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BlimeyCharlie
Original Poster
179 posts
11 months
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Hello all.
I'm setting up a business that needs to be VAT registered. I am already a sole trader in another industry altogether, so familiar with that side of things, but not VAT registered. Whilst looking into this it has got me thinking.
My thought are to register as a sole trader again, to get things up and running with a minimum of paperwork, and then later on establish/register as a Ltd company.
However, I wonder if I am better doing that now? What are the obvious/real life advantages of Ltd v Sole Trader?
I am funding everything myself, there is no borrowing, but in the future I may well need to.
My main question is am I better off setting up a Ltd company from day one? I will have VAT returns to do anyway. Is there much extra work/hassle with paperwork once a Ltd company has been established?
If Ltd is the way to go, is there a minimum age? I'm thinking of having my daughter involved as a shareholder, but not running it. Or my partner. But I want it to be 'my' company, as it is my money, time etc.
My partner is a Sole Trader herself too anyway. There are pros and cons of her being VAT registered in her business, but again it is the Ltd v Sole Trader question I am 'stuck' with for her too.
With regard to VAT registration, there does not appear to be a way of speeding this up. Is this correct?
And does buying a vintage company name offer any real advantage? I think not.
I've looked at a fair bit of stuff to do with this and it is not sinking in. Hence my call for advice.
Thanks in advance
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s2sol
597 posts
40 months
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I've recently incorporated. My main motivation was to reduce my tax liability. If your earnings from any employment get above £40k, it's worth incorporating.
Unless there's any other pressing reason, I wouldn't bother. It's a lot more admin, your accountant will charge you more for much the same work, and you're a company director, with all the arse ache that involves.
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BlimeyCharlie
Original Poster
179 posts
11 months
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s2sol said: I've recently incorporated. My main motivation was to reduce my tax liability. If your earnings from any employment get above £40k, it's worth incorporating.
Unless there's any other pressing reason, I wouldn't bother. It's a lot more admin, your accountant will charge you more for much the same work, and you're a company director, with all the arse ache that involves. Thanks for the advice. That is just what I'm after. And by £40k 'earnings' that is what you earn, and not 'turnover'. Not really a question. Thanks again.
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NickHKent
220 posts
35 months
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Similar story here, have gone self employed for my latest venture to keep things simple in the short term and will incorporate once there's some momentum.
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s2sol
597 posts
40 months
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Yes, earnings. Profit from a sole trader business, or salary/BIK from employment. Turnover is irrelevant.
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BlimeyCharlie
Original Poster
179 posts
11 months
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Thanks again.
Been a great help so far.
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s2sol
597 posts
40 months
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Eric Mc will be on tomorrow to tell you where I've made mistakes!
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DKL
1,838 posts
91 months
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The main advantage to a Ltd co is exactly that - your limited liability should the worst happen. After that then tax reductions corp tax v income tax can be well worth it. Can be a bit frustrating having money all paid for in the business but if you want to buy a Ferrari for yourself then it all ends up on your tax liability. Of course if you can persuade C+E that a Ferrari as a piece of art for work is all it is then that's fine 
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New POD
1,990 posts
19 months
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DKL said: The main advantage to a Ltd co is exactly that - your limited liability should the worst happen. After that then tax reductions corp tax v income tax can be well worth it. Can be a bit frustrating having money all paid for in the business but if you want to buy a Ferrari for yourself then it all ends up on your tax liability. Of course if you can persuade C+E that a Ferrari as a piece of art for work is all it is then that's fine Most big companies won't deal with sole traders, and yes the limited liability is important. One advantage of the money staying in the business, is you don't have to declare it all as personal income, as technically it belongs to the company. Which I suppose means you could build up a fund in the business, and then take a year off, and still pay yourself. The ferrari is a pool car, as incurs no personal tax liability as long as it's used for business, and marketing and networking is a clear business need. (Subject to the company car tax rules)
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Eric Mc
67,260 posts
134 months
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If you set up a second sole trading activity and you register for VAT because of the nature or size of that second sole trader, you need to be aware that you will also need to start raising VAT on the sales generated by the first sole tradership too. INDIVIDUALS register for VAT, not their separate sole trader activities.
