Should you go Limited?

Here we take a look at what you need to consider when converting your sole trade, the tax saving tips, common pitfalls and administrative requirements.

When thinking of converting to a limited company structure, it’s important to reflect on the commercial considerations affecting the decision, before reviewing the tax issues.

One key issue is to look at your annual drawings from the business. Unless your drawings are significantly less than the profits of business, incorporating is not going to give rise to a tax benefit. If your business were loss making it would be more advantageous to remain as a sole trader as your losses may be offset against other sources/spouses income in the year.

There are several benefits to incorporation that any sole trader should consider;

Tax rate of 12.5% as opposed to potentially 55%.
Tax efficient company pension schemes available
Tax efficient termination payments on redundancy/retirement.
Travel and subsistence rates can be based up civil servant rates.
Company offers more structure for raising outside finance, i.e. EIIS scheme, Seed Capital Scheme/SURE.
Certain degree of control over cash flow in respect of tax, as Director will only be taxed on the salary drawn, where as sole trade is taxed on the entire profit.

Tax implications of incorporating

CGT

The transfer of the business assets to a company by a sole trader will be a chargeable event for CGT purposes. However this CGT can be deferred, provided all the assets (other than cash) are transferred in consideration for shares.

There are a couple of key conditions for the relief to apply that you should discuss with your Accountant.

Income tax

The transfer of assets to a limited company can trigger what’s referred to as a “balancing adjustment” on the sole trader. This “balancing adjustment” can have a potential tax charge of up to 55%.

You will need to seek professional advice to help reduce this charge.

VAT issues

The new company is regarded as a separate entity for VAT purposes from the sole trade. Therefore VAT registration application for the new co. should be submitted to Revenue, as soon as possible. It also important to ensure any purchases invoices from incorporation are issued in the correct entities name for VAT recovery purposes.

There may also be stamp duty implications, you should discuss same with your accountant to help minimise these.

Administrative issues to bear in mind

The following other items should be dealt with when incorporating a new business:

Incorporate the new company with CRO.
Register new company for taxes, CT, VAT PAYE etc.
Set up new Limited company bank account.
Ensure clients are made aware of new bank details etc.
Ensure all invoices are sent on new company headed paper with correct VAT number.
Ensure all new purchases are invoiced to correct entity for VAT reclaim purposes.
Ensure all sales contracts are with new company.
Ensure old tax registrations in sole trade are discontinued, i.e. VAT & PAYE.
Be aware of professional services and close company surcharge.

We can help

If you would like to concentrate on running the business, we can assist you with your move to a limited company.

Last updated: 28th April 2015