It’s a conversation that many sole traders periodically have with their accountants. Is it a good idea for me to incorporate as a limited company? Although the answer isn’t always clear cut and can depend very much on individual circumstances, there are clearly a number of potential advantages. The rate of corporation tax for small companies is attractive, of course. There are savings on national insurance. And by finding the optimum balance between salary payments and dividends, you can manage your tax affairs more efficiently.
Often accountants will present the transition as being very straightforward, which at many levels is exactly right. The paperwork is fairly minimal and you can simply transfer the assets of your sole proprietor business and move on. But this might turn out to be a missed opportunity.
Forward-thinking advisers will take advantage of the change in status to undertake a tax planning exercise. By making use of existing rules, it’s sometimes possible to save substantial sums in personal tax by capitalising the future earnings of the business. This idea of accounting for ‘goodwill’ on incorporation can often be missed, but it’s a simple idea. Your business is actually worth more than its tangible assets and this should be taken into account in any valuation.
You should always feel confident your accountant has a good, current understanding of the tax regime and recognises the opportunities that potentially exist. With the correct adjuster clause in a legal agreement, you’re protected even in the unlikely event of there being a dispute over the figures. The valuation can simply be readjusted and reflected in the records of the business.
So although it’s important not to let the tax tail wag the commercial dog, if you decide that incorporation is the right route for your business, make sure you look at all the possibilities. We even managed to save one client enough money to help him invest in a new house. It’s just a question of thinking that little bit bigger.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk