New formation to simplify VAT registration?

[ultrahertz]

To cut a long story short, my dad ran a decorating business for about 40 years until his death last year, he was VAT registered and employed 6 - 12 staff for most of the years, reduced to 2 (plus himself) as he 'wound down' with age.

My mother's been running the business since then. She decided not to bother with VAT registration, as she's doing the books in the old fashioned way and did not want any hassle as she's been a housewife until now.

I've not long been back from serving abroad and I'm looking at taking the business on, however it would take us way over the VAT limit and part way through the financial year would it be a nightmare going back and accounting for the transactions so far this year?

My solution is to form a company (VAT regd, ltd by shares) and have my mother work as a contractor through that company, allowing me to keep her income below the VAT threshold and transfer the business to a new structure fairly seamlessly.

1. Seeing as I would be registered for VAT, could I still be done for artificial seperation of trade?

2. Can my mother become a director or employee of the company whilst she's registered as self-employed and contracting for the company?

3. Any other suggestions / points / advice would really be greatly appreciated.


James

 

[Scalloway]

1. As you have not had previous involvement with the business I would think it would be ok.

2. Your mother can either be a contractor or a director, not both.

 

[ultrahertz]

Thanks for the reply, Scalloway, very much appreciated.

 

[Taurus.C]

Hi there,

A little bit late to reply your enquiries but just have some information to share.

(1) No, a limited liability company is based on the legal principle of "separate legal personality", therefore the legal entity and yourself are to be viewed two different person. It will be your proposed company entering into a contract with your mother's company not yourself as an individual, despite the fact that you are the director and owner of the company.
The remaining part would be "conflict of interest", this is more like an internal issue of the companies. Since there will be just you and your mother are involved in the companies then there is no problem at all. (typical issue with conflict of interest happens when there are a number of shareholders involve in the company(s) and they believe that the director has a conflict of interest (like you and your mother's personal and business relation, may render you unable to act for the best interest of the companies therefore breach the director's duties under Companies Act 2006/

(2) In my opinion, your mother can be both the self employed contractor or as a company director. (this is more a question of whether there is any restrictive covenant on the employment contract - which is not applicable your mother situation since she is the owner of the company and hire herself as an employee.

Don't get confused between a director or an employee, because under UK company law, a director is not automatically became an employee. A director will become an employee of the company and receive remuneration upon an employment contract is agreed and signed between the director and the company, hence subject to income tax and NI contribution.

To thrive, it may be more tax efficient for your mother to trade through a LTD instead of being a self employed (sole trader) because paying corporate tax (LTD) is lower than as a sole trader in a long run and there are a number of tax relief available for companies such as annual investment exemption and rollover relief.

I hope the information helps and should you have any question please feel free to let me know.

Kind regards,
Taurus

Archers Corporate Services Limited

 

[ultrahertz]

Never too late, and many thanks for the response.

After an astonishingly busy Xmas, it'll be mid January before I'm able to sort it all out, as I'm also my own materials/consumables supplier, and I'm not sure how that will affect proceedings.

Hi there,

A little bit late to reply your enquiries but just have some information to share.

(1) No, a limited liability company is based on the legal principle of "separate legal personality", therefore the legal entity and yourself are to be viewed two different person. It will be your proposed company entering into a contract with your mother's company not yourself as an individual, despite the fact that you are the director and owner of the company.
The remaining part would be "conflict of interest", this is more like an internal issue of the companies. Since there will be just you and your mother are involved in the companies then there is no problem at all. (typical issue with conflict of interest happens when there are a number of shareholders involve in the company(s) and they believe that the director has a conflict of interest (like you and your mother's personal and business relation, may render you unable to act for the best interest of the companies therefore breach the director's duties under Companies Act 2006/

(2) In my opinion, your mother can be both the self employed contractor or as a company director. (this is more a question of whether there is any restrictive covenant on the employment contract - which is not applicable your mother situation since she is the owner of the company and hire herself as an employee.

Don't get confused between a director or an employee, because under UK company law, a director is not automatically became an employee. A director will become an employee of the company and receive remuneration upon an employment contract is agreed and signed between the director and the company, hence subject to income tax and NI contribution.

