Sole trader or not Ltd Co

[Lancs Jag Boy]

I'm about to leave corporate land and undertake some consulting for what I would expect to be no more than 12 months. My initial thoughts were to set-up as a sole trader. I have one client secured already for six months and possibly another two for month long assignments, I'm aware that I don't want to be caught out by HMRC in only trading with one client.

I'm happy with my rates and if self employment results in a little more tax efficiency than the last 15 years of PAYE, then that's a bonus.

Can anyone give me a good reason to form a Ltd Co, as I have no major expenditure for equipment or anything similar?

Appreciate your thoughts.

[Eric Mc]

Ltd co can offer some additional tax and NI savings although the compliance costs, including accountancy fees, are at least double those for a simple sole trader.

There is always the problem of IR35 to be dealt with as well. Whilst the issues that surround IR35 (i.e. whether the individual is a bona fide proper trading business or not) equally apply to sole traders, the ramifications are very different.

If a sole trader is recategorised as an employee, his EMPLOYER has to pay over any underpaid PAYE tax and NI.

If a limited company falls foul of IR35, it is that Ltd Co that has to pay all the missing PAYE tax and NI (not the "employer".

So, in some ways, the individual carries a greater tax risk if recategorised under a Ltd Co than he does if a sole trader.

[V8mate]

Ask your client whether they have a preference.

[Eric Mc]

Any client with half a brain would insist thay YOU set up your own company. That would at one stroke remove any risk of THEM having to dig into their own pockets afor any underpaid tax and NI.

[jon-]

I always wondered about IR35 and why most IT contractors run with Ltds. Now I know. Thanks Eric

[JonRB]

Eric Mc said:

If a sole trader is recategorised as an employee, his EMPLOYER has to pay over any underpaid PAYE tax and NI.

If a limited company falls foul of IR35, it is that Ltd Co that has to pay all the missing PAYE tax and NI (not the "employer".

So, in some ways, the individual carries a greater tax risk if recategorised under a Ltd Co than he does if a sole trader.

Indeed, and this is precisely why most clients would not even consider contracting a Sole Trader.

Which leaves the options as setting up a Ltd. Company or using an Umbrella Company.

Edit: Apologies - Eric's clarification came in whilst I was typing this.

Edited by JonRB on Wednesday 10th February 16:31

[mrmr96]

Doesn't operating via a limited company also provide protection if you give shonky advice as a consultant?

[ewenm]

mrmr96 said:

Doesn't operating via a limited company also provide protection if you give shonky advice as a consultant?

You insure against that - as above, most companies will not take you on as a contractor without proof of insurance.

[Eric Mc]

mrmr96 said:

Doesn't operating via a limited company also provide protection if you give shonky advice as a consultant?

Up to a point. A total rogue may not be able to "hide" behind his Ltd Co - but many do, unfortunately.

[Lancs Jag Boy]

OK, thanks for all the rapid advice. What I'm hearing is...

If I can operate as a sole trader, great. But the chance of my client/s allowing me to do this are slim. So it is likely that I'll be going down the Ltd Co path.

Many thanks.

[JonRB]

Lancs Jag Boy said:

If I can operate as a sole trader, great. But the chance of my client/s allowing me to do this are slim. So it is likely that I'll be going down the Ltd Co path.

As I mentioned earlier, if it's just for 12 months there is the option of using an Umbrella Company or Managed Service Company. They're less tax efficient, but for a short period like 12 months you'd offset that with the money saved on company formation, accountants fees, and the like. And also the hassle of VAT Registration etc.

Edited by JonRB on Wednesday 10th February 16:59

[muppetdave]

Interesting thread, as I was about to post a very similar question.

I am/will be working with a wider number of clients - hopefully for at least two days/month with each client. So it appears from those comments the Ltd Co. is the way forward - are there any other considerations there given that I definitely will be working with more than one client?

Also as a further question, and I know Eric's answer of must be registered as self-employed for IR35 ASAP, but I was made redundant, and signed on immediately (mostly to go and do low-costs courses I wanted ) - at what point (off the record) should I establish the company and start to take a dividend (obviously when the business gets paid) and sign off of the dole?

[Graham]

ewenm said:

mrmr96 said:

Doesn't operating via a limited company also provide protection if you give shonky advice as a consultant?

You insure against that - as above, most companies will not take you on as a contractor without proof of insurance.

I've never been asked for professional indemnity insurance in 10+ years ( waste of time if you ask me any way, much better to take on someone that you think can do the job rather than trying to sue if they eck it up) as a ltd co consulting company, but all clients will only talk to ltd and vat reged companies.

[Eric Mc]

muppetdave said:

and I know Eric's answer of must be registered as self-employed for IR35 ASAP,

Sorrym but that comment doesn't make any sense to me.

[muppetdave]

Eric Mc said:

muppetdave said:

and I know Eric's answer of must be registered as self-employed for IR35 ASAP,

Sorrym but that comment doesn't make any sense to me.

Sorry, what I was getting at is that I know you've warned people a lot of the risk of not registering as self-employed when they get something up and running for fear of fines etc from the HMRC. Where I was headed with my question was that does the situation change if the business is set up as a ltd. co. with me listed as a director?

[Eric Mc]

People don't need to "register" for Self Employment. What they do need to do is notify HMRC within three months of starting their business that they have commenced trading.

The situation is different if you are setting up a limited company which will be the trading entity. As well as "registering" the company at Companies House, you will need to notify HMRC of the setting up of the company and the date it commenced trading. You will probably need to register the company for PAYE as well.

Edited by Eric Mc on Thursday 18th February 15:33

[Four Cofffee]

If the 'year' cuts across 2 tax years sole trader may work, depending on what other work you have in the rest of both of those years. if you have nothing else planned I wouldn't pay the extra cost of Ltd Company unless I was going to be in the 40% band and could put some dividends or funds away or later years.

[Eric Mc]

Four Cofffee said:

If the 'year' cuts across 2 tax years sole trader may work, depending on what other work you have in the rest of both of those years. if you have nothing else planned I wouldn't pay the extra cost of Ltd Company unless I was going to be in the 40% band and could put some dividends or funds away or later years.

Since the advent of the "current year basisi of assessment", the major benefits of having a business year end that is just after the tax year end aren't anything like as advantageous as they once were. There are SOME advantages, buit there are also disadvantages and, especially for small sole traders, I usually recommend that they go with a 31 March year end.

[TooLateForAName]

Graham said:

ewenm said:

mrmr96 said:

Doesn't operating via a limited company also provide protection if you give shonky advice as a consultant?

You insure against that - as above, most companies will not take you on as a contractor without proof of insurance.

I've never been asked for professional indemnity insurance in 10+ years ( waste of time if you ask me any way, much better to take on someone that you think can do the job rather than trying to sue if they eck it up) as a ltd co consulting company, but all clients will only talk to ltd and vat reged companies.

I have. But I did project based stuff rather than the usual BoS (Bum on Seat - ie really a temp employee rather than a business delivering something) contracting. For most contractors I agree, generally if you are working as a part of their team then them proving anything is your fault enough to sue is very unlikely anyway.

It is very common to have to prove various levels of Public Liability though.

[jamescartwright1]

maybe this article will help http://www.wisteriaformations.co.uk/articles/index...