Showing posts with label sole trader. Show all posts
Showing posts with label sole trader. Show all posts

Tuesday, July 25, 2023

Can a director provide services to his own company?

If you are the director of a limited company, you may be tempted to provide yourself some services to your company rather than hire a third-party freelancer and then bill the company for those services. However, this practice can have legal and tax implications that you should be aware of. Let's go over the potential pitfalls and the steps that can be taken to avoid them. 


Conflict of Interest

The first issue you need to be aware of is the potential conflict of interest you might create between your duties as a director and your interests as a self-employed contractor. As a director, you have a fiduciary duty to act in the best interests of your company and its shareholders, which means that you should not enter into transactions that are detrimental to the company or that give you an unfair advantage over other shareholders. However, as self-employed contractor, you may have an incentive to charge your company more than the market rate for your services or to provide substandard services that do not meet the company's needs. This could expose you to legal action from the company or other shareholders for breach of fiduciary duty or unfair prejudice. 

To avoid any conflict of interest, you should make sure that the terms and conditions of your invoices are fair and reasonable and reflect the market value of your services. You should also document the nature and scope of your services and keep records of the time spent and the expenses incurred. And then you should make sure that you obtain the consent of other company directors as well as other shareholders, if any, before billing your company. You disclose any potential conflicts of interest. Your objective is to prevent HMRC from challenging the validity of your invoices and tax your self-employment income as disguised payments for your work as a director. Which means that you would have to pay income tax and National Insurance contributions (NICs) at higher rates and that your company would have to pay employer's NICs as well. 

Thursday, May 19, 2016

10 Reasons why it's still worth going Limited

With the recent increase in dividend taxation, many of our clients are asking whether it still makes sense to incorporate when you are a Sole Trader. It's a tough question to answer as indeed, the tax benefits of running a business as a Limited Company have now been seriously curtailed. If you extract all of the profits from your company as they arise, the total tax and national insurance (NI) paid is now almost identical whether your are operating as a Limited Company or a Sole Trader.

There are still a number of benefits however to operate as a Limited Company. Here they are:

1. Better legal protection

As the name suggests, if you run a Limited Company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your Limited Company. Those running a business as self employed do not enjoy such protection from financial claims if things go wrong with their business. While it's possible (and recommended) to subscribe to a professional liability insurance, there is always a risk of running foul of the fine print...

2. More professional image or status

In some industries, having a Limited Company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with Limited Companies rather than Sole Traders or even partnerships. Indeed by being transparent, adhering to regulatory requirements and opening up company accounts to public scrutiny, you are demonstrating that the business is being correctly managed and this inspires confidence.

3. Wider availability of some contracts

The reason bigger corporations do not hire Sole Traders is not just image or professionalism but IR35 risk. The IR35 regulation was put in place to prevent employees to set up shop as free-lancers just to save tax. In other words if HMRC decides that a free-lancer behaves as an employee, then he is required to pay the same amount of tax and NI as an employee would. He he does not, whoever hired him is responsible for the back tax and NI, unless he operates as limited company (and in which case that limited company is responsible). It's easy to understand then why some organisations will only deal with limited companies!

4. Name protection

Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar. As a Sole Trader, you can use a trading name but it's not protected and there is nothing to prevent a competitor to start using the same trading name as you. While it's possible to protect a trading name with a trademark, it will be in practice a lot more expensive than just creating a company with that name.

Monday, August 10, 2015

Changes To Dividend Taxation From April 2016

You will have heard by now of the changes that were announced during the Summer Budget 2015 last month regarding dividend taxation.

To re-cap, the current proposals are to abolish the 10% tax credit on dividends from April 2016 and replace it with a new £5,000 dividend allowance. The proposals also set out the intention to change the rate at which dividends are taxed from April 2016 to the following:

  • Basic rate band: 7.5%
  • Higher rate band: 32.5%
  • Additional rate band: 38.1%

Currently the effective rates are 0% in the basic rate band, 25% in the higher rate band and 30.56% in the additional rate band. Since the Summer Budget last month no further information has been released, and we are still waiting for the draft legislation which may not arrive until the Autumn Statement later this year.

As it stands the information provided is very general, and the following is unknown:

  • How the dividend allowance will interact with the personal allowance
  • Whether the dividend allowance is available in full for higher and additional rate tax payers

If the proposed changes go ahead then it is clear that personal tax liabilities will increase for director/shareholders who pursue a strategy of taking a small salary and dividends to extract profit. But it's impossible at this stage to a reliable calculation.

Many people are wondering whether it still makes sense to operate as a Limited company or if it will be more tax efficient to operate as a sole trader from April 2016. However it's impossible to answer this question right now as it is rumoured that Class 4 NIC may increase, partly due to the fact that Class 2 is being abolished from April 2016. And the much publicised ‘Tax Lock’ does not apply to Class 4 NIC.

Sunday, June 5, 2011

Is the VAT Flat Rate Scheme worth it?

In the UK there are basically 3 ways you can collect and pay VAT. The standard scheme that everyone know about: you collect VAT on your sales and recover VAT on your purchases then pay the difference to HMRC every 3 months. The principle is quite simple (practice is lot more complex however!).

There is a second method which is a slight variation on the first one: it's available to businesses with an expected turnover of less than £1.35m and it's called the cash accounting scheme. Using standard VAT accounting, you pay VAT on your sales whether or not your customer has paid you. Using cash accounting, you do not need to pay VAT until your customer has paid you. It can improve cash-flows for businesses with less favourable terms for suppliers than for clients.

Then there is the flat rate scheme. It was designed to help the small business but you need to understand all the implications before you jump. It's only available to businesses with a turnover of £150k or less and once you have joined you can only stay in the scheme for as long as your turnover remains under £230k.

Sunday, March 13, 2011

How well do you know your clients?

We have already stressed in the past the importance of credit control. It's even more critical in a difficult business environment to ensure that you only extend credit to those clients who will pay you. You don't have to rely on luck however. There are many tools that allow you to monitor your clients and be alerted they start showing signs of financial difficulties. But until now those tools have been very expensive and therefore most small businesses have been unwilling to use them.

That's not the case anymore. At TaxAssist Accountants, we have teamed with Red Flag Alert to get extensive data from which you can now benefit. Be it sales, credit control, collection, risk or compliance we have information on every limited company, every PLC, LLP, 3.5m sole traders and 26.7m director records. The data source comes from Companies House, London Gazette, Central Register and Equifax, which provides data intelligence and protection against credit risk. Using those tools you can now:

Monitor your risk
We can provide 'real time' critical automated e-mail alerts when a company being monitored starts to deteriorate. Using various detrimental triggers, we will notify you of changes to your customer/supplier status as they happen, in order to minimise your risk exposure.

Tuesday, February 8, 2011

SMEs face potential penalties on accuracy of records

HMRC are planning a programme of checks that will review the adequacy and accuracy of records kept by small and medium-sized enterprises. The programme will use existing law regarding both record-keeping requirements and penalties for failure to comply, with sanctions imposed for significant failures. The Revenue says it conducted a random enquiry programme that indicated poor record-keeping is a problem for 40% of SMEs. The department has issued the consultation document Business Records Checks to discuss the implementation of a new programme. The campaign would begin in the second half of 2011, with around 200,000 small businesses being selected for one of the new checks. HMRC expect to raise £600 million over its first four years.

Sunday, January 23, 2011

Extracting profits from your company

One of the benefits of running your own company is that it gives you a lot of flexibility when it comes to extract profits from the firm. As a sole trader, whatever profit you make is taxed immediately at a rate that depends on the amount of profits but that can now be as high as 58% if we include Class 4 National Insurance Contributions.

