Converting from Sole Trader to Limited Company

[Jez Taskin]

I've reached a point where I need to convert from sole trader to limited company. I run a small dog walking business and employ a couple of part time assistants. I guess there will be just one combined director and shareholder - me. I won't be vat registered at this stage. I have several questions about the conversion.

1) Is there a best time of year to convert (perhaps in terms of the HMRC tax return cycle or anything else)?

2) Is it best to carry on running my tax year to my sole trader April 5th date or is it better to run it to the date I convert to a limited company, or perhaps a different date?

3) I need to buy a larger vehicle for my business which will be my only major expense over the next year or so. From a tax perspective (or any other), am I best doing this before or after I convert?

4) Should I pay someone to convert my business for me or is all of this relatively easy? Is there an easy online guide. (I found the HMRC page to be very bare bones - https://www.gov.uk/limited-company-formation/overview.)

5) Limited by guarantee or shares - what are the advantages or disadvantages? Does it really matter?

Thanks

 

[Scalloway]

2. Your last period as a sole trader will run to the date the business is transferred to tye limited company

4. You would be best advised to get your accountant to help to make sure you get the best tax breaks

5. Don't set up a company limited by guarantee! They are generally used by voluntary groups. You won't be able to take out dividends as there will be no shareholders.

 

[Jez Taskin]

2. Your last period as a sole trader will run to the date the business is transferred to tye limited company

Thanks for your reply Scalloway. I wasn't very clear with my question 2. What I meant was, I will convert to a limited company at some point in the Autumn (unless someone tells me there's a better time to do it in terms of tax breaks). Once I convert and run as a limited company should I retain my April 5th end of tax year date, or is it better to run my accounting year to a different date with HMRC for filing tax returns?

 

[Bob]

Are you sure that it will be beneficial for you to convert to a limited company following the recent budget changes? Make sure that you talk it through with an accountant before changing over.

 

[Ian J]

Why do you wish to convert to limited company? If your turnover is under the Vat threshold there may be no financial advantages at all and if it's limited liability that you want I can't see that being of much benefit in your line of work as long as you're adequately insured

 

[Jez Taskin]

Why do you wish to convert to limited company? If your turnover is under the Vat threshold there may be no financial advantages

Are you sure that it will be beneficial for you to convert to a limited company following the recent budget changes?

It's mainly for limited liability and tax / NI reasons. I will pay less tax and NI if I convert. I'm planning to have another income from property so I will pay myself a smaller salary from the ltd company in order to keep my personal HMRC bill down. I'll use the extra profit retained in the ltd company to hopefully build the business and employ more people.

 

[Jez Taskin]

Are you sure that it will be beneficial for you to convert to a limited company following the recent budget changes?

Hi Bob, which budget changes in particular should I be aware of?

 

[Bob]

Hi Bob, which budget changes in particular should I be aware of?

The new dividend tax on dividends > £5K

 

[Jez Taskin]

The new dividend tax on dividends > £5K

Thanks for the tip. I'm guessing it's still more tax efficient if I convert to a limited company and pay myself a small wage of £670 / month (to keep my NI down) and £420 / month in dividends (to keep the dividends under 5K / annum).

 

[Ian J]

I'm guessing it's still more tax efficient if I convert to a limited company and pay myself a small wage of £670 / month (to keep my NI down) and £420 / month in dividends (to keep the dividends under 5K / annum).

It wouldn't surprise me if the tax savings were more than offset by the extra costs involved in running a limited company though.

I'm still not sure what benefit the limited liability would be to a "small dog walking business" though

 

[cheaper accountant]

If you get a better deal on your accounting fees then you may be marginally better off.

I agree that limited liability may not be that useful as I can't see why you would need business loans etc, but I could be wrong.

 

[Jez Taskin]

If you get a better deal on your accounting fees then you may be marginally better off.

I don't want to pay 40% personal income tax. I want to keep the money in the company and expand at a pace that suits me. As a soul trader I'd be rushed into spending profit on expansion by April 5th each year or be pushed into 40% tax by the business and other incomes.

 

[Karimbo]

3) I need to buy a larger vehicle for my business which will be my only major expense over the next year or so. From a tax perspective (or any other), am I best doing this before or after I convert?

I can answer this, I've calculated this for my business, it worked out far more cost effective to buy the vehicle outright using my personal funds and then make mileage claims against the company rather than bring the van into company ownership and be hit by BIK tax for personal use.

Mileage claims are tax free and dont even get hit with the P1D/P9D employers NI tax (I dont drive more than 7K miles. period). I know there are limits to how many miles you can claim but I fall well short.

