Whether to incorporate has always been a hot topic for the self-employed and those in partnerships, and many tax changes over the last decade have made it either more or less attractive at various stages. Although many businesses have incorporated, individual circumstances must always be considered, and for various reasons there have certainly been many businesses which were better off staying as sole traders or partnerships.
Remaining as a sole trader or in partnership generally has the advantages of more flexible use of losses (although a cap of £50,000 has recently been introduced to curb “excessive” reliefs being claimed), lower Capital Gains, lower “secondary” taxation (such as company car and van taxation or Employer’s NIC), substantially reduced administrative burden (the business’s money is your money) and generally lower professional fees. Additionally, the business is easier and cheaper to close and your accounts are secret with HMRC (provided of course that they don’t leave them on a train).
For every incorporation, the business can benefit from generally lower tax rates on profits, the ability to retain profits in a lower tax environment (although drawing them out at a later stage might involve a double tax charge); the ability to take some profits as dividends (NIC free); and the creation of a loan account on incorporation (which can then either be drawn on tax-free or used to supplement other drawings in order to avoid the higher rates of personal tax). Additionally, incorporation can offer limited liability status and to a certain extent credibility (although publicity surrounding the huge numbers of Limited Companies being created and struck off in recent years may have reduced this perception somewhat). These factors (not all of them negative or complicated) all need to be considered on a case-by-case basis, and in many cases these factors will be the difference between incorporation being worthwhile or merely an administrative headache for a minimal gain.
However, ignoring any complicating factors, from a pure and simplistic limited company versus sole trader comparison, assuming all profits are drawn as dividends, the savings to be had from incorporation should in 2013/14 range from a mere £800 for annual profits of £20,000 to £5,000 at £100,000 profit to a saving of over £10,500 with annual profits of £300,000. Beyond that profit level, the savings continue as profits rise, reversing the trend seen a few years ago where there was a maximum saving that could be had through incorporation. As such, many businesses which have previously dismissed incorporation in earlier years need to revisit the position to see if their previous decisions remain correct.
Incorporation should not be undertaken lightly however, and everyone involved should consider all of the factors before taking the next step. But maybe it is time to put your best foot forward…
For further information on any of the above points or to discuss your tax affairs generally, please do not hesitate to contact Robin Beadle.