To thrive, it may be more tax efficient for your mother to trade through a LTD instead of being a self employed (sole trader) because paying corporate tax (LTD) is lower than as a sole trader in a long run and there are a number of tax relief available for companies such as annual investment exemption and rollover relief.

I hope the information helps and should you have any question please feel free to let me know.

Kind regards,
Taurus

Archers Corporate Services Limited

 

[Bob]

Hi there,

A little bit late to reply your enquiries but just have some information to share.

(1) No, a limited liability company is based on the legal principle of "separate legal personality", therefore the legal entity and yourself are to be viewed two different person. It will be your proposed company entering into a contract with your mother's company not yourself as an individual, despite the fact that you are the director and owner of the company.
The remaining part would be "conflict of interest", this is more like an internal issue of the companies. Since there will be just you and your mother are involved in the companies then there is no problem at all. (typical issue with conflict of interest happens when there are a number of shareholders involve in the company(s) and they believe that the director has a conflict of interest (like you and your mother's personal and business relation, may render you unable to act for the best interest of the companies therefore breach the director's duties under Companies Act 2006/

(2) In my opinion, your mother can be both the self employed contractor or as a company director. (this is more a question of whether there is any restrictive covenant on the employment contract - which is not applicable your mother situation since she is the owner of the company and hire herself as an employee.

Don't get confused between a director or an employee, because under UK company law, a director is not automatically became an employee. A director will become an employee of the company and receive remuneration upon an employment contract is agreed and signed between the director and the company, hence subject to income tax and NI contribution.

To thrive, it may be more tax efficient for your mother to trade through a LTD instead of being a self employed (sole trader) because paying corporate tax (LTD) is lower than as a sole trader in a long run and there are a number of tax relief available for companies such as annual investment exemption and rollover relief.

I hope the information helps and should you have any question please feel free to let me know.

Kind regards,
Taurus

Archers Corporate Services Limited

Unfortunately you need to take this post with a pinch of salt as it contains some inaccuracies and ignores important differences between employment and self-employment

 

[Bob]

Probably worth consulting an accountant at the outset to make sure you get it right.
Most will give you an initial consultation free of charge to see if you can work together.Not exactly sure what you are proposing but understand that you wish to form a company to take over the whole of your mother's business. If your mother is trading at a level below the VAT registration threshold, then the limited company should not need to register until it exceeds the rolling 12 month threshold which you have to calculate at the end of each calendar month. The limited company will start its own clock on incorporation provided that your mother was below the VAT registration threshold. You need to consider what the effect of registration - potentially an almost 20% hike in your invoice value - will have on the business. Depends whether you are dealing with private individuals / unregistered businesses or businesses able to reclaim the VAT.
So far as your mother is concerned, what services will she be providing to the business? That may affect how she can be remunerated. You also need to ensure that any quotations make it clear that VAT will have to be added if you register. Artificial separation won't be an issue unless your mother is intending to continue trading as a decorator with her own customers. If she will just be working for you no problem.

 

[ultrahertz]

Fully understand your point, and I should have perhaps explained the situation a little better.

Since my Father's death, my mother's been running it purely in order to keep 1 particular employee in work, she's been a housewife all her life and has no desire to start getting into business now.

She's got far more money in the bank than she'll ever need and as much as I've tried, I can't get her interested. She just charges day-rates to paint pensioners houses, so that when she's away one of the lads can do the phones. She's at the VAT limit running it like that.

I personally would rather not do this sort of domestic work at all, however it's not that hard to undercut local 'one man bands' by upto 50% or more, so I've never even considered that an issue. I also need to buy/rent a few vans before long and some spraying tackle and it'd make sense to get the VAT back.

The work I'm involved with myself is more commercial, a mixture of on-going contracts with factories / developers. I've got a guaranteed amount of work per month, which would keep the current staff plus three or four more in work.

There's 2 current members of staff who haven't really done much commercial work, and are getting on in age. If they would sooner keep doing domestic work, I would leave them employed by my mother and pass all private work on to her.

There's 3 particular months of the year that get ridiculously busy and require extra staff at short notice. We've always been lucky that we've been able to call in decorators at short notice, even though we might only be able to guarantee 3 weeks work. It would be great if I could pass this type of work on to those decorators throughout the rest of the year.

-- Shall definatley be consulting a few professionals before doing anything drastic. Need a new accountant anyway as current one literally uses 'books' and doesn't have a computer.

