Let me entertain you! Essential guide to entertaining costs.

I have a client that has a very successful business in The City and the vast majority of new work has been generated through recommendations and word of mouth. My client strongly believes in building solid long- lasting  client  relationships and they work very hard at cultivating new business relations and nurturing existing customers. Their secret is listening to customers and making a point of getting to know them and their business. The company do not advertise or spend on PR or engage in any form of social media, just lots of  old fashion meetings with clients and prospects over lunch or an evening meal.

So what are the accounting and tax implications of this? My client's entertaining costs are a crucial, integral part of the business. The costs can be paid for legitimately through the business and we track the costs by customer  just to gauge how much the company is spending on each client. However, the company cannot recover VAT on the costs and the cost of client entertaining is disallowed for Corporation Tax purposes. So VAT cannot be claimed on client entertaining and the cost cannot be offset against income for Corporation Tax.

Business entertainment and VAT

Generally you cannot claim back the VAT on business entertainment expenses. Business entertainment is defined by HM Revenue & Customs (HMRC) as any form of free or subsidised entertainment or hospitality.

It makes no difference whether the person being entertained is an existing customer, a potential customer or any other person who is not an employee. The following are not employees for VAT business entertainment purposes, and so if any of these are present at an entertainment or other event, it is considered to be business entertainment and you cannot claim back the VAT:       pensioners and former employees, job applicants and interviewees and non-employee shareholders. 

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Filing requirements for Limited Companies; which documents to file and when

This is a frequently asked question and if over-looked can lead to serious consequences. A Limited Company is obliged to file the following:

1) Annual Return (Form 363)

What is it?
An Annual Return is a summary of the business data of a Limited Company. It essentially includes details of the company directors and company secretary along with a description of the main business of the company. It also shows shareholder and issued share capital details.

When should it be filed?
The Annual Return 'made-up date' refers to the date when the information in the return must be correct. This date is one year after the incorporation of the company.

What are the consequences of late/not filing?
Failure to file an Annual Return within 28days of the made-up date is a criminal offence. Companies House may also remove the company from the register of companies.

2) Statutory Accounts

What are they?
The Directors of every Limited Company are responsible for filing accounts for each financial year. Accounts should include a Profit and Loss Account, a Balance Sheet and Notes to the accounts and a Directors' report.

When should they be filed?
The time normally allowed to file company accounts is nine months after the Year End.

What are the consequences of not filing?
Not filing company accounts is also a criminal offence. In additio, late filing penalties are charged by Companies House as follows:


Not more than 1 month late                      £150
Between 1 month and 3 months late          £375
Between 3 months and 6 months late         £750
More than 6 months late                        £1,500

The penalties are doubled if a company files its accounts late in two years running.

3) Corporation Tax Return (Form CT600)

What is it?
The Company Tax return is a calculation of the amount of Corporation Tax the company is liable for based on the taxable profits of the business. A company that is liable for Corporation Tax must register with HMRC and file a Company Return on time. It is important to note that a company must register even of it is dormant or if there is no Corporation Tax to pay. It is important to register with HMRC within three months of starting a new limited company.

Unlike Tax Self-Assessment or VAT, where filing dates and payment dates are the same, the payment deadline is before the filing deadline.

When is the payment deadline?
Assuming company profits are less than £1.5m, Corporation Tax must be paid nine months after the end of the Financial Year. So, if the the year end is 31st March 2010, the Corporation Tax for that year must be paid by 1st January 2011.  


When should it be filed?
The Corporation Tax return should be filed within 12 months of the Financial Year end.

What are the consequences of late filing?
If a return is filed late there will be a penalty even if there is no liability to Corporation Tax.

Late filing will result in a penalty of £100. HMRC will charge another £100 if the return is more than three months late. If your company return is late three years running, the penalty is £500 plus another £500 if it is then more than three months late.

For the purposes of this blog, a 'company' is defined as a Small audit exempt company with a responsibility to file abbreviated accounts. 

