Tangled in red-tape

I was on a course yesterday called “Small company reporting requirements”.

The amount of red tape and paperwork that even a small limited company needs to keep up with can be mind-boggling.

Now that the tax savings from being a limited company are not so significant, many smaller businesses (with profits under £50,000 per year) may decide not to become limited companies, to avoid the extra admin and red-tape.

If you’re a small business owner, a discussion with your accountant may help you choose which is the best course for you:

- Stay unincorporated and reduce the red-tape burden, but pay more tax

- Become a limited company, and pay less tax and have the protection of limited liability, but have more paperwork and reporting to keep up to speed with.

For example, we have several smaller clients who have chosen not to be companies, because they’ve got young families and want to have as much time as possible to spend with their children.

It’s all about what works best for you - but if you have a limited company, be sure to take advice from your accountant and make sure you are doing your best to keep up to date with all the required paperwork.

Doing it all in a rush after the year-end is not a good idea!

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11 Responses to “Tangled in red-tape”

1. Stefan Töpfer
   http://www.sme-blog.com
   
   Said on October 5th, 2006 at 9:15 am

   I agree!

   If you go the Business Link web site, you can also you their business start-up planner, as an excuse to not starting a business.

   Or, you go to see a good business advisor accountant who will help you with all this, so you can concentrate on your business.

2. Jason Holden
   http://www.holdenassociates.co.uk
   
   Said on October 5th, 2006 at 2:57 pm

   Really, this one depends on the advisers the client uses to support them.

   The tax advantages are still there, for example take a really small client who makes a taxable (tax year to 5 April 2006) profit of £15,000 as a sole trader, ignoring any other outside factors his/her tax position will look as follows:

   £
   Profit 15,000
   Less: Personal allowances 4,895
   Taxable profit 10,105

   Tax at 10% 209.00
   Tax at 22% 1,763.30
   Class 4 NIC 808.40
   TOTAL DUE 2,780.70

   The same in a limited company would yield a tax bill of £1,919.95 a saving of £860.75. Using a smaller firm of accountants and based on paying a realistic fee for being a sole trader then the increase in fees for such a small business if they use a system like WinWeb to maintain their records would hopefully be only around £500 with support given on the ‘red tape’.

   The more the client makes the bigger the saving i.e. the above based on a £25,000 profit which again is a small business the saving on incorporation is £1,960.75, even if the accountant charged a whacking £1,500 more the client would still be better off by £460.75, but not just in one year but every year.

   Even though the argument about red tape is valid, it is still far from prohibitive if you use the right advisor and let that advisor set up procedures for you to use.

3. Philip Woodgate
   http://www.sme-blog.net/sme_blog/
   
   Said on October 5th, 2006 at 10:24 pm

   Hi Emily

   I agree with you, the red tape and paperwork is mind-boggling. Take the new age discrimination rules for example. Advertise a vacancy in a magazine and you could be accused of being ageist. Why? The magazine may be aimed at young people and as a result the company is indirectly discriminating against older people. It’s easy to trip up on the red tape and the fall can be a painful one.

   P.S. Good luck with the blogging (which can also be a bit mind-boggling).

4. Dennis Howlett
   http://www.accmanpro.com
   
   Said on October 6th, 2006 at 5:37 am

   Jason - that’s way too simplistic. Clients make decisions for all sorts of reasons. It isn’t always about the amount of tax they pay.

   Interestingly, and as an aside, I would usually counsel 2 partner clients to avoid Ltd status - if they’re tax driven - on

5. Jason Holden
   http://www.holdenassociates.co.uk
   
   Said on October 6th, 2006 at 10:22 am

   My posting Den was only in response to that written by Emily, she had concentrated on tax, benefits or lack there off.

   If you look at the whole picture then if the client is growing a business then incorporation will be key to the eventual sale, fancy tax planning at a later date etc, some businesses operate in industries that only deal with you if you are an incorporated entity, even though you may be one man and his dog, and the list for and against goes on, hence a simplistic posting as to go into depth on Emily’s first posting would not be fair to everyone who falls asleep while with the accountant.

   What I don’t understand Den is if some one wants to operate under limited company status for tax benefits, why would you counsel them against it, as long as you tell them the up and down sides in their choice, then it is their decision ultimately. I am not in favour of the tail wagging the dog, but there are still pure short term tax benefits, and if you can, why would you not take advantage of them?

   Oh Den, I need to add to the last comment – if someone does go down the limited company route for the current tax saving advantages then just hope our friend Gordon doesn’t do something nasty, because for many reversing the status will not be pleasant.

