Deciding The Best Structure For Our Business

confused_sign_postOne of the fundamental questions when starting a new business is; “Should I run my business as a sole trader, partnership or limited company?”

The Government have, in recent years, been herding us all in the direction of the limited company, as it allows them to monitor statistical business data, and enforce deadline compliance, via Companies House. In the majority of cases, therefore, under current legislation, it will be preferable to run your business as a limited company. Some of the benefits of doing so include:

Limited Liability.

A limited company is a separate legal entity, distinct from ourselves as directors / shareholders. If your business fails, your house and other assets are not at risk (unless you have guaranteed any debts personally, or you have been guilty of fraud in your conduct as directors).

An alternative to the limited company is the limited liability partnership (LLP) which is favoured by some accountants. Whilst, as the name suggests, this will have the bonus of limited personal liability for partners, it will lack some of the other benefits of the limited company, such as the associated tax savings.

Image.

The perception held by most people is that limited companies are larger entities, and this automatically gives increased credibility.

Taxation savings.

Over the last few years, legislation has changed almost yearly. For some of that period, the first £10,000 of a limited company’s profits were tax free. Although this provision is not currently in force, the Small Companies Corporation Tax Rate presently stands at 20%, for profits up to £300,000.

Currently, a self employed person will pay a basic rate of Income Tax of 20% (rising to 40% from £32,000 of taxable income) plus 9% Class 4 National Insurance. This, obviously, represents a potential minimum saving of 9% on every penny earned for a limited company.

Even with the slightly increased accounts costs involved with a limited company, it can be well worth considering the change for those with significant incomes,  who are still operating as sole traders.

It’s also worth noting that, under Self Assessment, we pay our tax six monthly in advance. Corporation Tax, however, is currently paid 9 months after the year end, giving us some, potentially, quite favourable cash flow assistance. On the flip side, of course,  if our business is making less than around £9,000 per year, at current rates, then the financial argument for limited companies will not be relevant, and many will still opt for the slightly simpler structure of the sole trader business.

Ok, so that’s all very well, but how do you go about setting up a limited company? What does it involve? Is it more work or more expensive? Will you have to have an audit, register for VAT or find a company secretary?

The latest Companies Act 2006 has now completed the task of simplifying the limited company process, by, amongst other things, removing the requirement to have a company secretary, from 1 April 2008.

Other recent simplifications include:

  • The audit requirement for small companies has been removed for companies whose turnover is below £6.5 Million. Also, for companies of this size, we are not required to submit other than the most basic abbreviated accounts to Companies House, so our turnover, gross profit etc will not be a matter of public record.
  • The requirement to have two directors has now also been removed.
  • Limited companies were previously required to have at least two shareholders. This was, in reality, a bit of a pointless exercise, anyway, as many business owners would simply issue 100 shares, 99 to themselves and 1 to their partner. This requirement has, once again, been removed.

The net effect of all of this is that, from April 2008, it is now possible to form and run a limited company with just one person, without the need to involve anyone else. The structure of the business, therefore, becomes as simple as that of a sole trader (although there is a little more reporting required to HMRC and Companies House).

The other benefit of this is in the costs involved. The fact that most of us will never require an audit, will significantly reduce accountancy costs, and the simplified company structure means that you can now form a brand new limited company online from as little as £25.

Advertisements
Posted in Uncategorized | Leave a comment

How Do We Run A Car Or Other Vehicle Through The Business

2343195195_852cf1c65b_m

One area that most new business owners need to know about is how to run a vehicle

The answer to this will mainly depend upon whether you are running the business as a sole trader or a limited company, as follows: (including, where applicable, their own car) through their business.

Sole Trader

As a sole trader, YOU are the business, and your car automatically becomes part of the business, for tax purposes. In this scenario, you are simply required to keep a record of your business mileage, which can then be compared against the vehicle’s total mileage for the year, to give a ‘business’ percentage. If, for the sake of argument, this works out as 60%, you can then claim 60% of the entire running costs of that vehicle, including fuel, tax, insurance, repairs etc.

Limited Company

This is a totally different scenario, as the limited company is a separate legal entity in its own right. This means that, if you simply pay for the car through the business, then the company is, effectively, providing you with a company car, which will be subject to tax like any other employee. The last thing any of us want is to be taxed for using our own vehicle.

The way around this is to use what are know as MAPs  (Mileage Allowance Payments – formerly the Fixed Profits Car Scheme) whereby we can claim a set mileage rate from the business, which we then use to finance the running of the vehicle. This way, the company indirectly pays the motoring costs, but there is no tax implication, and the vehicle remains your own property.

