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Contractor’s Question : I am in a permanent job but have had my own limited company before when I was contracting. I have developed some software in my spare time. One piece is now making a decent regular income so I am now looking at how I manage the payment. I was thinking of setting up another limited company to set the cash aside. Presumably if I went ‘Ltd’, all I would need to pay is the corporation tax and administer the books each year? Or are there other set-up options to consider, which may be more tax or time-efficient? I could go through an umbrella company but I think it would be better having my own company. What do you think is my best set-up option for what is emerging as my Plan B? Expert’s Answer : What you have created clearly has value if it generates a regular income and, while it is difficult to advise you without the full facts, you will need to consider what to do with the cash generated, as well as the intellectual property rights (IPR) for the software. If the IPR is held personally, then income generated on licensing this software is taxable at your marginal rate of tax, which will vary depending on other income, but could be as high as 60%. If this is an issue, then one possible solution is to sell the value of the IPR developed to a limited company. Once owned by the limited company, corporation tax will be payable on the profits generated by the IPR. It must be remembered, however, that when you extract cash from the company, you will also incur a personal tax liability. Protecting the IPR is a strong commercial consideration and you should not overlook the limited liability benefits that ownership of the IPR by a limited company may offer. If a company is considered the best vehicle and there is a high value on the IPR, advice should be sought on how best to contribute the IPR to the corporate vehicle so that tax exposure on any disposal is managed or removed. It may also be worth considering the jurisdiction under which the corporate is formed. If your intention is to develop further software then consider incurring these costs in the limited company so that the possibility of obtaining a 175% deduction against income on qualifying research and development expenditure is not lost. This relief only applies to expenditure by companies. In summary, if the cash generated is required for day-to-day living then there is little tax benefit in owning the IPR in a separate legal entity, although there may be other commercial benefits. If the intention is to roll up funds for future use, then ownership or perhaps a licence to a limited company is tax-beneficial. The expert was Paul Spindler, partner within the technology group at Kingston Smith , a chartered accountancy firm. Jan 26, 2010 Email this article Printer friendly page Previous Page
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