I was looking at a aged van at £5K territory though, the calculations might be different on a newer van.

 

[Jez Taskin]

I can answer this, I've calculated this for my business, it worked out far more cost effective to buy the vehicle outright using my personal funds and then make mileage claims against the company rather than bring the van into company ownership and be hit by BIK tax for personal use.

Mileage claims are tax free and dont even get hit with the P1D/P9D employers NI tax (I dont drive more than 7K miles. period). I know there are limits to how many miles you can claim but I fall well short.

Hi Karimbo, that's interesting. At the moment I use my vehicle on roughly a 95% business, 5% private usage, so as a sole trader I claim against tax for 95% of expenses on it, including purchase, repairs and fuel. If I buy a vehicle as a limited company, is BIK tax significant if I'm using it privately for only 5% of the mileage?

 

[Scalloway]

BIK on vans

https://www.gov.uk/expenses-and-benefits-company-vans/work-out-the-value

BIK on cars

https://www.gov.uk/calculate-tax-on-company-cars

 

[Jez Taskin]

If you get a better deal on your accounting fees then you may be marginally better off.

I agree that limited liability may not be that useful as I can't see why you would need business loans etc, but I could be wrong.

I remember a couple of years ago when I last looked into this, someone advised me I should convert to a limited company when my personal taxable income from the business exceeded £35K. I was told that's about the point where it becomes more tax efficient and the gains outweigh the extra costs. Do we have a new figure now that the Chancellor has added his new tax to dividends? Are we talking 40K income now? (The calculation is different for me as I'm planning to have another income stream, but just for comparison.)

 

[Ian J]

I remember a couple of years ago when I last looked into this, someone advised me I should convert to a limited company when my personal taxable income from the business exceeded £35K. I was told that's about the point where it becomes more tax efficient and the gains outweigh the extra costs.

I was told that the figure was double what you were quoted and was roughly in line with the registration limit for Vat which was about £70,000 at the time

 

[Ian J]

[QUOTE="cheaper accountant, post: 2580627, member: 154925]
I agree that limited liability may not be that useful as I can't see why you would need business loans etc, but I could be wrong.[/QUOTE]

In all likelihood he would probably be asked to personally guarantee a business loan in any event

 

[john1989]

Under the current rules, you should look at incorporation when your profits start exceeding around £25k.

If you waited until they hit around £70k, you probably paid a lot more tax than you had to.

 

[Karimbo]

no 2 instances are the same

Under the current rules, you should look at incorporation when your profits start exceeding around £25k.

If you waited until they hit around £70k, you probably paid a lot more tax than you had to.

no 2 situations are the same, you can get to £100k turnover and only make a measly profit. You are legally required to become vat regged by then.

If you're selling physical goods then your profit margin will be very smell. If you're doing consulting work then 90% of revenue will probably be profit..

I'm sure an accountant here can provide a very smart matrix for when you should vat register.

In my case waiting for 25K profit would not be advisable. My business is a b2b av equipment rental company. Lots and lots of VATTED capital assets have been purchased - most of year 1 was non-profitable. My customers are all VAT businesses so me charging VAT was immaterial to them. Additional I claimed back a hell of a lot of input vat by voluntarylu registered for vat.

 

[john1989]

Ian mentioned taxable income (I.e. Profits). My post on the back of that mentions profits.

Turnover wasn't mentioned by me at all.

I think you are confusing registering for VAT with incorporation. Everyone seems to be discussing incorporating whilst you are now discussing VAT registration.

 

[Ian J]

If you're selling physical goods then your profit margin will be very smell.

 

[Karimbo]

Ian mentioned taxable income (I.e. Profits). My post on the back of that mentions profits.

Turnover wasn't mentioned by me at all.

I think you are confusing registering for VAT with incorporation. Everyone seems to be discussing incorporating whilst you are now discussing VAT registration.

You didn't mention turnover, I mentioned it because if your selling physical goods you'll hit the vat threshold (based on turnover) very quickly long before you can actually make 20k profit

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[john1989]

What has the vat threshold got to do with incorporating a business?

 

[Karimbo]

Talking of which, I just remembered my vat is due tomorrow. Heart skipped a beat because I thought today was the 8th

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[Karimbo]

Oh nvm sorry extremely busy and dining too many things, thought you were talking about vat reg

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[DontAsk]

no 2 instances are the same

If you're selling physical goods then your profit margin will be very smell.

Regardless of odour, why will margins be small?

You yourself said no 2 instances are the same but then come out with a sweeping generalization. try applying that to Apple, for example.

My company makes 50% margin on physical goods. Direct sales are more like 80% but that's offset by lower margin sales to wholesalers and retailers.