If you own a limited company however you have a lot more flexibility and if you are not needing the cash now, you can reduce your tax considerably. In most cases it's just a matter of following those simple steps:
  1. If, as a director, your only revenue comes from your company, you can extract up to the personal allowance without paying personal taxes and that cost is tax deductible for your company. That amount is currently £6,475 but it should increase up to £10,000 in the next few years. Keep in mind however that if your annual salary is £5,715 or more you will incur some national insurance contribution costs. This is why most directors extract just that amount every year: no tax, no NI and allowable expense for the company.

Thursday, December 16, 2010

What tax relief for use of home?

This is a common question and unfortunately, it's a bit more complex than most people think.

Depending on your legal setup, the steps to take to recover some of your personal expenses on use of home are different. For a sole trader, the process is quite straightforward but for a limited company there is a bit more work and paperwork required:

You are a sole trader


You can just deduct a portion of the home cost. The calculation is done as a two step process. First you calculate the total running cost of your home:
  • Utilities (Water, Gas, Electricity)
  • Insurance
  • Rent or Mortgage Interest
  • Council Tax
  • Maintenance
  • Internet and Phone

Friday, September 10, 2010

The 10 key steps to creating your business - part II

I wrote in a previous post about what you should do when starting a business. That post talked about what you need to do before or right at the start of your new venture. This post now discusses what you should do right after that and picks up where the previous article left off:
  1. Get an address and a phone. For the office there are a lot of brokers out there that will be happy to find the right office for you. Some people start from home, and use serviced offices when and as required. Regus has some very flexible plans that allow you to use their premises when needed for business meetings. Another option is to check some of the self-storage companies such as Access Storage that also provide offices for rent at very competitive rates. You can also share an office with an existing business. Gumtree is a good place to start if this is what you are looking for. As for the phone, having just a mobile number on your business card is not a good idea. Fortunately, most VOIP vendors can provide you with local numbers (including fax lines forwarding faxes to your email) that you can easily use wherever you have a broadband connection. Be careful though as some vendors can lock you in since there is no automatic number portability for fixed line numbers. Some brokers can help find the right solution at not cost for you and you should use them. Skype is also a viable solution, even though it is not based on open standards like SIP.

Monday, September 6, 2010

10 tips to improve your Credit Control

We all know that there is only one way to go bust: lack of cash. Cash-flow management is therefore just as important as profit monitoring when it comes to manage your business. And the best way to do that is to keep a close eye on what accountants call the Aged Debtors list: those clients who have been billed but have not paid yet.

So how do you do it? Here are 10 tips you should follow to become a pro at managing your cash-flows:
  1. Don't extend credit. This one is obvious: if you can avoid offering credit, you don't have a problem to solve any more. Unfortunately there are very few businesses that can afford to not offer credit. In most cases you will have to offer some level of credit. If that's the case, read on.
  2. Do not invoice manually. With many systems to choose from, some for as low as £10/month, you should not invoice clients using Microsoft Word. Whether it's Kashflow, FreeAgent, Xero or Sage, all allow you to specify your standard terms and will alert you when a bill is overdue. They will also produce the Aged Debtors automatically. Lastly they will allow you to keep notes so that you know why the bill has not been paid next time you call to follow up.

Sunday, July 18, 2010

The 10 key steps to creating your business - part I

You have decided to start up a new business. It's a lot easier to do in the UK than in some other Europeans countries. Yes I am thinking of France and its famous red tape. However, while it's easy to start a new business it's also easy to make the common mistakes that cause 1 in 3 start-up businesses to fail in the UK.

So if you don't want to be in that 30% bucket, what are the top 10 things you should do as soon as possible when you create your own business?
  1. Choose a name for your business and protect it. If you intend to build your brand you need to trademark it. The name does not have to be the same as the one of your company. As a matter of fact, if you are a sole trader, your legal name would be "John Doe trading as Amazing Widgets" for example. 
  2. Decide on the legal structure. Sole Trader, Partnerships or Limited Companies all have benefits and drawbacks. Make sure you understand all the implications (and costs) before you decide on a given structure. Most accountants will be happy to provide a free consultation to help you out. We at TaxAssist Accountants certainly do.