QUESTION: I am a mechanic, and I am considering starting my own business. Should I operate as a sole trader or start a limited company?
ANSWER: Choosing between a sole trader and a limited company will depend upon several factors including personal preference, size of business, tax liability etc.
Let’s delve deeper into the specifics of operating as a sole trader versus starting a limited company in the UK, focusing on record-keeping, allowable costs, filing tax returns, and tax payments.
RECORD-KEEPING
As a sole trader, your record-keeping is generally less complex. You need to maintain records of your business income and expenses, including receipts and invoices. This information is crucial for completing your self-assessment tax return. However, the separation between personal and business finances is not as distinct.
On the other hand, a limited company requires more meticulous record-keeping. You must maintain company accounts, which include financial records, invoices, receipts, and details of assets and liabilities. The company’s finances must be separate from your personal finances.
ALLOWABLE COSTS
Both sole traders and limited companies can claim various costs to reduce their taxable profits. Common allowable costs for mechanics include tools, equipment, insurance, vehicle expenses, and business-related travel.
Sole traders can also claim costs related to their home if they work from there, though this is subject to specific rules. Limited companies, with their separate legal entity status, can often claim a broader range of costs, including pension contributions, professional fees, and certain employee benefits.
There are some differences when it comes to claiming capital allowances as well, so care is needed.
FILING TAX RETURNS
For sole traders, the process of filing a tax return is part of the self-assessment system. You report your business income and expenses on a self-assessment tax return, and your tax liability is calculated accordingly. The deadline for filing is usually the end of January following the end of the tax year.
Limited companies, however, have more extensive filing requirements. Annual financial statements must be prepared in accordance with accounting standards and filed with Companies House. Additionally, a company tax return must be submitted to HMRC. The deadlines for these filings depend on the company’s financial year-end and are generally stricter than those for sole traders.
TAX PAYMENTS
Sole traders pay income tax and national insurance on their profits, and these payments are due by the deadline set by HMRC being 31 January following the end of the tax year. Payment on account may also be required if your tax liability exceeds a certain amount.
Limited companies pay corporation tax on their profits. The deadline for paying corporation tax is usually nine months and one day after the end of the accounting period. Companies with significant profits might have to make payments on account.
One advantage of operating as a limited company is the ability to control when you take income. You can choose to take a combination of salary and dividends, which might offer tax advantages depending on your overall income.
CONCLUSION
In summary, the decision to operate as a sole trader or a limited company involves a careful consideration of factors such as liability, record-keeping preferences, allowable costs, and tax obligations.
Sole traders benefit from simplicity, while limited companies offer more extensive financial separation and potential tax advantages. Seeking advice from an accountant is crucial to making an informed decision based on your specific circumstances and business goals.
:: Shane Martin (s.martin@fpmaab.com) is tax director at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.