The AMAP rates are 45p per mile for the first 10,000 miles a year, and 25p per mile thereafter.

Further details can be found at; http://www.hmrc.gov.uk/payerti/exb/a-z/m/mileage-expenses.htm#x1

Posted in Taxation | Tagged , , , , , , | Leave a comment

What Do We Do About PAYE / NI Now That We’re Self Employed?

2400058179_e1a994de22

As of April 2011, from commencement as a self employed person, you will be required to pay Class 2 National Insurance, which can now be paid either monthly or six monthly.

This is paid at the equivalent rate of £2.65 per week, and covers the taxpayer for profits of up to £7,755. Anything over and above this is subject to Class 4 National Insurance, at 9% (up to a maximum profit of £41,450 per year, after which the rate drops to 2%).

For limited companies, it is possible to pay yourself a salary of approximately £149 per week, without paying PAYE or NI, with the majority of remuneration being taken by way of a dividend, which, as investment income, is not subject to National Insurance.

However, to ensure a minimum contribution is paid, thereby ensuring future pension and other benefits, we recommend the payment of a slightly larger salary to each director (usually around £9,000 – £9,500 per annum).

In order to minimise work (and therefore cost) recent changes in NI legislation mean that this salary can now be paid annually, as long as the recipients are also directors.

Full details of how / when to pay can be found at;  http://www.hmrc.gov.uk/payinghmrc/class2nics.htm#1

Posted in Startups, Taxation | Tagged , , , , , , , | Leave a comment

When Should I Tell The Tax Man About My Business?

ts24

Many of us will have started out on a part time basis, whilst still holding down a full time job, until we are ready to ‘take the plunge’ into a full time business.

Often this will either be in the same line of work as our main employment, or it could be the development of a personal hobby or interest.

So, if it’s just a little income on the side, when do we have to register as a ‘proper’ business, with the Inland Revenue etc? Unfortunately, the ever benevolent Tax Man now requires us to register immediately, as soon as we have undertaken our first piece of self employed work.

A few years ago, we were able to notify the Inland Revenue at the end of the first year’s trading, on submission of the first year’s accounts and tax returns. This is no longer an option, and we are now all obliged to advise H M Revenue & Customs, by completion of a Form CFW1, within 3 months of undertaking our first piece of self employed work. Failure to do so will now result in an automatic fine of £100.

Once registered, you will now be classified as self employed, and you will be sent a Self Assessment Tax Return to be completed annually, showing your income and expenses from your self employment as well as details of your employment. You will be subject to tax and national insurance on any profits you make, but the good news is that any losses incurred (which is quite common in the first year or two) can be offset against your employed income, which will usually then result in a tax rebate.

So. There is no such thing as ‘casual part time income’ from self employment. You must register immediately, or face financial penalties. As the business continues to grow, you will then need to consider the tax advantages offered by the setting up of a small limited company.

These days, most people will choose to register, as self employed, online. You can do so here;   https://online.hmrc.gov.uk/registration/options

Posted in Startups | Tagged , , , , , | Leave a comment

Praxis Goes To Press

Praxis

September 2013 sees the launch of Praxis Press, the official blog of Praxis Accountancy Limited, maintained and written by CEO, Alan Young.

Alan is no stranger to the world of blogging, having previously written the 1st Addition Accountancy Blog; ‘The 1st Edition’. He has also served as in house accountant, and has written articles, for the likes of Enterprise Nation, The Home Business Network, The Telegraph Business Club and the Ebay Journal. He has also hosted a number of web chats, including a ‘Frugal-Preneur’ Web Chat, for ‘Make Your Mark’, jointly hosted with Clive Lewis, Head of SME’s at the ICAEW. Alan also briefly hosted the ‘Ask Alan’ slot on ENTV.

Alan was further commissioned to write the ‘Small Business Guide To Startups And Finance’, on behalf of the Telegraph Business Club, following the advice he offered to Home Business Network forum members, prompting Dave Sumner Smith, Program Director, The Home Business Network and Telegraph Business Club to write;

“The subjects of tax and expenses have attracted more questions and comments than any other topics on the Forum. And many of the questions have been answered (extremely well) by Alan Young, who knows far more about working from home than any accountant I have ever come across”.

The blog will start with a number of popular articles and posts reproduced from some of the above sites and publications, updated for any changes in current legislation (correct at time of going to press) many of which have been prompted by the FAQ section of the company web site. All comments, feedback, question and requests for future articles are greatly appreciated.

Posted in News & Events | Tagged , , , , | Leave a comment