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Sarah Hamilton - SJH Accounting - My journey as a Freelance Accountant

This Blog is written for Motivating Mum UK (www.motivatingmum.co.uk 
Twitter: @motivatingmumuk ).
It is about my journey as a Freelance Accountant. I'm still at the beginning of my journey but I've already learnt a lot along the way including:

1)  You can never network enough
In my experience joining networking groups has been an extremely worthwhile investment in my business. Networking has provided me with some fantastic leads to generate new business and more importantly has given me access to a wonderful team of experts to help my business grow. I would recommend investing as much time and money in networking activity as you can. Make sure that you update all of your contacts efficiently and that you have face to face meetings with people who you connect with. Collecting a pile of business cards is a waste of time and effort. The more you reach out and connect with others, the more you will benefit. You will also learn so much from others who are further along their business journey.

2) Support others as much as you can and you will reap the rewards
In the early stages of your journey, be prepared to give advice and support  others wherever you can. Use every opportunity to demonstrate your expertise. Run free workshops, prepare useful, insightful blogs and always be on the end of the phone to support others. Also, be prepared to listen to others and take an interest in their business. Your business interests may not be aligned, but never under-estimate the connections other people may have.

3) Perseverance
As a one-person business, you will encounter more challenges than you could could ever imagine. My advice is to persevere and stick with it and eventually your efforts will be rewarded.

"The secret of life, though, is to fall seven times and to get up eight times."
— Paulo Coelho (The Alchemist)


4) Be prepared to move out of your comfort zone
Your work will no longer be handed to you on a plate. You will have to reach out and bring in new clients. You will also be responsible for all aspects of your business from IT to Marketing. You will need to ensure you have the best support your budget allows in these essential areas of your business.

Be prepared to move out of your comfort zone!


'I used to have a Comfort Zone,
Where I knew I couldn't fail,
The same four walls of busy work
Were really more like jail........

I couldn't let my life go by
Just watching others win
I held my breath and stepped outside
To let the change begin'...........

Anonymous

5) Be resourceful
It is amazing what you can do to kick-start your business on a shoe-string budget. Be resourceful; look out for free training courses (also a good networking opportunity), free software and even answer questionnaires to gain rewards such as free subscriptions for different services and products. Sign up for newsletters provided by support networks such as Motivating Mums UK. There is a wealth of free advice on all aspects of business available from this website.

6) Use Social Media - it's free!
Get connected for free on Twitter and Linked In. This will enable you to connect with others and demonstrate your expertise.

These are my 'Pearls of Wisdom' that I have gained along my journey. I still have a long way to go and I'm still learning. Good luck. You will never look back!

Sarah Hamilton - SJH Accounting
E: mail@sjhaccounting.co.uk

6 reasons why every business should have a 'Business Plan'

Every business should have a business plan no matter where the business is in its' business journey. It is just as important for an established business to have a business plan as it is for a new start up venture. A business plan  should essentially include an outline of the goals of the business, a strategy to achieve the goals, credentials of key personnel along with projected financial information (projected Profit and Loss, Balance Sheet and Cash Flow).


Business Plans do not have to be set in stone. A good business plan can be amended as much or as little as necessary and goals can be re-set to reflect changing circumstances of the business or to reflect different business scenarios. A number of plans can be created to reflect 'what if?' or different scenarios. For example: 'What if the business adds another service or product line?' or 'What if the business takes on 10 new staff?' or 'What if prices are increased by 5%?'. The business plan will show the impact on profitability and cash flow under the different scenarios.


The financial information is based on a number of assumptions (best estimates based on known information/estimated information) and should include a forecast Profit and Loss account measuring the profitability of the business, a balance sheet measuring the net worth of the business along with a cash flow forecast. This information is vital for the smooth running any business. For example, a cash flow forecast is vital for seasonal or cyclical businesses. A cash flow will highlight peaks and troughs in the business cash flow and will identify when cash is most constrained. This will enable a business to plan in advance to cope with this and to arrange a short-term overdraft if necessary.


So why is it so important to have a Business Plan?


1) Goal setting
Every business should have clearly defined goals. We cannot measure success or failure without setting clearly defined goals; both financial and non-financial. We need our business to have direction and structure and to be able to monitor progress by comparing actual performance versus the business plan.


2) Start up finance
The majority of new businesses will require a capital injection of some kind to kick-start the business. A business plan is a pre-requisite for obtaining any kind of start up finance.


3) Setting price structure
A business plan should be the starting point for establishing price structure. It is vital to set a price structure which is competitive in the market and one that ensures that adequate profit is achieved. (Particularly relevant to businesses selling to consumers with the recent increase in VAT. Businesses on tight margins have not been able to absorb the VAT increase and have had to increase sales prices).


