Daniel is the co founder of More Than Accountants and an ACCA Chartered Accountant. He will be more than happy to help More Than Accountants clients implement any guides or strategies that he has posted to the blog. If you would like to learn more about becoming a More Than Accountants client you can quote online by using our Unlimited Accountancy Services Quoting Tool.
Get ready for 12.5% VAT. Most supplies made by the hospitality industry will carry 12.5% VAT from 1 October 2021.Some businesses will have to deal with four rates of VAT in their accounting systems from 1 October 2021.This has not happened since 1979 and will hopefully not happen again after 31 March 2022 when the temporary 12.5% rate for most sales made by the hospitality industry will end and the 20% rate will resume on 1 April 2022. We will then be back to three VAT rates: 0%, 5%, and 20%.Affected supplies In a nutshell, the supplies made by the hospitality industry that have been subject to 5% VAT since July 2020 will become liable to 12.5% VAT for the period between 1 October 2021 and 31 March 2022.
There is a certain kind of tax relief that is intended for import VAT and it is known as the Low-Value Consignment Relief (LVCR). With the implementation of LVCR, UK businesses are not obliged to pay for import VAT if the value of the shipment is less than £15.
UK residents who are trying to dispose their UK residential property should be aware of the new rules which requires them to report and make a payment for their CGT (Capital Gains Tax) liability with a 30-day period of completion. This comes as a shock to many people. In fact, during the last six months of 2020, HMRC issued fines to approximately 13,113 people who failed to meet the new deadlines. The total fines amounted to more than £1.3m.
HMRC will have to examine closely the coronavirus support provided to accountants and their clients. In this connection, Elizabeth Whiteley provided a summary of the guidelines and what could be the possible sanctions given to accountants and their clients if they want to take advantage of the SEISS (Self-Employed Income Support Scheme).
During the pandemic, most businesses need some support. That is why VAT payments that were supposed to be paid between March 20, 2020 and June 30, 2020 were instantly deferred. All in all, the VAT payments that were deferred amounted to a total of approximately £33.5bn.
Within the deferral period, businesses were not obligated to make any VAT payments. Rather, they were informed that the deadline for paying these liabilities that have accumulated is until March 31, 2021. But later on, it was changed. Instead of paying the whole amount at the end of March 2021, they are launching a new payment scheme which allows the businesses to further defer their payments.
What are the Options of Businesses in Paying for Their Deferred VAT?
When it comes to the repayment of deferred VAT payments, businesses are given three choices:
They can choose to pay the full amount of the deferred balance.
Or they can register to the new payment scheme.
For businesses who need more time to pay, they can get in touch with HMRC and ask for an extension.
First of all, businesses who are interested in applying for the new payment scheme can only sign up until June 21, 2021. Hence, if you are one of those businesses who wants to extend your repayments further, then you should sign up on this date.
On the other hand, to avoid any penalty, businesses should either pay the full amount of their deferred VAT or get in touch with HMRC and arrange for an extension of the payment which should be done by June 30, 2021.
What Will be the Penalties Imposed on Businesses?
The surcharge that is usually imposed for late payment of VAT may not be applicable in deferred VAT balances. Instead, a new penalty is created to specifically address unpaid deferred VAT. This is clause 99 and Schedule 19 of Finance Bill 2021. Presently, it is still on its way through the House of Lords.
In case businesses did not choose to pay in full, or apply for the new payment scheme or request for an alternative arrangement by June 30, 2021, then they will have to pay the penalty of five percent of their deferred VAT balances.
Did you find it confusing? Well, it actually means that the original deferral VAT payment scheme was to pay the full amount by March 31, 2021. However, the payment for deferred VAT balances was extended to June 30, 2021 or an arrangement could be made with HMRC to extend the payment.
How Does the New Payment Scheme for VAT Deferral Works?
With the new payment scheme, businesses can pay their VAT deferred balance in monthly instalments without any interest. Taxpayers can even choose the number of monthly instalments that they want to avail up to a certain level. However, they have to ensure that all of these instalments will be paid by the end of March 2022.
The maximum number of monthly instalments that can be availed by businesses will depend on the time that they have participated on the new scheme. However, the maximum number of instalments that can be availed by those businesses who have not applied for the scheme will be eight.