Probably worth consulting an accountant at the outset to make sure you get it right.
Most will give you an initial consultation free of charge to see if you can work together.Not exactly sure what you are proposing but understand that you wish to form a company to take over the whole of your mother's business. If your mother is trading at a level below the VAT registration threshold, then the limited company should not need to register until it exceeds the rolling 12 month threshold which you have to calculate at the end of each calendar month. The limited company will start its own clock on incorporation provided that your mother was below the VAT registration threshold. You need to consider what the effect of registration - potentially an almost 20% hike in your invoice value - will have on the business. Depends whether you are dealing with private individuals / unregistered businesses or businesses able to reclaim the VAT.
So far as your mother is concerned, what services will she be providing to the business? That may affect how she can be remunerated. You also need to ensure that any quotations make it clear that VAT will have to be added if you register. Artificial separation won't be an issue unless your mother is intending to continue trading as a decorator with her own customers. If she will just be working for you no problem.

 

[Bob]

Probably worth looking at this about disaggregation.

 

[ultrahertz]

I'm fairly convinced that I'm okay as far as the partitioning goes, what I'm really looking at, is the fact my mother quite literally inherited my dad's self-employed status.

Is it not still the case that sole traders can offset losses from any year against this years tax? This is the only reason I'm considering keeping my mother established, but I'm unsure wether or not it would benefit me at all.

 

[Taurus.C]

Thank you bbbbb's constructive criticism, instead of giving suggestion as to "give a little salt" on my opinion, may be you can give a little explanation as to the difference of employment and self employed perhaps would be more useful.


The original question is whether the mother can be both an employee of a company or as self employed. There is an Institution of Advance Legal Studies based in Russel Square, with many update to date books and legal journals which I would recommend to visit especially for corporate and commercial law and UK tax law. Online law journal database such as lawtel and Westlaw are highly recommended


Alternatively, I would recommend you to check HMRC website, sometime is not bad to run a little research before giving constructive criticism or advise -


Keyword search on HMRC website:


Employed and self-employed tax and National Insurance

(HMRC provides a statement that it is possible to be both employee and self-employed at the same time)


Hope you find the information useful


Further, I think same constructive criticism about adding a little salt may be applicable to your reply on VAT - "Should not need to require to register VAT". It is true that the company is "not obliged" to register VAT if the company annual turnover is below the 79K legal threshold. Company director or proprietor may however, choose to register VAT voluntarily.


It is important to consider how VAT system works. Depending on the company business activities, if the company runs an activities which its suppliers charges VAT for the supplied goods/products then even the company annual overturn its below the legal threshold then it may be commercially viable to complete the company VAT registration in order to reclaim the VAT amount being charged, hence more tax efficient for the company as a whole.


When you are running a business, you consider not only on the legal side of issues (what you are not obliged to do...etc )but also on practical commercial issues that would make it most tax efficient and commercially viable for the company/business.

---------------------

Dear Ultrahertz


With regards to setting off losses as a sole trader - "Where an individual as sole trader or partner makes a loss in a trade in any of the first four tax years, from commencement of that trade, ensure that the loss is set against total income for the previous three tax years, with the earliest year first. The loss has to be set off in full as partial claims are not permitted" (HMRC – Income Tax Losses Toolkit)


Hope you find this information useful


Kind regards,

Taurus.C


Archers Corporate Services Limited - Professional UK & Offshore Company Incorporation Consultancy

 

[Bob]

To thrive, it may be more tax efficient for your mother to trade through a LTD instead of being a self employed (sole trader) because paying corporate tax (LTD) is lower than as a sole trader in a long run and there are a number of tax relief available for companies such as annual investment exemption and rollover relief.

Perhaps you could expand on these items. Clearly you have access to information sources in Russel Square and online not open to me as a retired person

 

[Taurus.C]

if you are eager to learn or to seek advices then I would be happy to assist you otherwise...please go to HMRC GOV website.

HMRC site has the answers you are seeking and you will have a free access at home. With today's technology, many information are available on the internet and the authorities such as HMRC & IPO issue their journals on regular basis as well as many free legal journal online database....so a person working or retire status would not make too much a difference.


Kind regards,

 

[Bob]

It's unfair to the OP to continue the discussion on this thread but I note that understandably you do not wish to support the statements that you have made.