If you set up the second business as a limited company, because it is a separate legal entity to the individual and his original sole trader activity, the limited company can register for VAT but the original sole trader activity need not - as it is the limited company, not the individual, who becomes VAT registered.
Having two separate and distinct trading activities can make life pretty complicated - and the administration of a limited company imposes a bureaucratic burden on a business two to three times more complex than a similar sized sole tradership.
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BlimeyCharlie
Original Poster
179 posts
11 months
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Eric Mc said: If you set up a second sole trading activity and you register for VAT because of the nature or size of that second sole trader, you need to be aware that you will also need to start raising VAT on the sales generated by the first sole tradership too. INDIVIDUALS register for VAT, not their separate sole trader activities.
If you set up the second business as a limited company, because it is a separate legal entity to the individual and his original sole trader activity, the limited company can register for VAT but the original sole trader activity need not - as it is the limited company, not the individual, who becomes VAT registered.
Having two separate and distinct trading activities can make life pretty complicated - and the administration of a limited company imposes a bureaucratic burden on a business two to three times more complex than a similar sized sole tradership. Now it has become clearer. Thank you. My original, and still-trading sole trader activity is as a freelancer working for a large business, where I am paid a flat rate per day, which is an industry-standard rate, plus expenses (normally petrol if I use my car, parking etc). Charging VAT should not cause a problem, but the people who commission me will just see that my price/day rate exceeds what the rate actually is. That would then cause a problem, as it is not something they are familar with/want to be troubled with. Or I include VAT in my invoice, but then actually earn 20% less when I've paid it to HMRC. However, I can't be the only person working as a freelancer for this firm who is thinking of being VAT registered, so will find out if/how this works with them. It might be easier than I think.
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Eric Mc
67,260 posts
134 months
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Without opening a can of worms, working "freelance" for just one business (i.e. being a sole trader with just one customer) is always an indicator that perhaps you should really be a proper employee of that organisation.
There are other factors to be taken into account, of course, but merely supplying labour to one "customer" is rather indicative of an employee/employer situation rather than a true "trading" situation.
Don't forget, if you become VAT registered as a sole trader, you would normally be expected to charge VAT on your "Expense Claims" as well. Sole traders, in fact, should not really submit "Epense Caims". That is what employees do. A trading business bills its custommers in order to make a profit. It isn't that relevant to the business whether the bill covers time charges of the sole trader's labour or the sole trader or whether to trader is trying to recover specific costs he has incurred.
VAT doesn't have to be levied IF the expense claim element of a bill is in respect of a cost which did not contain VAT when purchased by the trader i.e. postage, train fares etc AND the trader is NOT adding a profit element to his expense related bill.
Once a profit element is inserted, the trader is deemed not to be recharging a cost but billing with a view to making a profit - which is taken as a normal sales invoice and therefore VAT will need to be charged on the full value of the invoice.
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RizzoTheRat
8,070 posts
61 months
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For me sole trading vs limited company came down to customer preference. A customer who I've done a lot of work for over the last few years (as an employee of a consultancy firm) prefer to deal with limited companies. Something to do with tax liabilities (I'm sure Eric can shed some light on what the detail is) meaning that the customer could be liable for sole traders while limited companies protect them.
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Simpo Two
54,262 posts
134 months
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RizzoTheRat said: A customer who I've done a lot of work for over the last few years (as an employee of a consultancy firm) prefer to deal with limited companies. Something to do with tax liabilities (I'm sure Eric can shed some light on what the detail is) meaning that the customer could be liable for sole traders while limited companies protect them. I've never understood that. You have only to see Watchdog to realise that most scammers hide behind Limited Companies - they go phut and the creditor has little or no redress. I put it down to more of an ego thing on the part of the buyer. The little guy working from his dining table will always be there, and liable if he cocks up. The Director will run away.