The first instalment should be paid right at the time that the business has joined the scheme. Furthermore, HMRC requires that succeeding payments should be paid in consecutive months.
It was in February this year that the applications for the new payment scheme were launched and it will end on June 21, 2021. Businesses can apply as long as their VAT returns are up to date. Also, they should be capable of paying through direct debit. This is because you will need a direct debit to set up your account. Businesses must do this by themselves since agents are not allowed to do this on their behalf.
Before businesses can take advantage of the new payment scheme, they must do the following first:
Mistakes on their VAT returns must be corrected immediately;
Determine the number of monthly instalments that they want to make;
Ensure that they are aware of the amount they owe, including the amount they have already paid and how much they originally deferred.
Finally, they should be prepared in making their first instalment payment.
There are instances wherein businesses are interested in participating in the new payment scheme, however, there are circumstances that prevent them from using the online service. For instance, they can’t pay using direct debit, or they don’t have a UK bank account, or their account requires dual signatories. If this is the case, then they should immediately contact the COVID-19 helpline.
What Should Businesses Do Right Now
Businesses should decide right away in case they have outstanding deferred VAT balances. Whether they will consider signing up with the new payment scheme which will end on June 21, or pay HMRC with the full amount until the end of June. However, if they miss the deadline, or the business is unable to apply for the new scheme, perhaps due to their outstanding VAT returns, then they can still avoid the penalty by getting in touch with HMRC as soon as possible. They must do this before or on June 30 so they can discuss any other possible payment options. With More Than Accountants being your VAT Accountant saving you loads on Tax.
In order to streamline the processing of those who are making claims under the coronavirus job retention scheme (CJRS), specifically for 16 to 99 employees, HMRC has come up with a time-saving template. Unfortunately, for some people, the arrival of the template is a bit too late.
As a business owner, you might be having some difficulty in understanding VAT, regardless if you already have some experience of it. If it is your first time to register for VAT, then its worthwhile to consider its effect on your pricing.
The new Recovery Loan Scheme (RLS) is part of the government’s announcement during the March 2021 budget. It’s goal is to offer financial support to UK businesses so they can recover, restart, and develop. This could be a real lifeline, most especially for independent and small businesses.
One of the key parts during the March 2021 Budget of the government was the Restart grants. It was created as a response to the COVID-19 pandemic. Businesses that are involved in the hospitality, leisure, and retail industry can greatly benefit from this. In England, there are approximately 700,000 businesses that belong in these industries.
As a taxpayer, you should be aware of the latest phishing scam that you might discover on your inbox. This is in connection with the fourth SEISS (Self-Employed Income Support Scheme) grant that is recently opened for claims.
If you are looking for the easiest, most effective way to record government grants onto the Xero platform, keep reading because the accounting experts at More Than Accountant are going to show you how to do just that. Let’s take a look:
For many UK businesses, the COVID-19 crisis was devastating. Lockdown measures meant business closures and new social distancing guidelines and the requirement of face masks and other protective gear is making it difficult for many businesses to interact with their customers, let alone stay open long enough to do so.
Money is one of the most essential things in any business. Hence, you must know how to secure financing for your business whether you are just starting or you presently have one. However, most entrepreneurs are having a hard time accomplishing this task. Moreover, they don’t even know where to start. If you are having difficulties in securing financing for your business, then this simple yet effective guide can help you in preparing to secure a loan for your small business.
Sometimes planning and maintaining a budget can be quite hard. There will always be cash flow problems, unforeseen events, and other issues that may come your way. Even if you have the most carefully planned business budget, there will always be some issues that will arise from time to time. Also, most of us will create a budget for business and personal use at the start of the year but will forget about them until the year ends.
If it is your first time creating a budget for yourself then knowing how to manage your money every month can be a bit challenging. Aside from learning how to organise, you also need to make difficult decisions when it comes to spending your money. Most often, we rely on the experience of other people. However, other people’s income and expenses are entirely different from yours. Perhaps they would spend $2,000 per month on rent, however, this kind of spending might not be appropriate for you.
