit, then you should already have registered for VAT and be charging VAT on sales and paying it over to HMRC less VAT paid on purchases. VAT registration isn't optional if you've exceeded the threshold, and there will be penalties and interest on VAT which you should have paid over but havn't.

Reducing your turnover again will enable you to deregister for VAT, but doesn't change your liability for the months when you should have been registered. Depending on your profit and turnover levels, it is possible that keeping turnover lower below the threshold may be best for you - the numbers need to be compared.

Re becomming a limited company, again you need the do the numbers to compare all the implications (good and bad) of being a company compared with continuing to be a sole trader.

I'd strongly suggest you engage a proper practising accountant rather than relying on a friend - you are clearly confused by it all and need someone to go through it with you and give you the full facts - getting snippets from friends and family is the way to land yourself with unexpected tax bills and doing things wrong.

NiceGuyEddie_2

If your turnover is beyond the VAT threshold then you must become VAT registered. When did your turnover reach £70k and what service/product are you selling?

If your sales are VATable then you need to charge VAT on them at the appropriate rate. It's important with VAT to remember that you won't be left with 'a huge tax bill' - you simply pay over the difference between the VAT you charged on sales and the VAT you paid on purchases; you are in essence an unpaid collector of VAT for HMRC and the costs of this will largely be the time it takes to prepare and submit the return, and potentially the loss of customers if you sell to non-VAT registered customers.

Regarding the plc, I'm sure this wouldn't even be relevant to you. If you wish to transfer the self-employment to a company then a private limited company (Ltd) is more appropriate in almost every scenario I can think of. The advantages and disadvantages of this are many and varied, and require professional advice as to whether it's the best option for you.

With regards to claiming expenditure, it's true that there are some differences between allowable expenses for income tax and those for corporation tax, but I can't envisage many situations where that would result in a larger tax bill in the first year once incorporated; whether you'd be one of the few depends upon what your expenditure consists of and your profit.

Given the confusion in your post, I suggest you ask your accountant about these issues (not the 'family friend' who has possibly created the confusion?) - if you don't yet have an accountant, engage one. The limited company issue can wait for another day, but if you've exceeded the VAT threshold and haven't yet registered then you need to move quickly

heretolearn_2

Yes, you seem quite confused here. Is the 'family friend accountant' actually working for you, or do you just nab them now and then for a bit of freebie advice. If they are working for you, you need to arrange a meeting to go over the pros and cons and to get everything explained properly. For example, we have software that runs a comparison for our sole trader clients on how much tax they pay as sole traders versus if they were Ltds, to enable them to make an informed decision.

But if you are relying on freebie 5 minutes here and there, you now need to get yourself a proper accountant. Also is this friend actually an accountant in a genuine way - it's not a protected title so anyone can call themselves that. If they are a bookkeeper, for example, they are unlikely to be able to give much advice on the intricacies of tax.

VAT: not optional once you reach the threshold. Reducing to below the threshold doesn't save you any tax directly (other than that your income is lower) so I don't think you quite understand how VAT works. It doesn't cost you anything. It actually saves you money generally as the price you pay for anything is lower - you get the VAT back. The only disadvantage is that you then become more expensive for your customers. If they are businesses, it doesn't really matter as most will be VAT registered. If they are consumers, it might.