Should I incorporate?
Deciding whether or not to incorporate your business is something that is often dismissed as too complicated and not worth the effort. In fact, it isn’t that bad and can lead to tax savings and a greater level of control over your income and the taxes due.
There is paperwork to complete but don’t let this put you off if incorporating your business is right for you. VAT registrations can be transferred and PAYE schemes can be set up and all of this is relatively straight forward.
Deductions
The accounting principles used to prepare accounts should be the same for all businesses but certain deductions may be allowed or disallowed for tax purposes where the business is conducted through a particular medium.
For example, companies are permitted to makes the following deductions, which are or will be restricted for an unincorporated business:
- Interest and finance costs for letting residential property (restricted from April 2017).
- Payments to your pension scheme.
Companies are not permitted to use the cash basis of accounting or fixed rate deductions (also called simplified expenses), which may make a difference to the level of taxable profit.
Administrative costs
The additional costs and hassle involving in running a company should not be underestimated. For example, when operating as a company the business owner will need to:
- Operate separate bank accounts for the company and maintain records of payments made to the business owners.
- Draw-up and submit annual accounts that comply with company law to Companies House.
- Submit an annual return to Companies House, including a filing fee.
- Tag figures in the accounts and tax return to submit both online to HMRC.
A company will normally have to operate a PAYE scheme to report salary and benefits paid to its director(s). This will require monthly RTI reports, unless the directors are paid only annually. As a sole trader or partnership you are not required to operate a PAYE scheme if you have no employees.
Tax reliefs
The following reliefs are perhaps beyond the scope of a typical sole director limited company. Nonetheless they are available and it is worth seeing if there is anything you can take advantage of. The tax reliefs only available to companies include:
- Enhanced reliefs for research and development (R&D tax relief).
- Reduced tax on income from exploiting patents (Patent Box).
- Enhanced reliefs for the creation of films, TV programmes, video games or theatre productions.
- Tax reliefs for investors using the Enterprise Investment Scheme (EIS), or Seed Enterprise Investment Scheme (SEIS) or Social Investment Tax Relief (SITR). SITR is available to unincorporated charities.