4) Break Even Point of Business
A business plan should reflect how much the business needs to turnover in order to cover fixed costs.This can be measured in headline financial terms, so £10,000 per month or in unit terms, so 20 IT consultations per month or 10 marketing packages per month. This information is vital and can be used to drive the business forward every month.


5) Measuring actual performance against a forecast
A business plan is the perfect tool to measure goals set against actual performance. Actual performance can be compared to the business plan at regular intervals (monthly, quarterly, six monthly) and shortfalls in profitability/turnover can be analysed and addressed earlier rather than later. Also, positive variances can be analysed (for example, income better than forecast, costs less than forecast) and improved upon where possible. 


6) Platform for Expanding a Business
A business plan is vital for established businesses too. If an opportunity to expand the business occurs, for example, a joint venture proposal, receiving a large offer for new business, the plan can be updated to show the impact on profitability, margins and to indicate whether additional finance will be required. A business may fail due to 'over-trading' which is expanding too quickly and not having the necessary working capital in place to cope with growth.  


To summarise, a good business plan will ground a business and help steer it through the ups and downs of its' business cycle. It can be used as a planning and decision making tool and can be revised to give clarity to the business at uncertain or difficult times. The initial investment in preparing a business plan will pay off in the long-term for the above six reasons.  


If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

The Budget 2011 - Implications for 'Mumpreneurs'

As always, the Budget is a trade-off. There are tax savings on the one hand and tax increases on the other. Please read the below questions and answers to gauge how the budget will affect your finances.

Question 1: Will I pay more or less Income Tax as a result of the Budget?

Answer: From 6th April 2011, the Personal Allowance will increase from £6,475 to £7,475. This is the amount of tax free pay you are eligible for before income tax is due. This means that if you earn just under £7,475 in 2011/2012, you will be £200 better off. The Personal Allowance will increase to £8,105 for the 2012/2013 tax year. 
The Government has stated that it wants to increase the Personal Allowance eventually, to £10,000, taking 1.1m people out of income tax altogether.

If you are a higher rate tax payer (earning less than £115,000) the threshold for 40% tax will be reduced from £43,875 to £42,475. (The higher rate threshold will not increase in 2012/2013). Therefore, on the one hand you will benefit from the increase in the Personal Allowance and on the other you will be worse off as the 40% tax threshold is triggered by a lower level of earnings.

Question 2: Will I pay more or less National Insurance?

Answer: If you are employed, your Employee National Insurance contributions (Class 1) will increase from 11% to 12%.

If you are self-employed and paying Class 4 National Insurance, your National Insurance Contributions will increase by 1% from 8% to 9%.


Question 3: Will my child benefit change?

Answer: Child benefit is frozen at £20.30 for a first child and £13.40 for each other child.


Question 4: How will the budget affect my child tax credit?

Answer: The second income threshold for the family part of child tax credit will be reduced from £50,000 to £40,000. The payment of £545 to families with new babies will also be reduced.  


Question 5: How will the budget affect the tax treatment of my childcare vouchers? 

Answer: Read my Childcare Voucher blog for more specific detail. Families who are close to the higher rate tax threshold should apply for childcare vouchers immediately.

Question 6: How will the budget affect my maternity pay?

Answer: The SureStart maternity grant is restricted to the first child.


Question 7: Will my company pay more or less Corporation Tax?
Answer: Corporation tax (large companies) will be reduced from 28% to 26% from 2011/2012 and then 1% thereafter. This will bring it down to 23% the lowest rate in the G7 by 2014-2015. Corporation tax rates will also be reduced for small companies, from 21% to 20%.

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Essential Guide to: Childcare Vouchers

If you pay for childcare (children up to 15 years old) on a regular basis and you are employed by a limited company or you run your own limited company, I highly recommend that you consider using childcare vouchers, particularly if you are a higher rate tax payer.

Who can use childcare vouchers?
Only Limited Companies are eligible to set up childcare voucher schemes. Childcare vouchers are a very tax efficient way of paying for childcare as childcare is effectively paid for out of pre-tax and National Insurance income.

How do they work?
Most schemes work via salary sacrifice which basically involves giving up salary and in return buying childcare vouchers free of tax and National Insurance. For example, a basic rate tax payer sacrificing £1,000 could buy £1,000 in vouchers compared with receiving net pay of £700. By using the scheme, the tax payer saves £300 in tax and National Insurance. 

