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In most cases it is better to trade as a limited company. This provides ‘limited liability’ and there are usually tax advantages. Limited liability means that if the company is sued then it is only the company that is liable, your personal assets are not at risk (unless you have acted outside of the law. In such cases you may be personally liable).
This is not the case if you are a sole trader or partnership. You can register your partnership as an LLP (Limited Liability Partnership) which will provide the same protection through its limited liability status. However, you would not get the tax advantages a limited company can provide.
There is more administration involved in being a limited company which does put people off trading as a limited company. Whilst this is true, complying with the extra administration takes very little time. In most instances our fees would not be more because you are trading as a limited company.
If you are setting up as a sole trader or partnership you should notify HMRC as soon as possible. This can be done on-line.
If you are setting up as a limited company HMRC will be automatically be notified through Companies House. They will send a letter requesting information about the new company. You will need to register for Corporation Tax. Again, this can be done on line.
Should I trade as a limited company?
Starting Out In Business
When do I need to tell HMRC about my new business?
What else do I need to register for?
If you are employing people you must register for PAYE. In the case of a limited company, as a Director you are employed by the company. You will need to register for PAYE even if you employ no one else. Do this before paying yourself a salary.
You may also elect to register for VAT even if you are below the registration limited (currently £79,000). You must register for VAT if you are going to exceed this limit.
Should I elect to register for VAT?
There is no clear cut answer to this. The advantage of registering for VAT is that you can reclaim VAT on the goods and services you purchase. If most of your customers are also VAT registered then it is probably worth registering for VAT. A problem only arises where your customers can’t reclaim the VAT you charge. This makes your services more expensive.
Even if your customers can’t reclaim VAT you may want to think about voluntary registration. For example, if you anticipate that your business will turnover more than £79,000 and you are not charging VAT at the outset, then at some point your customers will be hit by a 20% hike in your prices. It could be better to charge VAT from the outset.
As with trading as a limited company, some people view having to account for VAT as another administrative burden and don’t register for that reason. If you are better off registering for VAT the register. It can all be done on line and with the right accounting software the whole process is pretty much automated. It is not difficult. We will not charge you extra because you are VAT registered – we will handle the VAT returns for you.
There are several VAT schemes, which should I use?
There are a number of alternative VAT schemes outside of the standard VAT scheme. Three of these are likely to be applicable to your business.
Flat rate scheme
Possible the most advantages and most widely used. Rather than recovering VAT on your purchases, you charge VAT at the standard rate (20%) but you only pay a percentage of this to HMRC. This is instead of reclaiming VAT on your purchases. The rate at which you pay VAT depends on the type of business you run.
For example, if you run an IT services company you the rate is set at 14.5%. The amount of VAT you pay is 14.5% of your turnover including VAT. So, if your turnover in the period is £10,000, you will have received £12,000 (10k + 2k VAT). Your pay HMRC £1,740 (£12,000 x 14.5%) rather than the £2000 in VAT received. You have effectively ‘recovered’ £260 in VAT.
The scheme tends to work best for businesses that have very little in the way of purchases on which they can claim back the VAT.
The scheme only applies to businesses with a VAT taxable turnover of less than £150,000 per annum.
Cash Accounting Scheme
Under this scheme you only pay the VAT on your sales when you get paid. Similarly, you can only reclaim VAT on purchases when you pay for them.
The scheme is available to businesses with a turnover of less than £1.3m. Depending on the timing of when you get paid and when you pay your suppliers, there can be cash flow advantages to this.
Annual Accounting Scheme
If your turnover is lea than £1.3m, you can file your VAT return once a year rather than quarterly. You will need to make interim VAT payments every 9 months (or quarterly). The amount of the interim payments is set by HMRC. In the first year of trading this will be based on estimates you provide. After this, interim payments are based on actual VAT payments made the previous year.
Given how simple it is to file VAT on a quarterly basis (for the vast majority of businesses), annual filing is not that much of a benefit. This can be easily outweighed by the risk of overpaying on an interim basis if your business is subject to fluctuations in turnover.