Limited Liability Partnerships

One of the most commonly asked questions when starting a business is whether it should operate as a sole trader, partnership or limited company. However many businesses instead choose to form a limited liability partnership (LLP), but how does this compare to other forms of legal entity?

An LLP combines many of the aspects of a partnership with those of a limited company. Perhaps the main benefit for most small businesses is that it allows the partners to easily allocate profits, and to draw money from the business, in any way they see fit without having to worry about shareholdings and dividends.

From a taxation point of view, an LLP is similar to a partnership. The business is not treated as being a separate entity, instead the profits are simply divided between the partners in a pre-determined manner, and the partners each pay income tax and national insurance contributions on their share of the profits.

The advantage of this is that it simplifies matters – there is no corporation tax or personal tax on dividends, and you can draw as much cash from the business as you see fit without the risk of having to pay tax on an overdrawn director’s account (section 419 tax) or having your director’s account taxed as a benefit in kind.

The disadvantage from a taxation point of view is that you are likely to pay more tax than if you were part of a limited company, as you will be liable for Class 4 National Insurance contributions at 12% as well as income tax at 20%. Corporation tax is only 20% for small companies and this often means paying less tax.

LLPs do have some similarities to limited companies as well. As their name would suggest, the business has limitied liability status, so that the directors would not be personally liable in the event of financial difficulty. A separate legal entity is also formed, with its own partnership number assigned by Companies House.

The disadvantage of this is that the statutory requirements of an LLP are similar to those of a limited company. You must file annual accounts at Companies House in the correct format, an annual return must be completed each year, and directors’ responsibilities are similar to those of a limited company. This means greater administration time and accountancy costs.

A few years ago the government announced tax benefits for LLPs and they briefly became popular as a result of this. However these tax breaks were subsequently withdrawn and LLP formations since become less common.

For most businesses the benefits of forming an LLP are outweighed by the disadvantages – you get limited liability status and simpler taxation rules, but you will often pay more tax whilst still having to meet the statutory requirements of running a separate legal entity such as filing documents at Companies House. That said, many business do go down this route and it remains a popular choice for professional organisations such as architects and solicitors.

For further advice please visit the main website of N S Accountancy, providing bookkeeping and accountancy services in the North East..

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Small business rate relief

Businesses who occupy only one property with a rateable value of less than £18,000 (or £25,500 in London) are eligible for small business rate relief, which reduces your liability to business rates.

Typically businesses can claim up to 50% rates relief, however in October 2010 a temporary scheme was introduced allowing businesses to claim up to 100% relief, meaning many small businesses are currently paying no rates at all. The scheme was originally intended to last for one year only but was extended in the last budget, and will now continue until at least 30 September 2012.

If your rateable value is £6,000 or less you are entitled to the full relief of 50% (or 100% under the current scheme). For properties with a rateable value between £6,000 and £11,999, relief is applied on a sliding scale from 50% (or 100%) down to 0%. So a property with a rateable value of £9,000 would qualify for relief of 25% – or 50% under the current scheme.

For rateable values between £12,000 and £18,000 (£25,500 in London), no relief is claimable but a small business rates multiplier is used to calculate the annual liability.

It is usually necessary to apply for small business rates relief and as a result many businesses miss out on hundreds or even thousands of pounds of relief per year. When your annual rates bill arrives it should be checked for correctness, and a form is usually enclosed which can be completed and returned if your business qualifies for rates relief.

If you think you qualify for small business rates relief and have not received an application form, contact your local authority for more information.

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Mileage allowance is now 45p

It’s been over four months now since HMRC quietly raised the mileage allowance from 40p to 45p per business mile. With fuel prices having doubled in the last 12 years or so, not to mention soaring insurance costs, this is a small consolation for hard pressed motorists but nevertheless a welcome move. Sadly the allowance is still only 25p per mile once you surpass the 10000 mile mark in any one tax year. I would say there are plenty of cars that would cost that in fuel alone, before any allowance is made for wear & tear and vehicle depreciation!

Many people are still only claiming 40p per mile so be sure to take advantage of the full 45p allowance that has been in place since April 6th. Of course, employers can choose to pay their staff whatever rate they like, and similarly directors can claim whatever mileage they wish from their companies. However 45p is the amount on which tax relief can be claimed, and if you claim less, the difference can be claimed as a business expense for income or corporation tax purposes.