Limits

The maximum childcare voucher payment is £55 per week per parent. Therefore, two working parents amay buy £110 a week of vouchers. Vouchers aren't specific to each child and have a long expiry date. Therefore, if you know you are going to have higher childcare costs in the near future, it might be worth getting the maximum allowance now. (You can also backdate vouchers).

Important changes for higher rate tax payers from April 2011

Tax band	Current – per parent	New joiners – per parent
Basic rate (20%)	£55/wk max Saving £900	£55/wk max Saving £920
Higher rate (40%)	£55/wk max Saving £1,170	£28/wk max Saving £610
Top rate (50%)	£55/wk max Saving £1,460	£22/wk max Saving £590

Join the scheme by 6 April 2011 and you can continue to get the current amount of vouchers.

If you are planning to join the scheme and you are a higher rate taxpayer, I highly recommend that you do it before 5 April 2011. If you join the scheme after this deadline, your savings will be halved.

Where to get vouchers from
Vouchers may be obtained from your employer (assuming a scheme is in place) or if you own a limited company you may set up your own scheme. Providers include: Kiddivouchers http://www.kiddivouchers.com/(which donates at least 5% of all profits to various charities) and Employersforchildcare http://www.employersforchildcare.org/(a not for profit organisation).   

Eligible childcare

The provider must be regulated; most nannies, playgroups, nurseries are registered.

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Business Expenses: Allowable and Non-Allowable

This is a very common question asked by clients. It isn't always clear which expenses are allowable (can be claimed) against the income of a business. The general rule is that an expense is allowable if it is incurred 'wholly and exclusively' for the purpose of carrying on the trade of the business.

Allowable Expenses

1) Mileage
You can claim 40p mile (up to 10,000 miles and then 25p/mile thereafter) as an expense claimed for business travel made in your own car. This is deemed to cover the petrol and wear and tear costs of running a car.

2) 'Use of home' allowance
If you work from home, you can claim a proportion of the utility costs. It is important to only claim the proportion relevant to the room that is used for running the business. 

3) Professional/Business subscriptions
Subscriptions to professional/business organisations that are relevant to the business are allowable.

4) Cleaning costs
If you work from home, you can claim a proportion of your cleaning costs; again pro-rating the total cost by the number of rooms used for business.

5) Assets bought before the business started
Assets bought before the business commenced trading are generally allowable. For example, a computer or other items bought in preparation for business.

6) Re-decorating your office
If you re-decorate your office, you can claim the re-decoration costs as an allowable cost.

7) Phone costs and broadband costs
Phone costs relating to business use can be claimed. Where a line is shared (business and private) a proportion of the costs can be claimed that relate to business use.
Limited Company Directors cannot claim broadband as an expense if there is any personal use.

8) Accruals
It is possible to include expenses that relate to goods or services provided before the year end (for example, legal costs) that are not billed until after the year end. This will ensure that tax relief is obtained as early as possible. 

9) Losses 
It is important to keep a record of losses as losses may be carried forward and used to save taxes in the future.


Disallowed Expenses
It is important not to claim the wrong expenses as this might draw unwanted attention from HMRC in the future.

1) Entertaining
There are strict rules about claiming entertaining expenses. Any expenses relating to entertaining customers or suppliers are disallowed. This seems unfair but the rule was introduced to stop people claiming for ski-ing trips and football matches etc.
However, if you are entertaining staff, for example for a Christmas party, you are allowed to claim £150 per person per annum.

2) Work clothes
Costs relating to work clothes are generally disallowed as it is argued that they could be used for private use.

3) Food and drink whilst away from home
Generally costs relating to food and drink are disallowed as HMRC regard this as an essential need. There are separate rules if you are staying away from home.

4) Gifts
Gifts to customers and suppliers are not allowable unless they promote the business and cost less than £50.

5) Tax and NI
These costs are not deductible (if you are a sole trader) against profits. 

6) Medical Insurance and Dental Insurance
These costs are not allowable against profits.

7) Childcare
Sole traders cannot use the childcare voucher scheme which is available to employed individuals. There are no tax breaks available for childcare costs for self-employed people. However, it is possible to set up a childcare voucher scheme and get tax relief against the cost of the scheme if you have a limited company.

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Top 10 Tax Tips - Keep more of your money and give less to the taxman!

Whilst tax is inevitable, there are some tax breaks that you can take advantage of to ensure that you don't pay more than you have to. A recent report (website unbiased.co.uk) shows that the average UK taxpayer wastes £186 a year in unnecessary tax payments.


Check out the below tax tips so that you can save as much money as possible rather than giving it to the taxman.


Tip 1: Check your tax code
Check your tax code. 4.3m employees were over-charged tax in the last 2 financial years because of problems with HMRC IT system. You can claim overpaid tax for up to 6 years, although this will reduce to 4 years in 2012. Check your tax code by looking at your payslip or your coding notice.


Tip 2: Cash ISA
Interest received on Cash ISA's is tax-free. If you can, pay the maximum (2010/2011 - £5,100)/ (2011/2012 - £5,340) into a Cash ISA. 


Tip 3: Pension Payments
Use your pension. Reduce your income tax by making a pension payment. The pension contribution will reduce your pre-tax income. Pension contributions tend to be deductible expenses for the company. Generally speaking, individuals will receive £25 from the taxman for every £100 paid into a pension scheme. Higher paid employees might want to consider a salary sacrifice and receive extra pension payments.This will save both tax and NI. It depends whether the individual can afford to give up the salary.


Tip 4: Mileage allowance 
Claim 40p per mile (first 10,000 miles) for any business mileage that you do in your private car. Keep a log of your business mileage to support your claim.


Tip 5: Working from home
If you work from home, you can claim a 'use of home tax allowance'. HMRC allow a modest £3/week without any evidence. This still represents a tax saving of over £60 per year. You may be entitled to claim a larger allowance.


Tip 6: Tax credits
It is estimated that there is £3.9billion of unclaimed child and pension tax credits. Nine out of ten families with children are entitled to child tax credits. A benefit checker such as Turn2us can help you check your entitlement (turn2us.org.uk).


Tip 7: Loss relief
If you are a sole-trader, there are a number of options available to you. You must use your loss relief to maximise tax relief. Companies have less flexibility, however, they can still carry forward/back losses.


Tip 8: Annual Investment Allowance
If you are thinking of investing in plant & equipment check to see whether you are eligible for the Annual Investment Allowance. Reduce your tax by claiming the Annual Investment Allowance (£100,000 2010/11).


Tip 9: CGT Allowance - Profit on sale of shares
If you have made a profit on selling your shares don't forget to use the CGT allowance of £10,100 (2010/11). Gains on shares are tax free below this limit.


Tip 10: Mobile phone costs
Make sure that your mobile phone is in your business name and you can claim all of your mobile phone costs as a deductible business expense.

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances

VAT - An Essential guide for Small Businesses

It is important to track turnover carefully as when a business exceeds the VAT threshold it must register for VAT.

1) When to register for VAT
A business should register for VAT when turnover for the last 12 calendar months (not accounting year) exceeds £70,000. Turnover is defined as sales before tax. A business should also register if turnover is likely to exceed £70,000 in the next 30 days or if a VAT registered business is taken over as a going concern. If a business makes significant VAT inclusive purchases and sales to VAT registered customers, it may be beneficial to register for VAT on a voluntary basis.   

2) Disadvantages of registering

• Compliance: VAT returns must be submitted on-line on a quarterly basis one month after the quarter end. It is therefore imperative that up to date records are maintained to meet the filing deadlines.
• If a business sells mainly to consumers, then registering for VAT means passing on VAT by way of increased prices or reducing margins by absorbing the VAT. I have a client who recently registered for VAT as the business turnover reached the VAT threshold. The business is business to consumer and due to the economic downturn the owner decided not to pass all of the VAT increase on to customers and therfore for the business to absorb most of the VAT.
• Keeping up with changes in VAT legislation; VAT rates have changed so it is important to check regularly to ensure that you're using the correct rates. It is important to ensure that the business accounting software can cope with the different rates of VAT.
• It is important to be aware that VAT cannot be claimed on all items of expenditure and that depending on the nature of the supply, VAT rates can vary. For example, VAT cannot be re-claimed on business entertainment although VAT on staff entertainment may be re-claimed.
• Penalties for late filing. Late filing is taken seriously and there are various penalties for failure to meet deadlines and for filing inaccurate returns. 

