Below is a real life case study of one of our client’s, John, and is typical of the relationships we have with our clients and our client service excellence.

Our approach with all our clients is the same. We listen, discuss and truly get to know you and your business, bringing our creativity and energy to your wider company issues on the back of your business numbers.

Offering solutions. Disentangling problems. And helping your future planning; focusing on what’s ahead, not simply dealing with what’s already happened.

Our client, John

Our long-standing client, John, has a growing small business making a steady profit and also has property revenue to top up his income.  With the combination of both streams of income, our client is well over the theoretical £30,000 profit threshold to consider changing his legal structure from sole trader to limited company.

Our process

At the start of the client relationship, we spent a lot of time getting to know John and his small business, both in the current context and of his future plans. As a long standing client relationship, we have watched the business thrive and grow and with regular contact with John and his business’ numbers, we proactively engaged with him to discuss the option of moving to limited company structure when we saw that his net income was growing steadily.

The benefits of moving from a sole trader to a limited company can depend on individual circumstances and of course, the opportunity to pay less tax is a huge incentive to consider such a move, but there are also a  few other reasons to consider that are common to all businesses.  Another good reason to consider a move to limited company status as your business grows, is to give yourself the option  to separate your personal and business assets and so allowing for ‘limited liability’, where your personal assets are protected in case your business finances suffer or the business goes bankrupt.  Separating your personal and business assets means that no matter what happens to you personally or with your business, neither one will have an impact on each other, and both operate independently from each other.

Another reason you may consider the move is perhaps at the insistence of your own clients who will not work with you unless your incorporated.  This request is not that unusual as it gives some comfort to clients that your business is established and one that they can work with in the long-term.

The prestige also of moving from sole trader to limited company could mean that it seems like an obvious next step for your business if it is thriving.

All the above reasons are valid and well known choices to business owners, but how do these advantages play out in a real life business scenario, such as John’s?

Is it the right thing to do?

When working with John, as we do with all our clients in the same position who have a growing small business, we work through the numbers as a start, carefully calculating tax due for both sole trader and limited company, understanding the tax position in each scenario and applying tax reliefs where applicable, and then comparing the numbers to see what the different level of taxation is due.  But that is only the beginning.

As we experienced with John, because we knew John and his business really well personally as well working with his numbers over a period of time, we were able to give strategic and honest business advice on whether it was the right thing to do.  Understanding a client’s unique set of circumstances is incredibly important when positioning them to be as tax efficient as possible, and we believe is just as important as keeping up to date with tax law,both actions combining to give the best tax position for clients.

As John’s business is a low risk one and coupled with regular and consistent low risk property income from his UK properties, we advised John to remain a sole trader, as the benefits of staying a sole trader outweighed moving to limited company status.  As well as the advantages noted above, two of the main disadvantages of  moving to a limited company structure is the increased level of reporting to HMRC and with it, increased accounting costs.

John’s tax position as a sole trader currently and the his tax position if he were to move to limited company status, is shown below.

 

John’s current tax position as a sole trader

John’s tax position as a Limited Company

Income received (before tax) Income received (before tax)
Salary from all employments £8,164.00 Profit from self employment £52,950.00
Income from UK property £7,413.00 Profit from UK Property £7,413.00
Dividends from business £31,833.00
Total income received £47,410.00 Total income received £60,363.00
Tax calculations Tax calculations
Personal Allowance (2018-19) £11,850 Personal Allowance (2018-19) £11,850
Total taxable income £35,560.00 Total taxable income £48,513.00
Salary and property income Salary and property income
Basic rate @ 20% of  remaining £3,727 £745.40 Basic rate @ 20% x £34,500 £6,900
Higher rate @ 40% x £14,013.00 £5,605.20
Dividends from business
Basic rate nil rate – £2,000 x 0% £0 Total Income tax charged £12,505.20
Basic rate – £28,773.00 x 7.5% 2,157.97
Higher rate – £1,060.00 x 32.5% £344.50 Other reliefs
Total Income tax charged £3,247.87 Finance costs – £759.00 x 20% £151.80
(Salary & property income & Dividends)
Total income tax due £12,353.40
Other reliefs
National Insurance Contributions
Finance costs – £759.00 x 20% £151.80
Class 4 Employer £3,413.34
Total income tax due £3,096.07 £37,926.00 x 9% £132.00
£6,600.00 x 2% £153.40
Corporation tax due £13,002.44 Total National Insurance Contributions due £3,698.74

TOTAL TAX BILL

£16,052.34

TOTAL TAX BILL

£16,052.14

It is clear that the main reason for changing the legal structure of a company, that of saving on your tax bill, is not applicable here.  The saving in tax for John is negligible – only 20p saving! – and as a result, moving to a limited company structure would only cost John more in accounting costs and time lost on duties to fulfil as a Company Director.

How we help sole traders

If you’re a thriving sole trader or limited company small business owner and are thinking of moving to the next stage of the business cycle, call us to see how we can help you.  Far from the traditional accountant model, Mirandus prides itself on its exceptional client service, and understanding you and your business is our client commitment to you.

Traditional accountants help with your figures in a historical and reactive way.   Our focus is different – and, we believe, smarter. Our number one priority is you, your business and helping you make the most of your figures in the context of the bigger picture.

Our approach with all our clients is the same. We listen, discuss and truly get to know you and your business, bringing our creativity and energy to your wider company issues.

Offering solutions. Disentangling problems. And helping your future planning – by focusing on what’s ahead, not simply dealing with what’s already happened.

Mirandus. So much more than your annual accounts. So much more than your average accountant.

We strongly recommend you speak with a tax and accounting specialist like Mirandus Accountants, who can help you set up in business and support you as you develop and grow. We are an accounting company in London who are tax accountants for the self-employed and offer accountant services for small business.  You can contact us to offer a tailored solution to your unique business circumstances.

Mirandus Accountants, supporting local businesses in the City of London and Greater London area, providing accounting and tax services to SMEs and OMB clients.  As strong advocates of cloud accounting and a QuickBooks Pro Advisor Practice, we offer access and training on QuickBooks as standard to all our clients, whatever stage of the business cycle.