   As for the rest of red tape, which is far greater than only company disclosure requirements as Philip has recently found out, I for one think running a business in the UK is now a very delicate operation and now more than ever make sure you have a (bloody) good team of advisers around you.

6. Emily Coltman
   http://www.cannonmoorcroft.co.uk
   
   Said on October 6th, 2006 at 3:09 pm

   Crikey - my first ever blog and I seem to have kicked a hornet’s nest!

   I agree, Jason - if a client is growing a business then incorporation may be almost inevitable, but for those clients who just want to tick along quietly and earn enough to cover household expenses, the extra red tape may (and does) put them off.

   Our friend Gordon did do something nasty when he got rid of the 10% band.

   Philip - thanks!

   M

7. Graham Salmon
   http://grahamsalmon.typepad.com/omb/
   
   Said on October 6th, 2006 at 4:17 pm

   Well the Chancellor suckered a lot of sole traders into incorporating, then 12 months later accused those very same people of defrauding the State by doing their best to avoid (not evade!!) national insurance contributions by paying dividends instead of salaries. 100% political.
   Oh yes, and let me dispell this latest urban mtyh. Most small companies and their directors pay more tax than similar unincorporated businesses. (CT,PAYE,NI,B-in-K taxes)
   If you add to that the ridiculous burden of new accounting standards , you can see that the average small businessman has absolutely no chance of doing his own accounts unsupervised.
   The solution? Outsource and collaborate with advisors - preferably those who use new technologies to provide the service. Winweb seems to provide that sort of interface.

8. Dennis Howlett
   http://www.accmanpro.com
   
   Said on October 6th, 2006 at 9:13 pm

   I never saw a case where incorporation was a deal breaker and in my time I counselled on close to 100 asset sales/purchases. For clients with significant interests, we usually chose a mixed structure based on their cash requirements plus risk profile. Tax was always a secondary consideration EXCEPT when considering a total disposal where the likely tax charge was above £50K. And there were plenty of those. But we usually knew long in advance what was likely to happen and created structures accordingly. We always warned clients that incorporating was very much a one way street.

   Once in, it’s a devil of a job to get out without significant penalty. The only time we went for enforced ltd co status was when there was no alternative way of securing assets for lending purposes. Thankfully, that was pretty rare.

   Jason - your calcs are way off. NICs alone would have a higher impact to say nothing of P11D car tax. Before thinking of pensions mitigation. We always thought in terms of the total cost/tax burden. In my exerience the marginal position was around £100K profit for a 2 person business. Nice to see successive gavernments have devalued benefits over the 13 years since I was a bag carrier. -:)

9. Jason Holden
   http://www.holdenassociates.co.uk
   
   Said on October 9th, 2006 at 10:50 am

   Den, calcs are not way off, dividends would be used to distribute profits not salary, after personal allowance is used up first in the company, all basic stuff Den, and as such my calcs stand.

   As for cars, no way do you put a car in a limited company these days, unless its one of those little green friendly things, and unfortunately no director I know off wants one.

   As for pensions we have new rules in the UK Den, who needs salary!

   As Graham has said collaborate with your advisers, use advisers who use technology such as winweb and the burden of running a business through a Limited company structure is no more burdensome on you than running a business as a sole trader/partnership in the UK.

10. THE SMALL BUSINESS BLOG » Blog Archive » Who is right, and who is running things?
    http://www.sme-blog.com/?p=187
    
    Said on October 13th, 2006 at 10:43 am

    […] Emily recently posted about all the red tape that a small Limited company must comply with and how mind boggling it all is, then Philip commented about the recently introduced age discrimination rules which are also very easy to trip over. […]

11. Peter Culpin
    http://www.worldwidenoticeboards.com
    
    Said on October 21st, 2006 at 9:57 am

    Jason’s comments are interesting. Among other things I am a qualified veterinary surgeon. It is common practice now for young vets who work as locums around the country to make themselves limited companies. They, as jason suggests, pay themselves a rediculously low salary on which they pay tax, then a dividend on which they don’t.
    Over the years, and still now, whenever I speak to an accountant and ask the question - “Shall we become limited?” the answer is the same - it’s not worth the hastle until you are making substantial profits - I wonder why - could it be they don’t want the bother of dealing with the small fry?
    filing the paperwork is not onerous - but - and I speak from experience - if you try to do it yourself and miss a deadline you will be heavily penalised.
    And finally if you think filing company accounts is bad - try the FSA - we launched a new pet insurance last year and became regulated as a way of showing we were all above board - what a minefield!
    Great site guys - I found you purely by chance from the Telegraph Business Club.

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