What is the difference between choosing to carry on business through a Limited Company or deciding to be self-employed? Is the tax system the same? What about VAT registration? You can have a lot of questions when you decide to start your entrepreneurial adventure as a freelancer, here are some things that should answer them.
When to register
If you decide to operate through a limited company, you will need to create the limited company before starting your business. If you are self-employed, you have until October 5 of the following tax year to inform HMRC of your business. This means that if you started your business in June 2018, you have until October 5, 2019 to notify HMRC. If your total sales are less than £ 1,000 in the tax year, you don't even need to register with HMRC.
What expenses to claim?
For most of your expenses, whether you are self-employed or negotiating through a limited company, it will make no difference. The differences will begin to show on purchases that have both a personal and business use. These are expenses such as motor expenses, mobile phone costs or use of home as an office.
The difference comes from the fact that if you are self-employed, you are subject to the rules of a business owner while if you are a director of a limited company, you fall under the rules of an employee.
Let's take motor expenses as an example, if you are self-employed you can choose to either use a percentage of your actual motor costs or claim 45p per mile. You can also bring in your car as a business asset.
When you negotiate through a limited company, you only have the option of claiming 45p per mile. If you choose to bring your car into the company, it will be treated as a company car. You will have a P11d and will have to pay additional national insurance. HMRC will consider the personal use of a company car as additional salary.
Who to will deal with from an accountancy point of view?
Being self employed means that you will only need to deal with HMRC, and the relationship will be about taxes.
The relationship with HMRC will continue if you trade through a Limited Company but you will also have to deal with Companies House. Companies House will check if your Limited Company is trading, if it is solvent, which means that it can pay its debts, and will check who the directors and shareholders are.
When will you need to submit your accounts?
If you chose to work as a self-employed, you will need to submit a self-assessment tax return by the 31 January after the end of the tax year. Trading through a limited company requires a little more administration.
Your Limited Company will need to submit its own company tax return and accounts to HMRC as well as a shorter set of accounts to Companies House both within nine months of its year end.
As a Director, depending on your own income, you will need to complete a self-assessment tax return as well.
When does tax need to be paid?
The tax points for a self-assessment are 31 January. If you have a payment on account, the second one will be due by 31 July. Payments on account will start once your tax payable exceeds £ 1,000 regardless of your status. A Limited Company will also have its own tax liability. The Limited Company will also pay corporation tax, and this will be due nine months after its financial year end.
How will you be taxed?
If you are self-employed, you complete your tax return for self-assessment and inform HMRC of the profit you made during the taxation year, the tax you have to pay is calculated on this profit.
Likewise, a public limited company will pay corporate tax on its profits. A Limited Company will begin to pay tax from the moment it makes £1 in profit. But then there are salary and dividends that you will extract from the Limited Company. You will then need to declare your salary and dividends on your self-assessment tax return and personally pay the tax due on this.
What about VAT registration?
VAT is a separate tax. When your turnover exceeds £ 85,000, you will have to register for VAT in all situations. You can, however, register for VAT even if your total sales is under the threshold.
How will you get paid?
The advantage of being self-employed is that you can take whatever money you want from the business.
As you will be taxed upon your profits and the money you take is not considered to be an expense. You can use a personal account instead of a business one if you want.
When you work through a Limited Company, you should not mix personal expenditure with that of the company. Never forget that the Limited Company is indeed a separate legal entity to yourself. Salary will need to be taken through a PAYE scheme and dividends will need to be voted after tax.
As with everything, there are pros and cons of both being self-employed and trading through a Limited Company. If you are considering starting your own business and are unsure of what route to take, we recommend talking to an accountant specialized in self-employed.