Directors urged to keep limited tax treats
Company directors making over £10,000 a year in profit should resist the urge to disincorporate despite an extra tax demand of nearly £2,000, a leading accountant has declared.
Speaking to Contractor UK, experts at Wilkins Kennedy said limited company formation still offers "a number of advantages" for today's professionals, regardless of the new and minimal tax levy of £1900.
In his Pre-Budget Report, Gordon Brown scrapped the tax-free status on the first £10,000 of profits and went further by imposing a 19 per cent rate on monies extracted up to £300,000.
Government has hailed the move as a simplification of a complex tax regime, but the measures come at a cost for small firms making less than £10,000, and their lucrative peers making up to £300,000.
Yet advisors are concerned the stampede witnessed to incorporate when Gordon Brown issued the nil band rate could now be reversed, as individuals reconsider the burden of being 'ltd.'
"Small businesses may now rush into reconsidering their legal status, but for many new start-ups operating as a company is often the most tax-efficient way to run a business," said Roger Williams, senior partner at Wilkins Kennedy.
"Companies pay tax on profits and gains at between 19 per cent and 30 per cent, compared with up to 40 per cent paid by individual," he added.
"These tax savings apply while the money is left in the company. As soon as it is extracted, the total tax bill (including corporation tax and income tax) increases to about 40 per cent - depending on the way in which the profits are extracted.
"This means however that the individual has control over when the tax is payable, which an u does not have."
Individuals can gain tax savings if they extract their company's profits via dividend rather than salary as to avoid National Insurance Contributions.
For creative and technical innovators, starting a limited company is often the ideal vehicle as they provide the owner with limited liability protection - a safeguard not available to sole traders.
Senior partner, Roger Williams said entrepreneurs running a limited company can find it easier to raise finance, for example under the Enterprise Investment Scheme, and potentially benefit from inheritance tax advantages.
"It can [also] be easier to lock in key employees by offering them shares in the company under a tax advantage scheme, such as the Enterprise Management Incentive Scheme," Mr Williams explained.
"Individuals are less keen to become partners - partly because of the unlimited liability but also because they don't understand partnerships as well as they do companies."
Last year, the government issued a consultation paper, 'Small companies the self-employed and the tax system' to stoke debate on how the regime could be improved for its target audience.
"The Government believes that the choice of legal form that a small business takes should reflect commercial rather than tax considerations," it stated.
Responding to Contractor UK as to whether tax in isolation is a commercial consideration, Wilkins Kennedy said most entrepreneurs would probably agree.
However, in a statement, the firm added: "In the tax world, where a transaction is entered into purely (or mostly) for a tax advantage, anti-avoidance legislation would say that was "uncommercial" and ignore it.
"In the real-world of course, tax is a cost like any other business cost and needs to be minimised."
The small business advisor added those companies unlikely to expand which make under £10,000 a year are the most likely to disincorporate.