Tax and a new Ltd Company

LinuxAllTheWay

Hi there,

I could really use a bit of advice for what I think will be a simple question to answer. There's so much info out on the web that it all seems to blend in to one.

Firstly, a little background information. My band is thinking of setting itself up as a Ltd company, mainly because next year is looking like it's going to be very busy and we want to be as tax efficient as possible.

I understand that the band members will each be share holding directors and not employees. All money will be paid to the Ltd with the occasional dividend payment to each of us. If I've got that right then we'll need to pay 21% corporation tax and each of us will need to pay 12.5% on the dividend. We won't have a high enough turn-over to warrant registering for VAT as we're looking at around £20k's worth of work.

Here's the bit I'm struggling to get my head around. If we wanted to purchase, say, a new amp at £100 would we be able to get any form of relief on that purchase? Another way of putting it would be to ask is there any tax advantage in getting the Ltd company to purchase the amp instead of the individual? If there is, when do we claim back that advantage? At the end of each financial year?

If the Ltd company did buy the amp then it would go on our asset register in which case we could write it off after three or four years (I think).

I want to get this clear in my head before approaching (or getting approached by) an accountant.

I hope the above question makes sense. Please let me know if you need any more income.

Many thanks

chrismac1

A limited company will save you NI (not tax) if you make taxable PROFITS above £15k - if you're only going to get £20k of work I'd say it's probably not worth setting up a limited company. It sounds like there are 8 of you (12.5% each you said) so if you are all directors and shareholders, every time one of you leaves or joins the band there are more accountancy fees to pay unless one of you is going to learn all the rules on what happens when directors or shareholders leave a company. You should also have a shareholders' agreement drawn up to prevent an argument within the band leading to stalemate / legal action within the company - very expensive - but more fees in drawing this up.

A partnership might make more sense. There is no tax advantage in having the company buy the asset instead of the individual, but the company is then the legal owner of the asset and not the person. So the person is certainly not free to do what he or she wants with that asset. At present you'd get relief in full for this expenditure unless you spent over £100k which is the limit for 2010-11.

LinuxAllTheWay

Thanks for that info. Very useful.

angelpie1000

Hi, My suggestion would be to find an accountant local to you and book a consultation with them. Most (good) accountants will offer a free initial consultation - you can talk through your specific situation and by asking their opinion, you will get an answer tailored to your circumstances.

I see lots of people set up a limited company seeing it as the "best solution" but not fully understanding the complexities it brings - often they end up with unnecessary penalties, which could have been avoided had they consulted someone before setting it up.

With 8 of you involved, the situation is more complex, as everyone will have a different opinion as to what is best, but having someone independent will avoid unnecessary conflict.

Going back to your initial question, if you did go for a company, it would be able to offset the cost of any equipment against it's taxable profits - either in full when you spend the money or through capital allowances. Make sure you ask your accountant to explain how capital allowances work

Good luck
Karen