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At what level do you tell your clients to incorporate

At what level do you tell your clients to...

I am just wondering what the current thinking is about what profit level you would tell your clients to incorporate.

I appreciate that there are other factors to consider apart from tax saving, but from a purely tax point of view, when do you tell them to incorporate?

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09th Jan 2013 17:13

Incorporation

There is no one figure.  I have been looking at this for a short talk I might have to give. 

Ignoring whether incorporation is the right route in the first place the inponderables to be brought into the equations include:

share allocation between self/spouse

spouse wages/director's fees

car/van benefits + other BIK's,

possible mileage allowances

pension payments

value of potential director's loan account on incorporation

Child Benefit reduction

effect of different sources of income on tax credits

possible partnership alternative.  

It will only be after you have looked at the numbers considering all these factors that you will find a break-even figure and can advise that incorporation may (for now) save tax.

If anyone thinks I may have missed anything then I would be pleased to hear from you

 

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By JAADAMS
09th Jan 2013 17:35

Depends - as Andy says...

Here is a link to a website that has made the calculations...

http://www.finansol.co.uk/ 

I have clients who are incorporated but are so to give the impression (!) that they are larger than they are.

Jennifer Adams

Associate Editor

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10th Jan 2013 09:37

£20k+

is the figure that i suggest that they start to give it some consideration. 

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10th Jan 2013 09:58

Increase in fees can outweigh tax savings

I lost a job last year where I had resisted incorporating a client as I didnt think it was worth it when higher accountancy fees were taken into account.

He moved to another accountant who charged £25 for the incorporation and less than I had been charging for the sole trader to do the company!

I don't think we are particularly expensive. Go figure!

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By Sarah P
10th Jan 2013 10:04

Another criteria Andy:

Availability of childcare vouchers through a company.

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10th Jan 2013 11:27

incorporation

Except and unless the business activity is a C.O.D business and is tiny, the costs of incorporation are irrelevant, and worthwhile;

Over the years tax levels are broadly similar (sole trader v one or two person ltd Co.) considerations are:-

With a ltd co you pay tax after you know what the profits are.For seasonal and variable work this is a real consideration.

you are entitled to unemployment, sickness, and a whole range of benefits which are not available to self-employed.

Personal tax and national insurance is paid monthly rather than a lump at the wrong time of the year.

Pensions, including state pensions, are easier to deal with, as are mortgage applications and a whole host of things.

Also not least, there is a legal entity (the company) between the individual and any disputant, whether HMRC or other third party. Especially so-called random or aspect enquries.

Last but not by any means least,

you may choose your accounting year and maintain a wall of sorts between private and business.

As regards our fees, with the ability to avoid the Jan 31 rush, The small additional cost is a value-for-money "Insurance"

If you work from home the use of an accountant's address as registered office an director's public "Address" may save a deal of junk mail.

 

.

 

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10th Jan 2013 15:50

In another life

we avoided going limited just to keep our figures out of the public domain. We had a multi million pound turnover with profits to match, but only the tax man and the partners knew :)

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10th Jan 2013 18:21

Liability first then .........Car.....

I always advise that Liability or vanity is issue 1, never incorporate JUST to save tax - unless the saving is big enough!

Then it is often down to cars

After doing the standard calcs and demonstrating NI saving (coupled with loss of that saving that the accountant charges) clients usualy say they want to incorporate (and are actually grateful to me for being honest enough to tell them I too will benefit!)

I then discuss cars, if they have traditionally had an expensive gas guzzling car (lets say a 4 litre Range Rover that does 15mpg) and you then factor that into it and look at mileage done and what would be reclaimed in the company compared to the tax deductions for that car in a sole trader - it often means they save more tax as a sole trader, whereas if they drive an electric or efficient car the 45ppm figures can actually be more beneficial.

Although saying that I do this calc every time but have never yet devised myself a timesaving spreadsheet - must get onto that....!

 

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By cfield
10th Jan 2013 19:43

Don't forget State Pension

This is often overlooked in the incorporation debate. Sole traders are usually gobsmacked when I tell them their Class 4 payments count for absolutely nothing. They almost fall off the chair when I say they can get more state pension than they do now (with S2P) and pay no NI contributions at all.

