Is operating as a sole trader costing your business money?
As businesses reel from tax announcements in the summer budget, all eyes are on the Chancellor for the Autumn statement. Simon Hayden, Partner at Perrys Chartered Accountants in Tunbridge Wells, discusses whether a business should incorporate
“For as long as I have been advising clients, the decision as to whether and when a business should consider incorporating has been a relatively simple one. For some, trading as a sole trader, partnership or LLP is the most suitable choice of business structure from the outset. However, for the majority, the decision as to whether they should incorporate or not often boils down to the point at which profits reached a level whereby the potential tax savings associated with trading as a limited company are enough to outweigh the increased hassle and administrative costs.
“There are two aspects to this potential tax saving. First, many clients are set up so that they take a small salary from their company at a level which incurs neither income tax nor national insurance. The rest of their income is taken as a dividend, which incurs no national insurance and, up to a certain level, incurs no income tax. Therefore, the only tax payable is corporation tax at 20%.
“In comparison trading as a sole trader, partnership or LLP means profits are subject to income tax and Class 4 national insurance. This Class 4 national insurance at 9% could mean that an extra £3,000 of tax would be payable by each sole trader or partner in a partnership.
“The second saving is a limited company is able to shelter undrawn profits from higher rates of tax. Sole traders are simply taxed on their profits, so if those profits exceed the basic rate tax threshold, some tax would be payable at 40%. Conversely, all limited companies now pay corporation tax at 20% regardless of their size. Business owners taking income out of companies start to pay higher rate tax on dividends beyond the basic rate threshold, however, those who don’t need to take all of the profit out can leave cash in the business and avoid paying any higher rate tax.
“For many years people have been speculating that the government would start charging national insurance on dividends. However, the surprise announcement in the July 2015 budget was that the way in which dividends are to be taxed would change from next April.
“From next April, the first £5,000 of dividends will be tax free. Thereafter dividends will be taxed at 7.5% up to the basic rate threshold and 32.5% above this point (additional rate tax payers will pay 38.1% on dividends).
“This tax increase means that in the future the decision as to whether to incorporate will not be so clear cut. The ability to shelter undrawn profits from higher rates of tax still remains, so for those who will benefit from this, the answer may still be the same. Many others will also still be better off as a limited company as the tax on dividends will still be less than the national insurance payable as a sole trader, however, there will be those who might be worse off.
“There are of course plenty of other reasons not associated with saving tax as to why it may or may not be beneficial to incorporate and businesses should seek professional advice before considering making any commitment.”
Fears over plans to increase tax levies on diesel usage after VW scandal
In the lead up to the Autumn Statement, the Centre for Economic and Business Research has reported that the lower petrol and diesel prices of 2015 have raised UK GDP by 0.6%, created an extra £11.6 billion of economic activity, 121,000 jobs and boosted government tax revenues. The research also shows that raising duty on diesel or increasing VED on diesel vehicles would cost businesses and families £9.3 billion across the current Parliament.
The research, commissioned by FairFuelUK, shows that the low oil and fuel forecourt prices seen this year have increased business investment, lowered production costs and improved household spending across the UK economy. Critically, the data also proves that the suspension of the government fuel duty escalator has increased tax revenues to the Exchequer by a net gain of £1.3 billion. Had the fuel escalator been in place the extra burden to the economy would have been £4.9 billion.
FairFuelUK campaigner, Quentin Willson, says: “This landmark report completely destroys the myth that high fuel duty levels increases government tax receipts. We’ve proved that keeping duty low actually increases revenues into the Exchequer by improved economic activity, more income tax, NI, Corporation Tax and VAT. The government must now do everything in its power to lower fuel duty as well as making sure fuel retailers pass on oil price savings to businesses and consumers. Our future economic strength depends on this policy.”
The CEBR report also strikes a warning note to the Chancellor in the run up to the Autumn Statement on diesel duty and VED. Any plans to increase tax levies on diesel usage as a reaction to the VW emissions scandal would cost the UK economy over £9 billion in extra taxation.
Calls for radical reform in Autumn Statement
Canary Wharf-based Condeco Software is calling on the Chancellor to announce a radical reform to business rates in his Autumn Statement.
The workplace technology expert believes that the growth of its firm, and other companies like it, could be hampered by current Business Rates. Its CEO and Founder, Paul Statham, believes that these business rates have become, in effect, a hidden taxation, because companies are paying higher rates just for location.
Statham says: "The chancellor has a huge opportunity to power growth in the economy by giving businesses the support they need to excel. Fast-growth companies and SMEs are the lifeblood of the UK, with firms like this accounting for more than half of employment (60%) and nearly half of turnover (47%) in the private sector - but they currently do not have all the tools at their disposable to build momentum. There has been a lot of discussion surrounding whether George Osborne will announce adaptions to business rates or whether he will devolve them. But what they need is a radical reform.
"Here at Condeco we have seen a period of huge momentum, and we are currently working with leading businesses across the world, including 30 of the FTSE 100. But we are being hit with high business rates specifically because we are based in Canary Wharf. These rates are excessive for the City and other high value areas, just because we are based next to large banks and similar companies. Simply put we are paying these higher rates simply for location, and in effect they become a hidden taxation. So, this must change.”
The Chancellor should avoid making a “raft of amendments” as constant change is not conducive to growth. Businesses are still reeling from the last budget, and the Chancellor should bear that in mind.
Wednesday's Autumn Statement is likely to see further devolution of power to the UK's regions, but will this really drive local growth?
Chris Maule, CEO and founder of peer-to-peer bond investment platform, UK Bond Network
“If rumours are true, Wednesday's Autumn Statement will see further plans announced to devolve powers to the UK's regions, with a significant objective being to drive growth outside of London. While the concept certainly holds potential, whether it meets this will very much depend on the extent to which powers are decentralised and transferred to regional authorities.
“One area Osborne is expected to give more detail around is local control of business rates. This is important, as it may enable councils to be more competitive in the rates they offer businesses. But while having the ability to reduce these rates would improve regional attractiveness, efforts would be significantly furthered if councils were to have similar control over corporation tax, enabling them to lure businesses with regional taxation benefits also.
“Nevertheless, it's not just business costs that are hampering regional growth. Research indicates that it's the businesses in the most deprived areas of the UK that are struggling most to access finance. If Osborne really wants to address the North/South imbalance, he needs to address the capital-centric structure of our financial system. By introducing regional investment banks, whose role it is to support businesses on a local level, Osborne could help to readdress the funding imbalance, while furthering his efforts to devolve powers to Britain's regions.”