So, what is the best invoicing service for small business? Invoicing is one of the most important things that you need if you are a small business owner or a freelancer. Without having an accounting team in your company, the task of invoicing will be done by the small business owners themselves. If you won’t make invoices for your clients, then you won’t get paid. Fortunately, there are a lot of invoicing options that are available right now that can help you in sending your invoices. But due to these numerous services that are available online, it will be harder for you to choose. It is important to use invoicing software that can easily create an invoice to make the life of a small business owner much simpler. In order to help you decide, we will give you our top 10 invoicing services that are perfect for small business owners and freelancers.
Marketing your business properly can make it grow big. On the contrary, if you will ignore it then it will just fade away. Having a marketing budget for your business is vital. This can help in preventing unintentional overspending or miscalculating the budget needed in order to be competitive. Unfortunately, determining how much money you need to invest in marketing can be very overwhelming and confusing. Here, we will provide you some strategies in setting a marketing budget that makes sense and supports your development.
We all have goals that we want to achieve. However, developing a strategy is more important than accomplishing success in life.
For instance, if you want to start your own business, then you might think that the most important thing to do was to set big goals. You thought that if you think big then you can change the world.
How much will it cost you to start your own business? Obviously, you will never know for sure, however, you could use some reasonable estimations. All you have to do is break them down into simple lists. Then, you can work from these lists. It’s going to be a guessing game, but the good news is you could make a good guess.
You may not realize it but the simple things in life are the most relevant ones. Just like in the workplace, simple strategies can make a big difference in building employees’ morale. Do you consider your employees’ morale a priority? If not, then this can probably destroy your organization. A lot of researches has shown that positive work attitudes can result in more productivity.
In December 2018 HMRC published a policy paper, Brief 13, which explains their new approach to payments and the subsequent VAT, for unfulfilled supplies. This paper is aimed at any businesses that retain payments or takes deposits for goods or services, which customers may not take up, and outlines a new interpretation on a slightly murky area of VAT obligations.
Getting access to funding is a constant hurdle for small companies, so it is of the upmost importance that you and your business understand how you need to best present yourselves so as not to hinder your chances when the funding opportunity arises.
As predicted, January brought about a revised version of HMRC’s VAT Notice 700/22: Making Tax Digital for VAT. The purpose of the notice is to explain the digital records that businesses will need to keep, and to supply information on what counts as compatible software, and it is important that all businesses begin to familiarise themselves with what is going to be expected, when the MTD process begins in April 2019. This version corrects a number of errors in the original, alters the conditions for applying for the ASA, and further details the soft-landing period. Detailed below are some of the changes to note…
For many businesses, the new year brings new, enthusiastic goals and targets, with companies of every variety setting their new business aims for the year. The SMART goal framework is a good way to approach this. (Specific, measurable, achievable, relevant and time-bound.) However there is more that can be achieved, and better ways to keep on target, so here are a few ideas to help you on the way to a better process for managing and achieving this year.
The MTD for VAT programme is a massive undertaking of the government to digitalise our tax systems for VAT. The project is underway with several phases to be rolled out, and some huge changes for us to get our heads around. So, what are the benefits of this idea, and who is benefiting the most?
There is a video on the Xero website introducing platform users to the e-commerce apps they can find through the Xero Marketplace. The video is but 15 seconds long. However, it says an awful lot in such a short amount of time.
As a small business owner, you have a lot of options for accounting software. You can even handle your accounting with a paper ledger if you want. But let’s face it, some accounting solutions are better than others. We submit that Xero is among the best solutions out there.
Sharing economy emerged during the Great Recession of 2008 where house prices fell by around 32 percent. (Amadeo, 2018). Sharing economy uses peoples’ underutilized assets and rewards them through monetary means. The concept does not focus on ownership but rather on the sharing of assets and resources. Hence, its name. Airbnb, a prime example of sharing platform, allows its users to rent their underutilized properties and make money off it.
