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Tuesday, 10 March 2015 17:00

Sole Trader or Limited Company?

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Have you considered what trading entity you will use for your new business ?

One of the most common considerations we look at with our clients is whether to trade as a sole trader or a limited company. There are implications for tax, legal status, how your clients and peers view you, and the amount of paperwork and form filling you will need to complete.

There is no one answer fits all, but selecting the correct vehicle could save you thousands of pounds in tax. If your profits look set to be in the region of £40,000, setting up a limited company and paying yourself in a combination of salary and dividends could reduce your tax liability when compared to a sole trader by over £2,500, and the savings increase as your profits grow.

If in the early days of business you are investing to get things off the ground then you may incur losses. If this is the case then the sole trader route may be better for you as sole trader losses offer greater flexibility and can often be used to carry back to earlier tax years in the first few years of trade to trigger a tax refund.

The right structure for you will depend on your personal circumstances, and possibly the market that you operate in. Once you have decided to be your own boss, you need to choose the best structure for you.

This decision should be taken from the outset and before you commence trading.

Your legal structure is also something that you should take time to review periodically when you have started the business. It may be that a sole trader was the right choice for you at the outset but a couple of years in a limited company may be more appropriate.

Changing legal status has its implications, but with the right advice it can be a relatively straight forward process.

Making a mistake with your legal status could be costly and time consuming so do your research and make sure you make the right decision from the outset.

Related items

  • Hermes' Couriers at Employment Tribunal
    In this "landmark" ruling, the employment tribunal ruled that a group of couriers were not independent contractors, as Hermes had claimed, but were in fact workers who should be entitled to essential workers' rights.

    The ruling affects the 65 couriers who have already brought claims but is also likely to impact upon the wider network of 14,500 Hermes’ couriers who are engaged under the same contracts as the couriers who will now follow suite and look to collect similar awards.

    It is the latest case to be brought by the union GMB over the so-called gig economy, where the likes of Uber have argued that their drivers are self-employed contractors.

    A further hearing will take place to calculate the holiday pay, national minimum wage and any unlawful deductions due back that the couriers should receive. This could run into multiple thousands of pounds per employee based on their duration of employment.   It will also have an effect on similar industries and businesses of a smaller size than Hermes.

    Tim Roache, GMB general secretary, said,  "Bosses can't just pick and choose which laws to obey. Workers' rights were hard won, GMB isn't about to sit back and let them be eroded or removed by the latest loophole employers have come up with to make a few extra quid. Union activity seems to be very high in this area and there seems to be a groundswell of support from government.”

    "Not only will this judgment directly affect more Hermes’ couriers across the country, it's another nail in the coffin of the exploitative bogus self-employment model which is increasingly rife across the UK.”

    A Hermes spokesman said, "We will carefully review the tribunal's decision, but we are likely to appeal it given that it goes against previous decisions, our understanding of the witness evidence and what we believe the law to be.”

    "Nevertheless we have always been fully prepared for any outcome of this decision and its impact on 15 couriers and former couriers.”

     

    If you are a YBC member and an employer or sole trader/self employed and think that you may be affected by this ruling, call the YBC Employment Support Line.

  • Employees – they aren’t really are they?
    Recently two cases occurred where “employees” have sought clarification from employment tribunals of their actual status. In both cases, based on the facts not the paperwork, the tribunals have found the claimants were workers not subcontractors.

    The law recognises 3 types of people who work with organisations:

    1. Employees who have a contract of employment
    2. Subcontractors  who have no association with the company but merely provide services on an as and when basis
    3. Workers who are an intermediate stage which although is recognised in the employment rights act is not clearly defined.
      • Individuals are likely to be workers if:-
      • they have a contract or other arrangement to do work or services personally for a reward (your contract doesn’t have to be written)
      • their reward is for money or a benefit in kind, for example the promise of a contract or future work
      • they only have a limited right to send someone else to do the work (subcontract)
      • they have to turn up for work even if they don’t want to
      • their employer has to have work for them to do as long as the contract or arrangement lasts
      • they aren’t doing the work as part of their own limited company in an arrangement where the ‘employer’ is actually a customer or client
      • their contract with the business uses terms like ‘casual’, ‘freelance’, ‘zero hours’, ‘as required’ or something similar
      • they had to agree with the business’s terms and conditions to get work - either verbally or in writing
      • they are under the supervision or control of a manager or director
      • they can’t send someone else to do their work
      • the business deducts tax and National Insurance contributions from their wages
      • the business provides materials, tools or equipment they need to do the work

    why is it important? well workers have the following rights which a self-employed subcontractor does not:-

    • 5.6 weeks' paid annual leave each year
    • a maximum 48 hour average working week, and rest breaks
    • the national minimum wage (and the national living wage)
    • protection of the whistleblowing legislation

    Tribunals do not just look at the documentation which may say X is a subcontractor but dig deep into the facts of the relationship, as both Uber and Citysprint have found out. If both company’s appeals fail then both of them will be faced with substantial claims for unpaid holiday and unpaid wages and possibly other claims as well.

