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Sole trader client

My question is,

Van = £20,000

Expenses = £3,000

Is client better off operating as a sole trader at this low profit level and claiming all van costs through the business (except limited private use) or should he trade as Ltd Co?

Thanks in advance?

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sole trader client

what are the profits?

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In the first year of business, the profits excluding the van are £10,000

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Any other personal income to offset the loss against?

A sole trader can offset a loss against some other personal income; the owner of the LTD cannot.

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time to change is...

When profits after allowing for CA's is >£15k ...consistently.

With 10k profits less the van, he makes nothing - make sure you get a tax credit claim in at this level of profits so he gets a payout there. Also offset losses where you can and get a refund for him

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Wrong question?

The question asked is just about the computation of the amount of tax payable either as a Sole Trader or a Limited company but I think it ignors some key issues.

Costs of looking after a limited company compared to a sole traderRisk within the business - the more risk the more desireable the companyFuture planning - there is no certainty that the current tax rates will continue and therefore a Ltd company may become more "expensive" and may be difficult to leave

I just feel that it is a bigger question than what is the lowest tax postion right now.

Mike

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Wrong question?

Mike's reply is spot on.  If he is only making £10,000 per annum and financing a £20,000 van, the additional compliance costs of a company are going to make big holes in the profit, Companies House compliance, annual accounts and return.  HMRC corporation tax return, payroll, personal tax return.  I was not going to mention the amount you are charging for posting this question and reading the replies but I have.  Can he afford these add ons?

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other issues

My own approach to this is to explain the main plusses and minuses, print off the piece on forming a limited company from my website and insist the client reflects on this for at least 3 days, and stress that he or she can have the company formed within 3 hours but it will take a minmum of 6 months and often longer to reverse that process.

Every client gets a calculation of how much the tax benefits - if any - will be, and an assessment by me of how easy they will find it to run a limited company.  For example, people forming a limited company with "friends" who propose not to have a shareholders' agreement, clients who currently deadline chase on every VAT return or SA return are actively discouraged by being given a "To Do" list of things they need to change in their modus operandi to avoid problems.

Despite all of this I am currently in the process of striking off 3 limited companies for clients who in my view formed them at 100 mph and paid minimal attention to the risk warnings I gave them, because the issues which have led to them striking off were not only foreseeable before they went limited they were foreseen and pointed out to them.

 

 

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Just one point

The real reason for a Limited Company is to restrict personal liability.  Was it formed for this purpose.  If so then a LLP maybe a better option

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Drawing money out of the business - overdrawn DLA

It is not just the profit level that provides a comparison point for the total tax costs under either format.

In recent years I see a number of instances where directors draw more than profits which has adverse consequences - extra paperwork (CT600A and P11D) plus potentially higher NIC costs (as can't draw dividends so have to draw higher salary) and/or higher CT costs (s455 charge).  All this extra hassle for being a Ltd Co.   In a sole trader or partnership format the only adverse tax consequence is a requirement to disallow some of the interest paid where such borrowing arises from excess drawings.

In theory this problem should NOT arise - no business can long-term survive where the owners (be they director-shareholders, sole proprietors or partners) draw more money out than is being earned - unfortunately in the real world this scenario does arise and, in my view, should be factored into the decision table of what business format is most appropriate.

 

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Three tax returns or one (or 54) a year?

Sole trader, wife paid at less than £464 per month, no other employees:

One Self-Assessment Tax Return

Limited company, now we have THREE tax returns instead of one:

One Self-Assessment Tax Return  (director)

P35 (payroll) at least in respect of company's employment of the director

CT600 + iXBRL complications for Ltd Co

[ PS. RTI as of next year replaces one P35 a year with either 52 or 12 RTI reports to HMRC ]

Where there is no obvious financial necessity (as in limited liability) and the tax savings are marginal, then the additonal tax compliance costs by trading through a Ltd Co most likely will outweigh the percieved tax saving.

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12 page accounts or 2 page accounts

A sole trader legally needs only one page accounts (the Trading Account), if need be supplemented by a Fixed Assets schedule, so that makes two pages.

A limited company (even small ones) often end up with 12 page sets of accounts "to be compliant". 

All this extra work needs paying for.  Some accountants like this because of the extra fees generated, under the principles of mis-selling compensation a disclosure of the likely extra costs (accountancy fees) is highly recommended.

 

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Licensing

A limited company can be advantageous in some circumstances where the operating entity has to hold a licence.

An example is a bus/coach company or a haulier.

In such circumstances when the business is sold the buyer does not have the hassle of having to apply for a new operators licence or extend their existing operators licence if they acquire the shares in the existing entity - the existing licence can be continued with.

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