State of Sharing Economy in 2019
As we are living in the digital age, more and more people are connected to the internet via their smartphones. Statistics reveal that there will be 2.82 billion people with smartphones across the globe. (Statista.com) Due to this rise of digital platforms and the proliferation of smartphones, revenues coming from sharing economy platforms are only expected to increase. It is estimated to grow to a $335 billion industry in 2025, compared to its $14 billion value in 2014. (PwC UK)
Trust is the main currency of sharing economy. According to an expert, in order to succeed using sharing economy, it is important to gain the trusts of consumers. Likewise, the supplier should also be able to trust its consumers to make the transaction successful.
Kickstarter, Uber, Airbnb, eBay
Major Companies in Sharing Economy
Airbnb
Airbnb is the most popular home-sharing platform founded by Brian Chesky and Joe Gebbia in 2008 with an estimated company value at $38 billion dollars.
Uber
Uber is a popular peer-to-peer ride sharing platform founded in 2009. They also offers food delivery and bicycle sharing. It has an estimated $11.3 billion dollars in revenues in 2018.
eBay
eBay a widely used as a buy-and-sell platform was founded in 1995 by Pierre Omidyar. It has an estimated revenue of around $11 billion dollars in 2018.
Kickstarter
Kickstarter is a crowdfunding platform that focuses on helping small companies in “bringing creative projects to life”.
Total Transaction Value by Sharing Economy in UK (Source: PwC UK)
UK as a Sharing Economy Hub
The initiatives of the UK government in 2014 promoted the country as “best place in the world to start, invest in, and grow a business, including through a package of measures to help unlock the potential of the sharing economy.” Since then, the UK’s sharing economy has been the fastest growing in Europe since 2015. Transaction values doubled in 2015 (from £3.9 billion in 2014 to £7.4 billion in 2015). Experts expect UK’s sharing economy to grow to an estimated £140 billion in 2025. Similarly, other European countries should also expect rise in their sharing economy.
Ride-sharing platforms (such as Uber and Zipcar) top in terms of revenue, garnering 38% share of the market. Followed by peer-to-peer accommodation platforms such as Airbnb and Onefinestay with 27% share of the market.
An Outlook for the Sharing Economy
According to studies conducted by the Warwick Business School, sharing economy platform users grew by 60% in just 18 months between January 2016 to July 2017 in the UK. This increase is the result of phenomenal rise of sharing platforms in the UK.
In the same study, 78% of people aged between 18 to 24 years old have already used sharing platforms at least once before. Evidently, this proves that millennials are the driving force of UK’s sharing economy.
Looking forward, we can see a future where resources are shared such as cars, bicycles, spare bedrooms, foods and clothes among others. This can result in a more efficient use of resources and can limit shortages of supplies.
People also use sharing platforms to save money and has been a lifestyle to some using them more than once a month. According to the same study by the Warwick Business School, 84% of people who earn less than £40,000 annually has been using sharing platforms to save money.
Sharing platforms are leaders of innovations embracing new ideas. Aside from trust, innovation is also important. The ever-changing industry is forcing companies to rethink their business models and how they operate.
Is Sharing Economy still about sharing?
According to Harvard Business Review, sharing economy is not “sharing” economy at all but rather an access economy. They argued that sharing is a form of social exchange between persons without any profit. Moreover, a transaction between a company and a consumer who don’t know each other is no longer sharing at all.
Conclusion
As we are progressing in the digital age, with the proliferation of smartphones and the internet, sharing platforms will only continue to exist. Additionally, property ownership will also continue to decrease, as property sharing will be more prominent. Younger people will have access to these sharing services.
Sharing is caring. Underutilized resources should be shared rather than to be kept hidden or unused. This can promote peer-to-peer sharing and will have massive impact on our environment. Not only it does it help individuals save money but also help reduce waste in general.
Living with less. Additionally, sharing economy promotes living with less. As sharing platforms increase in number, inversely prices drop. People will rather rent than to own.
Learning about sharing economy is important as it is projected to be a major player in the global economy.
Among the most talked about accountancy news these days is the Making Tax Digital (MTD) for VAT scheme set to go into effect in April 2019. VAT-registered companies meeting a certain threshold will be required to start reporting VAT digitally from then. The question is, how many qualifying companies are actually ready for implementation of MTD for VAT (check out our guide on how to find UTR number)?
With the implementation of Making Tax Digital (MTD) for VAT looming, it’s becoming increasingly more apparent that the new digital system for managing VAT is not going to be everything HMRC promised. In fact, reality promises to be a bit more challenging than the original vision of MTD for VAT. Many accountants are not ready for Making Tax Digital however every client at More Than Accountants are fully compliant.
Auto-enrolment was considered an important protection for lower paid workers when it was first announced a few years ago. Now that the vast majority of companies addressed by auto-enrolment have complied with the law, there is growing concern that the same people helped by auto-enrolment are now being hurt by unfair application of pension tax relief. A number of accountancy news stories reveal calls for the government to change things.
It was not too long ago that contractors were being offered a seemingly endless number of schemes that allowed them to take home up to 90% of their income while simultaneously reducing their tax liabilities. Known as contractor loan schemes, they offered a way to funnel contractor income through multiple channels before being returned in the form of loans.
There is always something to worry about for businesses when it comes to HMRC. Our tax scheme is so complicated that even the most experienced accountants are prone to having problems. A case in point is a recently settled squabble between HMRC and a company that makes chocolate bars. Who knew a chocolate bar could cause such consternation for the taxman?
The Xero accounting platform is one of the best in the business for a lot of reasons. At the top of the list is the Xero Dashboard, a single location to find all of the most important accounting functions you need quick access to. The Dashboard is a fast and efficient way to address accounting both in the office and in the field, and it is highly customisable for your convenience as well.
April 2019 is when the new Welsh rate of income tax (WRIT) kicks in for Welsh taxpayers. From 2019, the amount of income tax Welsh taxpayers pay will be partly determined by standard UK rates and partly by the National Assembly for Wales. If you own a business in Wales, the WRIT will definitely affect you. You need to start thinking about it now, in terms of both your accounting and the software you use for payroll.
The most successful business leaders in the world talk a lot about hard work. It goes without saying that it is difficult to succeed without working hard. But all work and no play makes Jack a dull boy, as they say. Well, not necessarily in business, but there is a similar principle in the business world that calls for taking the time to relax and meditate.
Xero’s built-in quote tool offers a tremendous amount of functionality that makes quoting, estimating, and invoicing as simple as a few clicks or taps. The tool is a single-entry tool, meaning that the information you enter into new quotes or estimates is instantly transferable to invoices without the need to re-enter all of the information all over again.
Are you already using the Xero cloud accounting software to manage your business? If so, you really need to try Xero Touch, the mobile app that makes cloud-based accounting on-the-go incredibly easy. If you are not a Xero user, now is as good a time as any to check out the award-winning accounting package that has been turning heads since 2006.
Making Tax Digital (MTD) is the HMRC plan to have a fully digital tax system.
Who does MTD effect?
All businesses above the VAT threshold of £85,000.
What does MTD mean to your business?
The HMRC have estimated a loss of tax revenue of approximately £8 billion a year from errors and mistakes alone that they are looking to now capture. They will be doing so by making it compulsory to submit your company accounts quarterly, your business will already be completing a quarterly VAT return however what this means is you will be effectively submitting your end of year set of accounts every quarter.
For every business with revenue over the VAT threshold of £85,000 your company’s bookkeeping will need be up to date every quarter and then the accounts would need submitting digitally to the HMRC. This will massively effect the amount accountancy work your business needs completing quarterly.
As a director you will also have to submit your personal tax return quarterly from 2020.
Fines will be payable for businesses who do not comply with Making Tax Digital.
What does MTD mean for accountants?
There is now extra work involved for every client over the VAT threshold. The fee charged to a client in 2019 will be 3 to 4 times more than paid in 2018 unless technology is embraced to reduce man hour needed to complete tasks such as bookkeeping which traditional accountants are struggling to come to terms with.
When will MTD happen?
MTD trials started in the first half of 2017. Full implementation is planned for 2019.
More Than Accountants are Making Tax Digital ready. We offer unlimited accountancy services and monthly bookkeeping for one monthly fee. You can use our online quoting tool here.
Every new customer receives a free Xero accounting software subscription and a free Kindle Fire 7 tablet to manage their accounts on the go.
Making the most of cloud-based accounting is all about taking advantage of reports. Xero offers a number of reports, including the popular profit and loss statement. This report makes it easy to track your net income over a set amount of time. It starts with your gross revenues, then subtracts your expenses to come up with net income.
The other side of getting paid is paying your own bills. You will be pleased to know that bill management is as easy in Xero as invoicing and payments. The platform’s bill management system is very similar to invoice management in terms of function. It even uses many of the same procedures, buttons, and labels for a more uniform experience.
It is difficult to succeed in business without proper budgeting. Once again, Xero has it covered. The Xero budget tool is a fast and easy way to create multiple budgets covering every aspect of your business. You can then track your performance by comparing your actual receivables and payables against your established budgets.
One of the reasons you chose Xero as your accounting software package is its rich set of features made possible through cloud technology. One of those features is online invoicing. This feature makes invoicing your clients a breeze whether you are using a mobile device or your computer.
Now that you have set up your live bank feed in Xero, it is time to learn how to reconcile your accounts. Don’t worry, Xero makes bank reconciliation easy and fast. Just click a couple of buttons and let the software do its thing.
Making Tax Digital (MTD) is part of the government’s plan to make it easier for businesses to stay on top of their day-to-day accounts. HMRC wants to be one of the most digitally advanced tax administrations in the world – improving efficiency, effectiveness and ease of compliance. The plans signal the end of paper accounting for millions across Britain (see our online accountants for small businesses).
From April 2019, legislation will require businesses above the VAT threshold to set up a digital tax account and file quarterly returns online. Preparation starts now, with businesses and accountants moving online to improve efficiency, boost profitability and make the transition painless.
Making Tax Digital preparation is included with the More Than Accountants Unlimited Package.
The unlimited package never has any unexpected fees, unlimited telephone access to your dedicated accountant, includes all of your personal and business accountancy needs and includes a free Xero license – all for one monthly fee! You can quote using our online quoting tool by clicking here.
Need help with your company accounts? More Than Accountants offer an unlimited monthly accountancy package, you can quote online here. Never any unexpected fees.
If you own or run a business, you must prepare company accounts at the end of every financial year. Your company financial year does not have to coincide with the tax year (April to March). A copy of the company accounts must be sent to shareholders, Companies House, HMRC, and anyone who attends your company’s AGM.
The main purpose of the company accounts is to establish the financial position of the company and to calculate the amount of corporation tax that is due to HMRC.
As a director of the company, it is your responsibility to ensure that the company accounts are accurate and submitted by the required deadline. Even if you employ an accountant to prepare and submit your accounts, the onus is on you to ensure that this is done correctly.
What Do Company Accounts Include?
The company accounts should include the following:
A Balance Sheet – this is a report that shows a list of all assets and liabilities
A Profit and Loss Account – this report shows all the money earned and spent by the business in the financial year.
Notes about the accounts
A directors’ report – unless the company is classed as a micro-entity
An auditor’s report – unless the company has an exemption
The name and signatures of all company directors.
Deadlines for Company Accounts
Companies must file their first set of company accounts twenty-one months after the date the company was registered with Companies House. Subsequent accounts must be filed within nine months of each financial year end.
Any corporation tax due need to be paid nine months and one day after the financial year end. You must inform HMRC within this timeframe if your company does not have any corporation tax to pay.
Penalties for Late Filing
Failure to file company accounts with Companies House by the required deadline can lead to penalties. If your accounts are filed late, the following penalties will apply (at the time of this writing) for private limited companies (public limited companies have different penalties):
Up to one month after deadline – £150
One to three months after deadline – £375
Three to six months after deadline – £750
More than six months after deadline – £1,500.
If you file your company accounts late two years in a row, the above penalty amounts are doubled.
You are legally responsible for ensuring that accounts are completed and submitted by the deadline.
A good accounting system makes it possible to easily manage all your financial resources – even petty cash. Xero is such a system. You can set up a petty cash account in Xero as easily as you can a bank account. You can easily record transactions and even transfer money from a bank account into the petty cash account. Everything is explained in detail below.
It would seem that in the era of cloud computing and software as a service (SaaS), more accounting professionals would leave behind their paper ledgers and legacy spreadsheets. Apparently, that is not the case. A surprising new report suggests that far too many accountants are not keeping pace with technology.
Xero is all about running your business more efficiently with technology. When you connect Xero with your bank account, it makes daily reconciliation so easy that you will actually look forward to doing it every day. Information flows freely via a live bank feed, so you’re never left wondering whether transactions have cleared or not.
What are the differences between a Limited Company (LTD) and a Sole Trader?
As a sole trader, you are personally liable for all your business’ debts, whereas, in LTD(also see limited company accountants), your business is a separate legal entity. That means your financial assets are protected in most cases of financial difficulties.
Let’s go through each structure and help you make an informed decision.
Quick Comparison Table
Factor
Sole Trader
Limited Company
Legal Status
The individual and business are the same entity.
The company is a separate legal entity.
Liability
The owner is personally liable for debts.
Limited liability protects personal assets.
Taxation
Income tax on profits, National Insurance (NI).
Corporation tax on profits; NI & PAYE for wages.
Control
Complete control by the owner.
Directors/shareholders have roles; shared control is possible.
Admin & Filing
Minimal reporting requirements.
Must file annual accounts with Companies House.
Business Image
Often seen as more minor or more personal.
Professional and larger company image.
Who is a Sole Trader?
An individual who operates their business independently without legal distinction between themselves and their enterprise – thus taking responsibility for any debts or legal obligations related to running it as part of personal responsibility.
What is a Limited Company?
A separate legal entity created from shareholders (shareholders) and directors that offers limited liability protection – personal assets will likely remain secure even in cases of financial strain on behalf of the business.
As the sole owner, you have complete authority over all business decisions, enabling a quick and flexible response to market shifts.
Profits after taxes belong solely to you – offering direct evidence that hard work pays off financially.
Since sole traders do not require publishing accounts publicly, any financial data remains safe and private.
Disadvantages of Being a Sole Trader
As a sole trader, you assume personal liability for all debts and obligations of your business if it runs into financial difficulty, potentially placing personal assets at stake if necessary.
Sole traders pay income tax up to 45% plus NICs, while limited companies face corporation tax of 19–25%, depending on profits.
Raising capital may prove more challenging for sole traders without issuing shares, potentially hindering expansion plans.
Some clients and suppliers may perceive sole traders as less reliable than limited companies, potentially hindering any opportunities when doing business together.
Advantages of Operating as a Limited Company
Operating under Limited Liability can protect shareholders from personal assets; liability is limited solely by what was invested.
Limited companies typically pay lower corporate income tax rates than individuals, and dividends distributed may also incur less stringent taxes.
LTD afford their owners several distinct advantages, including enhanced credibility with clients, suppliers, and investors;
Limited Company also has access to funds via shares issued for growth and expansion purposes and extraordinary staff hiring flexibility.
A company does not depend on its current owners for survival; even when ownership shifts, operations continue unimpeded.
Disadvantages of a Limit Company
As with any business venture, starting and operating a limited company comes with additional responsibilities and costs, including registration with relevant authorities, annual reporting requirements, and meeting statutory obligations.
Financial statements and specific personal data regarding directors can be publicly accessed, potentially jeopardising their privacy.
While dividends may be tax-efficient for shareholders, they’re not tax-deductible expenses for the company, and shareholders may face additional liabilities on any dividends received.
Directors have legal obligations and responsibilities, and noncompliance can result in penalties or disqualification from office.
Financial Liabilities
What are Personal and business-level liability differences between a sole trader and a limited company?
Sole Trader
Sole traders are held personally liable in litigation unless appropriate insurance is in place.
Such insurance usually covers product and service liability, employer liability, personal indemnity, etc.
Limited Company
Limited companies, as legal entities, are held liable in the event of litigation. In the UK, it is rare and challenging to directly suit LTD directors or officers except in certain qualifying cases. For example, directors and officers may be held responsible for:
Director or officer-perpetrated fraud, including tax fraud
Criminal activity, like corporate manslaughter
Violations of health, safety, and environmental rules
Deliberate concealment of offences committed by directors or officers
Taxation and Profit
How sole traders and limited companies differ in tax obligations and profit treatment.
Sole Trader
Sole traders pay Class 2 and Class 4 National Insurance and income tax on all business profits.
