When to incorporate - The Book-keepers Forum (UK)

abacus12345 · Guru

When to incorporate

RobH · Expert

Hi Johnny,

Of course as you know the guy in your avatar has managed to mess this up a bit! Currently if the only consideration is tax efficiency, I tend to suggest incorporation when taxable profits are around £20k. You need to offset any extra tax saving against additional costs involved (primarily the accountancy fee increase). A big talk to the client really emphasising they can no longer use the business/company bank account as a personal account. I always explain that the additional compliance work will increase the accounts fee from say £300 to around £700. There is also PAYE, P11D, Dividends, director's loan accounts to consider. Sometimes you just know the client is better suited as a sole trader than a director but you still have to let them know the options.

I haven't properly run the figures for the new dividend tax charge regime but clearly it is a less appealing option....I'll need to look at this very soon. I don't expect many clients looking to dis-incorporate though...

abacus12345 · Guru

Hi Rob. Yes my figure for trade profits were around 20 - 25k. Less PA. NIC Class 2 + 4. At those figures the favourable side definitely starts to sway to Ltd. In regards to a one man band can the employers allowance be used against employers NI? If not, what if one man band has his wife on payroll for general admin? Paying her an hour per week? Possibility to save on div tax? Sort of offset one with the other.Assuming he is nearer to 30k than 300k in trade profits.

Shamus · Forum Moderator & Expert

Hi John,

taking a different but I think complimentary attack to Rob here.

As with VAT there is no deminimus level for incorporation and other things besides the availability of dividends need to be considered.

Some will argue that the veil of incorporation protects the owners of a business from some level of personal liability but you will find that for smaller companies personal guarantee's make such an immaterial consideration.

There is more paperwork associated with incorporated entities and as an owner director you will be subject to a lot more legislation.

The business must be considered a seperate entity to the owners (echoing here Robs statement about diirectors believing that the companies money is the same as their money). The reality is that the company is a seperate legal entity much the same as a child is seperate from its parents. The parents must look after the child but it has rights of its own and the parents can be held responsible should the child be abused or mistreated.

Similarly as an owner / director you have a fiduciary duty of care for your business which entities such as companies house may hold you to account for.

Many smaller entities incorporate because like VAT registration it says something about the business (which may not be completely true). You will find that if you are looking to work with corporates they will not deal with the self employed so you will find that many of your clients especially IT contractors who work in that world are incorporated although in many cases they would much prefer to be self employed.

The big issue of course is class 1 NI contributions where as an incorporated entity one finds that you are paying both employee's and employers contributions which is the real drive by the Government away from Dividends.

Dividends were never really about tax saving, they were about NI saving as if you think about it dividends are from taxed profits where wages are an expense so reducing profits. Yes there is a very small advantage but not enough to justify incorporation. As I say, 12% employee plus 13.8% employer NI contributions are the real issue (makes people have wet dreams about merely paying class 2 and 4!!!).

The above said, as a director you are an employee of the company so you have certain employee advantages over the self employed, although such are also restricted due to having control over the company.

To take on one's spouse you need to show that they make a genuine contribution to the business (see also next paragraph).

The employers allowance is (from April) not available to one man limiteds so I expect HMRC to go after Husband / wife businesses that are able to circumvent the new rules with a lot more enthusiasm meaning that you are really goiing to need to be able to prove beyond all doubt that the arrangement is genuine and not merely attempting to circumvent tax regulation to give yourself an unfair financial advantage.

HTH,

Shaun.

abacus12345 · Guru

Hi Shaun. Yes I concur with your description in regards to the extra legislation, primarily, the companies act. Not to mention extra paperwork if you will. I see advantages to incorporating on an elitist level, some businesses only like to trade with Ltd, as some VAT registered companies will only trade with other VAT registered companies. Incorporation for a builder would be suggested? If purely to have the safety of limitation, obviously that in itself has its own boundaries. Not forgetting a potential goodwill element, whereby I believe anything less than 10k is not usually contested by HMRC. Also an element of a

abacus12345 · Guru

Think half my post disappeared...anyway. The last point I wanted to mention on my previous post was, there is also the option of a <£10K Directors loan, obviously this is a grey area, yet still viable, needless to say, it carries the risk and consequences if not settled. One has to ask the question if it would be settled if the need was there in the first place to take a £10K loan, - that's another story. (These are purely my own thoughts, so please don't take anything from these posts of mine to be gospel.) Thanks

-- Edited by abacus12345 on Sunday 21st of February 2016 05:03:07 PM

-- Edited by abacus12345 on Sunday 21st of February 2016 05:04:40 PM

Leger · Master Book-keeper

Shamus wrote:
To take on one's spouse you need to show that they make a genuine contribution to the business (see also next paragraph).

The employers allowance is (from April) not available to one man limiteds so I expect HMRC to go after Husband / wife businesses that are able to circumvent the new rules with a lot more enthusiasm meaning that you are really goiing to need to be able to prove beyond all doubt that the arrangement is genuine and not merely attempting to circumvent tax regulation to give yourself an unfair financial advantage.

This will only affect one of my client's but I'm assuming they are ok still. His wife works 8 hours a week doing admin work, and has done for the last 2 years.

The Govt has not given any indication as to where the line will be drawn, and strictly speaking, the rules as they are mean that, even if you have your spouse working one hour a month (genuinely), then you can claim employers allowance.

abacus12345 · Guru

I wonder how many MP's claim expenses for their spouses?

abacus12345 · Guru

So, legislation stipulates wife would need to be a NI secondary contributor, for a husband and wife team to be eligible for the allowance.

Leger · Master Book-keeper

abacus12345 wrote:
So, legislation stipulates wife would need to be a NI secondary contributor, for a husband and wife team to be eligible for the allowance.

Where does it state that please Johnny

abacus12345 · Guru

Amendment to the National Insurance Contributions Act 2014

2. In section 2 of the National Insurance Contributions Act 2014 (exceptions), after subsection (4) insert

Excluded companies

(4A) A body corporate (C) cannot qualify for an employment allowance for a tax year if

(a)all the payments of earnings in relation to which C is the secondary contributor in that year are paid to, or for the benefit of, the same employed earner, and

(b)when each of those payments is made, that employed earner is a director of C..

-- Edited by abacus12345 on Monday 22nd of February 2016 10:33:45 PM

Leger · Master Book-keeper

If, as I suspect, you've lifted that straight from the aweb thread, then I disagree

Firstly, the subsection where the amendment has been placed, is under the heading service companies.

What does "secondary contributor" mean? In context I would suggest an employer or the agency concerned.

I note the comments underneath what you've quoted, if from aweb, disputes it and I'm inclined to agree with that poster.

http://www.accountingweb.co.uk/anyanswers/question/employers-allowance-201617

That said, I'm no expert so I'm not saying you're wrong, just that I disagree without more tangible evidence.

But assuming you're right, do I presume the employer has to pay employers on his salary NI if he genuinely employs his wife, but not if he e employee with no family connections?

abacus12345 · Guru

Hi John

it was from here

www.gov.uk/government/uploads/system/uploads/attachment_data/file/479346/Technical_consultation_on_companies_excluded_from_the_Employment_Allowance.pdf

These Regulations amend the National Insurance Contributions Act 2014 (c. 7)

(the Act). Section 1 of the Act allows a secondary contributor to claim an employment allowance towards their liability to pay secondary Class 1 National Insurance Contributions. The employment allowance for the tax year 2016-17 will be £3,000. Section 2 of the Act contains exceptions and in particular provides that certain persons are not able to qualify for an employment allowance. Regulation 2 inserts new subsection (4A) into section 2 of the Act. The new subsection provides that a company cannot qualify for an employment allowance where all the payments of earnings it pays in a tax year are paid to or for the benefit of one employed earner only who is also a director of the company at the time the payments are made.

-- Edited by abacus12345 on Tuesday 23rd of February 2016 11:02:30 PM

-- Edited by abacus12345 on Wednesday 24th of February 2016 12:19:39 AM

Cheshire · Master Book-keeper

This is a consultation document only is it not?

We were aware of sole director/sole employee not being able to claim, with the issue then discussed widely that husband and wife businesses would gain an advantage over single ownership businesses, but my understanding was a secondary contributor was. 'Corporate' not individual.

Am I missing something?

abacus12345 · Guru

Hi Joanne,

What I mean is that the wife would need to be earning enough from the company for the company to be paying secondary. As the thread was started to see the most tax effective way for a small business owner to pay the least amount of tax, it was taken that he would not draw a salary himself to take him above the level.

Yes that was a consultation, I believe that will be in force come April -

Leger · Master Book-keeper

abacus12345 wrote:
Hi John
it was from here

www.gov.uk/government/uploads/system/uploads/attachment_data/file/479346/Technical_consultation_on_companies_excluded_from_the_Employment_Allowance.pdf

These Regulations amend the National Insurance Contributions Act 2014 (c. 7)
(the Act). Section 1 of the Act allows a secondary contributor to claim an employment allowance towards their liability to pay secondary Class 1 National Insurance Contributions. The employment allowance for the tax year 2016-17 will be £3,000. Section 2 of the Act contains exceptions and in particular provides that certain persons are not able to qualify for an employment allowance. Regulation 2 inserts new subsection (4A) into section 2 of the Act. The new subsection provides that a company cannot qualify for an employment allowance where all the payments of earnings it pays in a tax year are paid to or for the benefit of one employed earner only who is also a director of the company at the time the payments are made.

What am I missing Johnny? Basically that is saying what we already know, that sole Director's can't claim the employment allowance if they don't have any other employees. Now it's possible that the above could be interpreted to say that covers the spouse as well. I don't think it does, because then it would be for the benefit of two employed earners. Your interpretation, if correct, would also rule out the company claiming the employment allowance even if the spouse was over the secondary threshold.

It may well change before April, and the Govt clarify that the spouse doesn't qualify for rmployment allowance, but as it stands they do (not withstanding Shaun's assertion that the Govt would look very closely if done for avoidance purposes)

abacus12345 · Guru

John. At present one man limited companies ARE entitled to claim the allowance if the sole director draws enough salary to trigger secondary NIC paid for by the company. From April this is not the case. My interpretation is he either draws salary above the threshold, employs wife, pays her Â£10 per week. He can claim the allowance. Or two, he draws a salary below the threshold, his wife earns above the threshold thus allowance is granted.

Cheshire · Master Book-keeper

Hi John
Think the confusion has been caused by ' secondary contributor' rather than 'secondary threshold' and possibly even that Johnny' question may be geared to this tax year rather than next?!

Also - Johnny - are you talking about your own business too as there was some indication earlier on in the thread that that might be the case?

You are right in that sole directors can claim the allowance now but not from April. It's been discussed since the announcement to change this, that the new rules give an unfair advantage to husband and wife businesses, but the government haven't yet done anything about it so yes you can pay the wife and thus claim the allowance. Perhaps this will be 'outlawed' the following year, but as yet that remains only at consultation stage. I think, as Shaun states, for the one (wo)man business, then paying hubby or wifey £10 per week might not cut it in the event of an inspection. It would be down to proof of what she actually does for the business.

John I reckon you can rest easy for now. I wonder what they will do about other family members working in the business. I don't have a hubby working for me, but I do have my son doing a few hours each month. Let's see.

Leger · Master Book-keeper

Sorry Johnny, I didn't make it clear in my post that I was talking post April 2016. My client claims employment allowance now and I will be watching with interest (possibly the budget?) as to whether the Govt makes an amendment that will rule out a claim if the only employee is a spouse or other family member.

Hi Joanne - I would trust that your son will be fine, but even if they close the husband/wife "loophole" where do you stop? Whilst both my client's wife and your son are genuine employees (and should still be treated as such) those who intend to circumnavigate the situation will just end up "employing" more distant relatives!

Cheshire · Master Book-keeper

Im lining up all my Aunts, Uncles, brothers, nephew, cousins and there children (and boy are those loads of them)!!!!!!!! lol

Leger · Master Book-keeper

Don't forget the second cousins removed, and the ladies we used to call Aunty but they were just our mum's friends!!

Cheshire · Master Book-keeper

Leger wrote:
and the ladies we used to call Aunty but they were just our mum's friends!!

lol.

Im on Ancestry now checking for all my lost rellies

abacus12345 · Guru

Hi

Maybe my post didn't make sense.

No need to apologise.

Joanne, no it isn't for me as such, I'm just trying to gain a knowledge of LTD's. I like to see an option, as in the employment allowance, then see ways around it, looking for holes.

HMRC will always be looking for someone to bring to account. However we work for clients, not HMRC so to me, and my opinion it is best to look for all legal holes.

Surely until the words 'connected person'(s) are added to the legislation - all is good on the front of employing spouses and claiming the allowance.

Now having said that, if Mr one man band has a girlfriend - that again changes everything. Not always an advantage to be married....

abacus12345 · Guru

Two scenarios - Mr A buys a car, v5 is in Ltd name. After the fact, he is informed company cars are not the way to go. Is the only way to now claim the mileage allowance is by him selling the car to himself? (Ok its a separate entity, but you get the meaning) Having said that, that's a potential HP nightmare as although there is substance over form, I'm not sure the HP company would be happy.... scenario 2) Mr B is the CEO of a company who buys and sells meat (it's relavant) at the start of the year he takes Â£9000 out the business, by way of cash. Year ends approaching, doesn't have cash to repay - he does personally own a Â£9000 fridge (It's expensive I know) can this asset be introduced at Â£9000 MV to clear down the DLA? Thanks

Cheshire · Master Book-keeper

abacus12345 wrote:
Hi

Maybe my post didn't make sense.

No need to apologise.

Joanne, no it isn't for me as such, I'm just trying to gain a knowledge of LTD's. I like to see an option, as in the employment allowance, then see ways around it, looking for holes.

HMRC will always be looking for someone to bring to account. However we work for clients, not HMRC so to me, and my opinion it is best to look for all legal holes.

Surely until the words 'connected person'(s) are added to the legislation - all is good on the front of employing spouses and claiming the allowance.

Now having said that, if Mr one man band has a girlfriend - that again changes everything. Not always an advantage to be married....

Oh Ive seen lots of work on legal loopholes over the years. Some really creative ones, which were all shared round amongst a certain set of people and then HMRC got wind and closed the hole. Which is why our tax system is so flippin complex. But I am a firm believer in - if I can save my client a penny in tax then I will. (as you say - legally of course!)

----------------------------------------------------------------------------------------------

Mr one man band might have a wife AND a girlfriend!

YLB-HO · Guru

All a company has to do to get round this, is employ someone else for a day (or hour?) on the payroll each year! If they do it at the beginning of the year, then there is no argument. That gets round the word "All"...........

That is also the trouble with silly, unfair rules which try to penalise one group within other groups who are not being penalised.

-- Edited by YLB-HO on Thursday 25th of February 2016 06:13:56 PM

abacus12345 · Guru

I'm stuck on finding the answer to the question. Whether assets introduced can offset a directors loan. I know obviously cash clears, mileage allowance clears, unpaid expenses - Dividends - PAYE clears, bonus maybe. Now I know ordinarily to turn introduced assets into an advantage it's by way of capital allowances. So, is it written in any legislation whereby this isn't an available option? I've checked all my books, I see no mention of this setup. Thanks

Leger · Master Book-keeper

Providing he does actually have a fridge worth 9k and introduces it to the business then I don't see an issue (I am no expert in tax so care should be taken in heeding my non advice) as any Directors assets introduced would go to the Directors Loan account, wouldn't they?

abacus12345 · Guru

John,

Yes my thoughts too. I assume the same could be said if the loan was £11000?

It's sort of a scenario where a loan has been taken, it's approaching year end - Director has no funds -
I've seen examples where it is cleared by the above methods, in my post above, yet I've not seen it written that the introducing of assets is a no go!

Shamus · Forum Moderator & Expert

Would anyone else pay £9k for that fridge? (is there an active market for second hand fridges).

How was the market value derived?

What evidence exists?

Is the Fridge being transfered at more than the director paid for it?

Will transfer of ownership be matched by transfer of usage (I assume that the fridge was not used in the business before transfer so has been used for personal use).

If market value is greater than the amount the director paid for it then the value used will be the amount the director paid, not the market value.

HMRC will expect to see verifiable third party evidence of valuation (easy with cars which have an active second hand market, no so easy with fridges!).

abacus12345 · Guru

Hi Shaun. Fridge cost 10k an independent fridge expert values it to be 9k. MV used. Fridge will be used 24/7 to keep meat fresh. Purely all hypothetical. BUT Now something doesn't seem right in all this. Director takes 9k out in cash. Introduces fridge at 9k. Loan is wiped clear. Now, CA are available, so he has cleared the loan plus he will get capital allowances. So it is more effective to clear a DLA by introducing assets??

GordonB · Veteran Member

Hi Johnny,

Your last post highlights one of the important points to explain to sole trader clients who are considering incorporation. The company is a separate legal entity and it is the company not the director who would claim the capital allowances. So as has been mentioned if the director sells a fridge at MV to the company there is no problem, the company will then account for CAs as normal.

Regards,

Gordon

Cheshire · Master Book-keeper

Im assuming that there has been no mention of the fridge already being in the old sole trader business? With CA already been claimed on the fridge? I mean why would an individual buy a £10k fridge?

Although I have just seen a bath costing £30k!!!! That is not a typo

abacus12345 · Guru

Gordon - I did of course mean CA against Corporation tax, as an oppose to CA against Income tax.

Joanne, it was just an example - I thought better than widgets lol.

No there is no mention of the fridge when he was a sole trader. --

It was just a question I've never seen asked.

So we are agreed that an asset introduced into a company, can clear a directors loan - assuming all conditions relating to the asset are met?

GordonB · Veteran Member

Johnny I wan't suggesting that you were talking about IT as opposed to CT, I was highlighting the point that quite a few directors need it explaining to them that unlike a sole trader the money in a company is not theirs until granted as salary, dividends etc.
Regards,

Gordon

abacus12345 · Guru

Hi Gordon - No I apologise, I didn't mean for my response to sound obtuse.

Yes I believe that 'some' new Directors may well have a culture shock after incorporating, especially if they have spent X amount of years trading as a sole trader!