3) Advantages of registering

• It may be beneficial to register for VAT where expenditure is VAT inclusive and sales are business to business, therefore, where VAT is a pass-through. I have a client that registered for VAT on a voluntary basis as it was beneficial to the business to recover VAT on significant start up/capital expenditure costs. The VAT refunds were hugely beneficial to the cash flow of the business.  

4) Mechanics of registering
VAT returns must be filed on line with HM Revenue & Customs.

5) Tips

• Register as soon turnover reaches the threshold. Failure to do so will result in a penalty and a charge for the VAT that should have been declared.
• VAT can be re-claimed on supplies three years pre-registration (if the business still has the goods) and services provided six months pre-registration. 
• There are a number of schemes to help small businesses with VAT. For example, the flat rate scheme is an annual VAT scheme which aims to simplify accounting for VAT.

6) When to De-register

• If the circumstances of the business change it may be necessary to de-register for VAT.

VAT is a complicated tax. If you would like any advice on this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every care to ensure that the material is up to date and accurate. However, no responsibility for loss to any person acting or refraining from acting can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.

Business Structure: Limited Company v Sole Trader

There are a number of factors to consider when deciding whether to set up a business as a limited company or a Sole-Trader.

1) Record keeping
A company is required to:

• Keep accounting records and to produce audited accounts (if turnover > £5.6m). 
• File accounts and an Annual Return with Companies House. This information is in the public domain.
• Keep Statutory Books.

A sole-trader is required to:

• Prepare annual accounts for Self-Assessment tax return purposes. Annual accounts are not required by law.

Limited companies have a greater administrative burden. Professional fees (accountancy & legal) will be larger for a limited company.
It is more difficult to wind up a limited company than a sole trader business if a new venture does not work out.
Limited company information is in the public domain whereas as a sole trader information is private.

2) Payment of tax

A company is taxed in the following way:

• Tax is payable on director's remuneration via PAYE on 19th of the following month.
• Tax is paid on dividends under the Self-Assessment rules. Dividends are effectively not taxed whilst in the basic rate band. Once in the higher rate tax band dividends are effectively taxed at 25%. There is no NI on dividends.
• The company pays Employer's NI at 12.8% on a salary of over approx. £6k.
• Corporation tax is payable 9 months after the year end. Profits less than £300,000 are currently taxed at 21%.

A sole-trader is taxed in the following way:

• Tax is paid in instalments under Self-Assessment on 31st January in the tax year and 31st July of the following tax year.

For the majority of small companies, the most tax efficient way to extract profit from the business is to take a salary up to your personal allowance and to dividend the excess. However, dividend vouchers must be drawn up and minutes kept to document the dividends. Also, a dividend cannot be paid if the company doesn't have retained earnings.


3) Losses

A company can only carry forward tax losses against future profits of the limited company business. Limited company losses cannot be offset against personal income. 

A sole-trader can use losses against other income in the year or carried back to prior years.  

A sole-trader has greater flexibility in loss utilisation. Most businesses are loss making in the early years. If you leave a highly paid job to start up on a self-employed basis it is possible to offset losses against trading income. Losses can also be offset against other income, including dividends, savings interest or rental income.


4)National Insurance

A company is liable to employer's and employees' national insurance on director's salaries and bonuses. The NI charge is greater than that paid by a sole trader.

A sole-trader is liable to Class 2 NI of £2.40 per week and Class 4 dependent on the level of profits. 

The NI charge of a limited company is greater than a sole trader.


5)Prestige
An unincorporated business may not carry the same prestige as an Incorporation.

6) Tax on profits 
A company is liable to Corporation tax of 21% for profits up to £300,000 (2010/2011).

A sole-trader is liable to Income tax at 40% of taxable income over £37,000 and 50% over £150,000 (2010/11).

Therefore the choice of sole-trader versus limited company structure is not clear cut particularly if profits are less than £50k. However, when profits reach ~£100k, it may be beneficial to set up a Limited Company. (Limited Company tax approx. £10k less than Sole-Trader). 

If you would like any advice in this area or any other areas of accounting or tax, please contact me on 07834988638 or mail@sjhaccounting.co.uk, www.sjhaccounting.co.uk. Sarah Hamilton takes every. care in preparing material to ensure that the content is accurate and up to date.  However, no responsibility for loss to any person acting or refraining from acting as a result of this material can be accepted by Sarah Hamilton. You should always ask your accountant to give you specific advice which is tailored to your personal and business circumstances.