Should I Trade Through a Company? – Limited Parenting Skills

As a father sometimes I feel limited in my ability to look after the kids.  This could be likened to the fancy dress shop owner in Nuzzle and Scratch when he sends them out for sponge fingers (if you haven’t got kids just role with it).  A bit of a disaster but everything turns out ok in the end.

Share Certificate and Potato

I have felt this from the day that Jabo (#1 Son) was born.  Following labour Mrs TTF decided to have a little sleep (some wimpy excuse about low blood pressure).  I was therefore handed a newborn baby, without any further instructions, whilst the doctors were attempting to revive Mrs TTF.  It was at this point I wished that I had listened during the NCT classes instead of talking about football and being immature about breastfeeding with the other dads .  Thankfully Mrs TTF recovered fairly quickly and the mid wife relieved me of my initial duties.

Fast forward to present day I try my best to look after the children on my own .  I’ve pretty much got the nappy changing, playing with toys (they love the PS3 honest) and naps sorted.  The problem is the culinary delights that I serve up or to be more accurate the lack of them.

We have all the Annabel Karmel books which Mrs TTF dutifully prepares food from.  I tried once but it took me about two hours to make pasta shapes in tomato sauce.  Who bloody thinks it’s a good idea to peel a tomato and why do you have to grate things when you are blitzing them two minutes later?  So to avoid my children qualifying for the beanstalk in the school pantomime I have developed the following menu:

1.  Baked potato and Cheese

2.  Baked potato and Beans

3.  Baked potato and Tuna

As I pointed out to Mrs TTF they will never get scurvy!

I would like to think that the kids have accepted my limited approach to childcare but when it comes to tax is it a good thing to be Limited?

THE TAX BIT

Whether to trade through a company or to follow the self-employed route is a question that is asked of accountants everyday.  Unfortunately there is no universal answer and it will depend on both the commercial and personal circumstances of each case.  Some of the issues that need consideration include:

1.  Losses

If the business is projected to make losses in the first year it maybe beneficial to commence trading as a sole trader or partnership.  This will enable income tax relief to be claimed against any other income received in the year of loss and the previous four years.

In comparison losses incurred by a company would be carried forward to offset against profits of the same trade.  In addition the rate of corporation tax can be lower than personal tax and therefore greater relief would be granted if losses were incurred by a sole trader/partnership.

2.  Managing Profit Extraction

As a self-employed individual you are taxed on 100% of your tax adjusted profits at your marginal rates which can be as high as 50%.

If instead you operate through a company it is important to understand that the company is subject to corporation tax (20% up to £300,000) on its profits and you are taxable on any monies extracted from the company at your marginal rate.

It is however possible to manage the level of income that you extract from the company by way of salary and dividends.  This enables you to restrict your income to a level that meets your requirements and potentially a lower tax rate.

This is particularly relevant during the current tax year as the additional 50% tax band will be reducing to 45% post 05 April 2013.

3.  Utilisation of Spouses’ Personal Allowances

Again unless you admit your spouse as a partner to your business then 100% of the profits will be assessable on you.  In any event they will be assessed at their marginal rate of tax and class IV NIC would apply if this were the case.

If your spouse does not utilise her personal allowance then it may be possible to give her shares in your company.  Dividends paid within an individuals personal allowance and basic rate band are not taxed.  With careful management it is possible to extract £38,227 (2012/13) income tax-free from a company.

But don’t forget that corporation tax would  still be payable on the initial profits of the company.

4.  Sale of Goodwill

If you are self-employed there are no tax reliefs for goodwill either self-generated or acquired.

If you have built up goodwill in your business then it is however possible to sell this to your company.  As explained in my blog about intangible assets it is possible to claim a deduction in the accounts of the company.

5.  Commercial Considerations

The beauty of a sole trader is its simplicity.  However if things go wrong there is the potential that all of your assets maybe put at risk.  It is therefore important to have sufficient insurance in place for your business.

If you did want to trade through a company due to tax savings you will also need to consider the additional costs of setting up and running a company.  Annual accounts are required each year in a specific format. Corporation tax returns are also required on top of personal tax returns.

The above is a very brief summary of the implications of chosing a trading vehicle.  There are a number of other issues to consider and you should always discuss your specific needs with qualified advisor.

To sum it up a limited company is like having kids.  There are some great rewards but they cost money to sustain and can be a bit of a pain in the arse sometimes!

By Peter Cross

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: