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If you’re thinking about starting up, you must carefully consider whether to form a limited company straight away or hold off for a while and become a sole trader. 

You may think forming a limited company will save you tax and must therefore be the best route.  However, many start-ups incur considerable costs in their initial months. And even if you do not have sizeable initial outgoings, you should still factor in a realistic margin for error in your budgeting. 

You will more than likely have a “learning curve cost” if this is your first time in business or if you’re going to be operating within a sector of which you have no prior experience. In either case, you should not expect the same return straight away as your more experienced competitors. 

If you make a loss as a sole trader, it can be set against your employment income for previous years, which in all likelihood will give you a handy refund after the first tax year. If you make a loss as a limited company, it can only be carried forward and set against future the company’s profits.  If the company never makes a profit, it will be wasted.

Even if you’re more confident that your business plan will be a success, you may still profit from waiting until you form a company. As a sole trader, you can build up custom, contacts, brand awareness and reputation in the business. From a tax point of view, this goodwill can be sold to the company. Future drawings from the company can be taken in the form of a director’s loan repayment, which will be especially beneficial if you expect to be paying tax at a higher rate.

You can set up as a sole trader by simply telephoning HMRC or registering online, whereas the route for a company formation is more complex.  Ongoing accountancy costs are bound to be higher and Companies House will publish your company’s financial results for anyone to see – including your competitors, suppliers and potential clients.

Yes, if your salary and dividends are organised properly, a company can save you considerable tax. It can also limit your liability to company debts. But the decision is not so straightforward. If you want to protect your trading name, you can always form the company and leave it dormant at Companies House until you are ready to start trading.

A limited company can save you tax in certain situations, but it is not always the best way to start out. A brief review of the options with your accountant could save you time and money in the long run.

  • Raphael Coman is the owner-manager of chartered certified accountants Coman & Co.

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My first blog post on setting up a business at home proved popular – I thought I would follow it up with some tips on the regulatory side to working from home.

  1. Decide whether to trade as a sole trader or to set up a limited company.
  2. Incorporate a company using a formation agent (e.g. @UKplc) or an accountant. This is easy and you should not have to pay more than £150 – including disbursements.
  3. As a sole trader, you will need to register as self employed with HM Revenue & Customs.
  4. You will be able to offset a portion of your home costs against your profits. This is a great way of reducing tax.
  5. VAT registration – this is compulsory if your sales are greater than £70,000. You can register voluntarily if wish to reclaim VAT suffered on purchases. It’s a complex area and you should seek the advice of an accountant. Make sure your accountant is set up to register and file returns online for you.
  6. PAYE registration – you will need to do this if you plan to pay yourself and/or your staff a salary. Again, use an accountant and make sure that the accountant is set up to make all the necessary submissions online.
  7. Home insurance – make sure that your building and contents policy covers you for working from home. Similarly, make sure that your car insurance covers business use. There should be no/minimal extra cost.
  8. Liability insurance – if you need it, you might want to make sure that it covers Public Liability Insurance at your home, particularly if you plan to regularly host clients, suppliers and/or staff.
  9. Business Rates – there is an element of scale to consider here – you on a laptop on the sofa is not a problem. Five staff turning up every day to work in the spare-room may be. If in doubt, check out your local council’s position.
  10. Registered Office – if you set up a company, you will need to have an “official” address. If you use your home address, you will need to display the company name outside your front door. The sign can be business card size. Alternatively, use your accountant or virtual office service.
  11. Make a note in your diary of the dates and deadlines that matter – particularly on the submission of official documents – because you get fined if you are late.

I’m always looking for new topics to blog about so if you have any suggestions – do get in touch or leave a comment below.

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If you operate a limited company and work at home, why not rent a room to your business?

Then you can offset the rental against your business profits and reduce your overall tax bill.

So how does this work?

Well there are just a couple of things you need to do to put this in place.

Rental Agreement

You would need to put a rental agreement in place between you, the home owner and your limited company.

Your accountant should have a standard agreement available for you to use. So this will not be an onerous task.

Calculate the rent

The rent that you charge should be equal to the amount that the room in the house costs you.

That means that the income received is equal to the costs and there is no personal profit on the rent. So you do not have to pay any income tax on the rent received, although the income and costs will need to be shown on your self assessment tax return – just a couple more boxes to complete.

Let’s take an example to show how this works.

Sam runs her business from home. She works in one of the bedrooms. The bedroom is used exclusively for business during the week but serves as a guest room at the weekends.

Her house has a total of six rooms.

Sam has added up her mortgage interest, council tax, utilities, insurance and broadband costs and they amount to £12,000 for the year.

She calculates the rental charge as follows:

Cost per room = £12,000 divided by six rooms = £2,000.

She uses the office five out of seven days, so charges 5/7th of the room cost to the business.

The rental charge is £1,428 for the year.

Sam is paid this rental from the business.

The business records this as a cost in the company accounts, which reduces its tax bill.

Sam enters the figures onto her self assessment tax return but has no further tax to pay on the amount received from the company.

What Next?

The rent charged will be based upon your own circumstances. For example if you rent your property you can use the rent paid instead of the mortgage interest in the calculation. So you will need to do your own specific calculation.

Have a chat to your accountant about how to get this in place. They should be able to help you with the figures and the rental agreement to ensure that you are claiming this tax deduction for your business.

Elaine Clark, www.cheapaccounting.co.uk

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