    Review documentation now remove any ambiguities look at the facts on the ground and if necessary be prepared to admit that an individual is a worker its cheaper and less stressful in the long run.

  • HMRC Vows To Crack Down On Use Of Freelance Jobs
    In relation to staff used for freelance jobs, a specialist HMRC team will target employers suspected of avoiding national insurance.

    HMRC has announced it is to form a specialist team to examine working practices at organisations that use staff for freelance jobs to fill what amount to full-time roles.

    Employers that persistently use office-based freelance workers to cover what would otherwise be full-time positions avoid offering individuals any of the associated benefits of full-time employment, such as sick pay, pensions and maternity leave, as well as avoiding employer national insurance contributions (NICs).

    If an organisation is found by HMRC to be in breach of existing laws, it could be fined up to 100% of the tax owed. The Treasury said it is currently owed more than £300m in lost national insurance contributions.

    It is unclear how widespread the practice is.  The crackdown comes at a time when HMRC is taking a renewed interest in the use of ‘umbrella companies’ to pay staff, and other unusual working arrangements that circumvent NICs and other taxes.

    Taxi-hailing app Uber and food delivery service Deliveroo are also legal cases over the status of their workers, who are currently classed as self-employed, with a tribunal decision on Uber’s case that has just come in as can be seen here:

    Uber's Employment Tribunal, on October 28th, ruled that two drivers who provide services to  Uber are 'workers' within the meaning of the Employment Rights Act 1996.

    This means they will be entitled to a limited number of employment rights .  Amongst other rights, they will be entitled to:-

    • 5.6 weeks' paid annual leave each year
    • a maximum 48 hour average working week, and rest breaks
    • the national minimum wage (and the national living wage)
    • protection of the whistleblowing legislation.

    As they are not employees, they will not be entitled to:-

    • the ability to claim unfair dismissal
    • the right to a statutory redundancy payment
    • the benefit of the implied term of trust and confidence
    • the protection of TUPE, if Uber sells its business

    I’m sure the verdict will be appealed and no doubt it is fact specific but be aware if you are taking on people under similar circumstances.

    Prime minister Theresa May recently announced a review of workers’ rights, amid concerns that almost half a million workers in the UK could be wrongly classed as self-employed. The review will look at whether the national living wage is being undermined, and what changes in legislation may need to be implemented as a result.

  • Should your New Worker be Employed or Self Employed?
    You need to take on a new person its cheaper to call them self employed saving national insurance and making them responsible for their own taxes. But are they really and will HMRC or an employment tribunal agree with you.

    Getting it wrong can result in substantial penalties getting it right at the outset will save a lot of time trouble. Current cases involving Uber drivers and bicycle couriers in London highlight issues.

    To determine the status, consider if the individual is engaged under a contract for service or services.  To summarise the issues to support self employed status the contractor:

    • Will provide services but may subcontract work
    • Is free to accept or turn down work. The engager is under no obligation to offer any or further work
    • Is likely to be in control of pace of work
    • May subcontract work or bring in assistance
    • Will normally supply all small tools and bring in or hire plant
    • Quote on a job by job basis must rectify faults in own time
    • Can profit from work done
    • Can accept a fixed term contract
    • Has no additional responsibilities or privileges although present on company premises
    • Gains no employee benefits
    • Can terminate if either side is in breach

    To support employee status:

    • Only provides personal service
    • Employer is obliged to offer work and the employee is obliged to do as employer requires.
    • Employer may control what how and when work is done
    • Employee has no right of substitution
    • Employer will provide plant and machinery
    • Paid whatever work is done benefits from minimum wage and holiday entitlement.
    • Employee can only benefit Only under a bonus scheme
    • Employee is hired on a Open ended agreement
    • Capable of being promoted
    • Can participate in pension scheme sick pay and enjoy family friendly policies
    • Employee must normally give notice to terminate agreement

    Other factors to support a self employed subcontractor

    • Has other full time employees
    • Rent workspace from 3rd party
    • Advertise
    • Has a website
    • Has other clients
    • Does his own billing

     

  • Still Time To Save
    The end of the tax year is just a few weeks away but it may not be too late to save yourself some tax.

    If you are trading as a sole trader or a Limited Company with a year end of 31 March or 5 April have you considered what you might be able to do to save some tax before your year end?

    If you need to renew any of your capital equipment for your business, just before the year end can be a great time to do it as you may receive full tax relief for the expenditure event though you have only incurred it days before the year end.

    Have you considered other tax saving measures – perhaps a contribution into your pension scheme?

    What about your tax free savings allowances – have you made the most of your annual ISA allowances if you have cash to invest?

    Take a bit of time before the end of the tax year to review your circumstances and see if there is anything you can do to reduce your tax bills and make your money work harder for you.