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Are you a construction worker, considering whether to set up as a limited company or operate as a sole trader under the Construction Industry Scheme (CIS)?
Let's explore the key considerations when making this decision:
We'd recommend you consider setting up a limited company once you reach profits of £75,000. The tax savings would be above £1,000 at this point, however, the time and hassle involved in administrating a limited company may not be worth it depending on the individual.
As your profit increases it becomes more and more beneficial from a tax standpoint to operate through a limited company.
Limited Company: Limited companies are subject to corporation tax on their profits. Directors may take a combination of salary and dividends, each attracting different tax rates.
Sole Trader: Sole traders pay income tax and National Insurance contributions on their profits through self-assessment, with tax rates differing from those applicable to limited companies.
Limited Company: By setting up a limited company, you establish a separate legal entity. This separation provides personal liability protection, shielding your personal assets from business liabilities.
Sole Trader: Operating as a sole trader means there's no legal distinction between you and your business. This usually isn't an issue if you have the right insurance, however, you would be personally liable for any debts your business incurs, potentially putting your personal assets at risk.
Limited Company: Subcontractor CIS deductions are claimed back through your company's monthly payroll scheme.
Sole Trader: Subcontractor CIS deductions are reclaimed through your Self-Assessment tax return.
In either case, if you are a contractor you must register with HMRC and report on CIS deductions you make when paying subcontractors.
Limited Company: Running a limited company entails more administrative responsibilities, including maintaining statutory records and filing annual accounts with Companies House. Paying an accountant to file your accounts and tax return would typically be at least £500.
Sole Trader: While still requiring record-keeping for tax purposes, the administrative burden for sole traders is normally less compared to that of limited companies. As filing self-assessments is much simpler accountants would typically charge much less, around £250 maximum.
Limited Company: Accruals basis accounting must be used, which is more complex than cash basis and will require someone who is at least qualified as a bookkeeper to administrate. Profit is recognised at the point when the transaction occurs, rather than when cash exchanges hands. So if you owe corporation tax for a given year, that expense is deducted in the same year even if it hasn't necessarily been paid yet. The same goes for sales invoices, bills and other contractual agreements.
Sole Trader: Cash basis accounting can be used for turnover less than £150k. This is a much simpler method than the accruals basis, and it could potentially save you some tax if you can time certain transactions to land on either side of the tax year.
Limited Company: You must ensure your company is making a profit before taking dividends. Profit may not be the same as net cash received, and only by ensuring you have proper accounts prepared under the accruals basis will you know where you stand.
Sole Trader: Pay yourself out of your profits as and when you please
Limited Company: Operating as a limited company may enhance your professional image and credibility with clients and stakeholders, potentially opening doors to more significant opportunities.
Sole Trader: While perceived as simpler and more straightforward, being a sole trader may lack the perceived stability and credibility associated with a limited company.
Limited Company: Setting up and running a limited company involves higher costs, including incorporation fees, accountant fees, and ongoing administrative expenses.
Sole Trader: Operating as a sole trader typically incurs fewer initial and ongoing costs, as there's no need for formal incorporation or some of the administrative requirements of a limited company.
Before making your decision, it's crucial to seek advice from a professional familiar with the intricacies of business structures and tax implications. A qualified accountant or business advisor can provide personalised guidance tailored to your specific circumstances and goals.
If you have any questions surrounding this area please feel free to book a call to discuss and we'll be happy to help.