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sumo69
862 posts
89 months
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Its so that the customer is protected from being liable as an employer with the PAYE and NIC liabilities that would arise - if the supplier runs through a ltd company then the risk is theirs and not the customers. Standard fare in the IT and much of the consultancy sectors.
David
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RizzoTheRat
8,070 posts
61 months
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That sounds like it. The customer in my case is one with budgets in the billions rather than the little guys. As mentioned above if your customers are individuals rather than VAT registered organisations then best to stay away from VAT registration if you can as it immediatly adds 20% to your prices for non VAT registered customers.
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Simpo Two
54,262 posts
134 months
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sumo69 said: Its so that the customer is protected from being liable as an employer with the PAYE and NIC liabilities that would arise - if the supplier runs through a ltd company then the risk is theirs and not the customers. Standard fare in the IT and much of the consultancy sectors. Ah, I thought it was just a simple 'A buying stuff from B' arrangement, not a more permanent relationship akin to employment.
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Eric Mc
67,260 posts
134 months
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RizzoTheRat said: For me sole trading vs limited company came down to customer preference. A customer who I've done a lot of work for over the last few years (as an employee of a consultancy firm) prefer to deal with limited companies. Something to do with tax liabilities (I'm sure Eric can shed some light on what the detail is) meaning that the customer could be liable for sole traders while limited companies protect them. To some extent - although if that particular risk exists due to the nature of an engagement then the risk still exists - only it has been passed on to your company in the form of IR35.
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BlimeyCharlie
Original Poster
179 posts
11 months
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Eric Mc said: Without opening a can of worms, working "freelance" for just one business (i.e. being a sole trader with just one customer) is always an indicator that perhaps you should really be a proper employee of that organisation.
There are other factors to be taken into account, of course, but merely supplying labour to one "customer" is rather indicative of an employee/employer situation rather than a true "trading" situation.
Don't forget, if you become VAT registered as a sole trader, you would normally be expected to charge VAT on your "Expense Claims" as well. Sole traders, in fact, should not really submit "Epense Caims". That is what employees do. A trading business bills its custommers in order to make a profit. It isn't that relevant to the business whether the bill covers time charges of the sole trader's labour or the sole trader or whether to trader is trying to recover specific costs he has incurred.
VAT doesn't have to be levied IF the expense claim element of a bill is in respect of a cost which did not contain VAT when purchased by the trader i.e. postage, train fares etc AND the trader is NOT adding a profit element to his expense related bill.
Once a profit element is inserted, the trader is deemed not to be recharging a cost but billing with a view to making a profit - which is taken as a normal sales invoice and therefore VAT will need to be charged on the full value of the invoice. I should explain my situation. This is what I do-it does not mean I'm correct! I work as a freelance photographer for a large media business. The freelance day rate is dictated to me-take it or leave it. Using freelance is the norm in this industry for this type of work. I don't tend to work for another business, as this may be a form of 'conflict of interest' if I work for a rival (obviously). So I am providing a service. If I have to travel to a location to do the work, it is normally via a hire car, hired by the company I'm working for. Should I have to use my own car, then I am paid per mile plus reimbursed any parking costs etc, which I have to show on my invoice. This is where I have been self employed so far-as a sole trader. And not VAT registered. What I will be doing is carrying on with the above, but also starting a business completely different using some of the contacts I have. This is buying a product from Company A, who is charging me VAT @20%, and selling it, including delivery, to Company B. My business will not be viable unless I can claim my VAT back from purchases made from Company A. Obviously I will then charge VAT @20% to Company B, who are used to this situation and is the norm. This is the situation, and this is why I'm seeing if I should be Ltd or Sole Trader still, but will 100% have to be VAT registered.
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RizzoTheRat
8,070 posts
61 months
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Take a very close look at IR35 regulations, sounds like you may be inside it which means a lot more tax. Probably worth reading a fair bit of stuff on here too http://www.pcg.org.uk/cms/index.php
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