I think the Child Benefit tax tilts the argument so far in favour of incorporation now that it is almost becoming a no-brainer. Add that to the tax saving you can make with childcare vouchers (most people are unaware you can use them for all sorts of kids activities right up to age 16) and that's usually enough to sway most people.

In answer to the original question, the typical tax/NI saving for profits of £50k a year is just over £5k at the optimal remuneration. And if you split the dividends with your non-earning spouse you can save another £2k. Even at profit of £30k a year the saving is over £2.5k.

The cars aspect is still relevant although high mileage drivers tend not to be too much worse off. Depends on the value and running costs of the car of course. The beneficial tax treatment for low CO2 cars is diminishing fast, so very difficult to justify a company car for an owner/director now.

But you should always be careful about incorporation if you are thinking of selling your business in the next few years, otherwise you are likely to be hit by the famous double-whammy effect before you've had enough time to save much tax/NI on your profits. 

There are some other risk groups. Associate dentists should never incorporate as they would lose their NHS Pension benefits. Freelancers at risk of IR35 should be cautious about it, and of course anyone with tax losses needs to take that into account too.

People working from home need to factor in the loss of tax relief on a share of their household bills, particularly telecoms, although they could overcome that by renting an office to their company and putting the mobile phone contract in the name of the company (so tax free).

In general, the threshold at which incorporation becomes worthwhile is very low now, even taking into account higher accountancy fees, and you don't even really need to do much more work on your accounting records than a sole trader would.

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11th Jan 2013 11:39

At least £20k probably closer to £40k

Looking at the economics and ignoring the liability aspect, I usually suggest something closer to £40k as the extra cost, administration and hassle makes it a little marginal below that in my view.  Also, it has in the past been a bit of a one way ticket and harder to dis-incorporate at a later date, though this is a little easier now.  I would be worried that a business with profits lower than £40k is possibly not a very sustainable one.  I also assess the client's ability to be organised and to respond to information requests promptly and so avoid all the possible penalties that could apply to a company if they fall short.  As directors, they do take on significant responsibilities and obligations, and they do need to appreciate that.

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11th Jan 2013 11:45

if liability isnt an issue but confidentiality is

then  you could always look at unlimited companies

 

Our threshold for incorporation is about £20k profit for an individual. Under that the additional costs of preparation can kill the tax benefits.

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11th Jan 2013 12:14

another factor...

...to take into account would be the extent to which profits would be withdrawn -vs- retained. If those involved have a lifestyle that precludes building up reserves, then incorporation may well increase tax, especially if you can't justify a big figure for goodwill on the way in - overdrawing loan accounts may be an option in some cases, but that carries its own issues!

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11th Jan 2013 12:28

Student Loans

An area I find more and more common when dealing with clients are Student loan repayments. They may as well be another 9% tax on income over £16,000pa. Therefore being Limited can allow you to control the situation.

Quotes can be tight for Limited Companys and there can be more issues arising such as planning advice on pensions, vehicle purchases, child care vouchers etc.

Unless there are good reasons and the business has potential, then I wouldn't incoprate until £40k especially if vehicles are involved. You can always incorporate a soletrader once they are established.

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By jdm5454
11th Jan 2013 12:37

To incoporate

The differing views here show how hard it is to make a decision.

Not a simply answer, then again if it was we might not be in business:}

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11th Jan 2013 12:37

Incorporation or not!

Keep insolvency and personal liability in mind.

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By Luke
11th Jan 2013 14:50

Cars

Also in the case of cars and car benefit, can you not just advise them to keep the vehicles out of the company and then to charge 45p/25p per mile as an employee?  Surely that would negate the potential disadvantage of putting the car on the balance sheet?

In answer to the OP, I start telling them to consider it from £25-30k upwards, really depends on their ability to keep decent books and records and have the discipline required to run a limited company properly.

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13th Jan 2013 08:21

Incorporation or not.

I say again; keep insolvency in mind. I realise that personal guarantees can defeat this, but at least you have the option. When "the spouse" is made aware of the risks, it's no contest.

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