Partners pay the same, but only on their share of profits.
Limited Company
LTDs pay corporate income tax on all taxable profits. Corporate income taxed is lower than the personal income tax paid by sole traders.
Company officers and employees are subject to individual income tax, NICS, and PAYE.
Income tax is assessed on dividends earned by shareholders.
Sale of the Business
Below are the variations of tax implications when you sell your business as a sole trader versus a limited company.
Sole Trader
If you sell to a private limited company to set up, you can claim BADR relief under certain conditions.
Disposal of business assets or a partial interest in the business may also be taxed as capital gains.
Limited Company
The sale of an LTD or its assets results in Corporation tax on any profits and taxes on shareholders for any distributions or proceeds they might receive.
Tax rules sometimes make it more beneficial to sell the shares of an LTD rather than the business itself or its assets.
Company shares can be given to others as gifts.
A company director owning over 5% of an LTD may qualify for less costly capital gains tax on gains of up to £10 million.
All accounts must be prepared using accounting standards.
Control and Management
Comparison of the level of control sole traders and LTD directors have on their business.
Sole Trader
You have complete control over your business.
It is suited for those who prefer simplicity and direct management.
As a sole trader, you can make decisions quickly and efficiently without formalities.
Limited Company
Directors manage the company, and shareholders hold ownership.
If you are the only director and shareholder, you’ll have similar control to a sole trader.
Adding more directors or shareholders means shared responsibilities and decisions.
Administrative Responsibilities
An administrative load and responsibilities for each business structure.
Sole Trader
You require minimal paperwork, making it a simple structure to manage day-to-day.
Although you are not required to file annual accounts, it’s good practice to maintain them for tax purposes. However, a self-assessment tax return is a must here.
Limited Company
Requires annual financial accounts.
You deal with tax filings with HMRC and records submitted to Companies House.
It takes more work but offers greater transparency and may help establish business credibility.
Borrowing, Financing, and Pensions
How sole traders and LTDs handle borrowing, financial options, and pensions.
If withdrawals result in an account overdraft, tax relief relating to bank charges and interest are restricted on any amounts counted as part of the overdraft.
Sole traders are only eligible for personal pensions.
Limited Company
Under the Companies Act 2006, company directors may borrow from LTDs. Tax liabilities are as follows:
The company pays a 25% charge.
If the director receives an interest-free loan, they will be assessed a tax charge.
LTDs can offer more generous company pension schemes with more benefits and fewer limits.
LTDs can hold company assets in a SIP, SAS, or other unapproved pension scheme.
Business Gains and Losses
How gains and losses affect tax for sole traders versus LTDs.
Sole Trader
You can use the loss to reduce your tax bill.
You can withdraw gains as cash with no effect on taxes.
Limited Company
Business losses offset company income but not the individual income of officers, directors, and employees.
When you withdraw gains from an LTD, they are taxed as dividends if paid as distributions (subject to NICS and PAYE) or as earnings if paid as earnings.
Generally speaking, employee benefits received by directors and their families are taxable.
You prefer simplicity with fewer filing and administrative requirements.
You are comfortable with personal liability.
Consider a Limited Company if:
Your business requires limited liability protection for personal assets.
You necessitate business growth, hire employees, or attract clients who prefer dealing with limited companies.
You are willing to manage the extra administrative tasks and compliance requirements.
Choosing between a sole trader and a limited company can affect your business’s financial health, legal standing, and growth potential.
Consult an accountant or business advisor to ensure you choose the structure that aligns with your goals, risk tolerance, and long-term business vision.
If you have questions about which structure might suit your business, please comment below, and we’ll be happy to help!
The ability to automate certain time-consuming tasks is one of the things that drives business owners to transition from in-house accounting to an online provider like More Than Accountants. Automation is a wonderful thing. For example, consider reconciling your accounts with our automatic bank reconciliation tool. You will never look at daily reconciliation the same way again.
It goes without saying that More Than Accountants fully endorses the use of state-of-the-art accounting software. By ‘state-of-the-art’, we mean something that is fairly modern as opposed to a legacy system that a company might have deployed 7 to 10 years ago.
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