For more info please visit the website of N S Accountancy, providing bookkeeping and accountancy services in the North East.

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VAT flat rate scheme

If you are a VAT registered business you are required to declare all your sales VAT, and to claim back VAT on your purchases, on a VAT return form every three months. For some businesses, using the flat rate scheme can save both time and money.

By using the FRS, instead of accounting for all VAT on sales and purchases, you simply declare VAT on a set percentage of gross sales, with no need to account for purchases at all. The percentage used depends on the type of business you operate, but is always lower than the standard rate of VAT, to compensate for the fact that no purchase tax is being reclaimed.

A full list of rates used can be found on the HMRC website at http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm

For example, supposing a hotel turns over £83,000 inclusive of VAT in a quarter. The VAT that will be paid over is simply £83,000 x 10.5% = £8,715. The 10.5% is the rate that applies to hotels as per HMRC. There is no need to worry about VAT on expenses so the process is greatly simplified.

Invoices are raised in the same way, with VAT @ 20% charged to customers. It is only the way that VAT is declared and paid over at the end of the quarter that is different.

Although you can’t normally reclaim VAT on expenses, capital items worth more than £2,000 can still be claimed. So for the hotel business above, if they had purchased a computer system costing £3,000+VAT, then input tax of £600 could be claimed in box 4 of the VAT return in the usual way, reducing their VAT liability by £600 to £8,115.

Adopting the FRS won’t always save money. It depends very much on the individual business and can even vary from one quarter to the next. It is therefore generally advisable to compare the two over a period of time to assess whether the FRS is a cost effective option. Unlike with the cash accounting scheme, which can be adopted at any time, HMRC should be notified in advance if the FRS is to be used.

For more info about VAT please visit the website of N S Accountancy, providing bookkeeping and accountancy services in the North East and click on the services section.

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Sole Trader vs Limited Company

One of the decisions new businesses often face is whether to operate as a sole trader, partnership or limited company. Most small business owners choose the sole trader or partnership route at least to begin with, because it’s the easier option, and perhaps because incorporation is associated with larger organisations with multiple directors and investors.

Whilst it is certainly true that choosing the sole trader option is likely to be the easiest and most cost effective option to begin with, there are longer term benefits to incorporation which apply to businesses of all sizes. Furthermore, company formation is a fairly straightforward process. There need only be one or two directors/shareholders, and there are just a few statutory laws to consider.

The chief benefits of incorporation as as follows:-

1. Tax savings

Precisely how much tax is saved by incorporating depends very much on how much profit the business makes and, to some extent, how much of this profit is taken as drawings by the business owner(s). For profits of £10,000 or less, your tax liability will be minimal irrespective of your legal structure, but for larger profits the savings can be significant. A sole trader paying standard rate tax will pay income tax of 20% and Class 4 NI of 9% on all profits above their personal allowance (currently just over £7,000 per year), as well as paying Class 2 NI of £2.50 per week. As a limited company, the rate of tax is 20% but with no NI payable.

For example, suppose your business makes £40,000 per year. As a sole trader you pay 20% tax on all income above the personal allowance:

(40000 – 7475) x 20% = £6505

Then there is the National Insurance:

Class 2 NI (2.50 x 52) = £130
Class 4 NI (40000 – 7225) x 9% = £2949.75

So your total tax and NI bill for the year is £9584.75 as a sole trader.

As a limited company, you can pay yourself a notional salary of £7475 per year. This uses up your personal allowance (and is therefore tax free) and reduces the company profits accordingly. The remainder is taxed at the small companies rate:

(40000 – 7475) x 20% = £6505

And that’s it – there is no personal tax or NI so you save just over £3,000 per year in tax. You also get longer to pay. Corporation tax is due 9 months after the year end, whereas income tax is payable on account in six-monthly instalments in January and July each year.

For earnings of more than about £43,000 it becomes a little more complex as we are into higher rate territory but the tax savings are still significant, and for these levels of income you would want to think about incorporating anyway given the size of the organisation.

2. Limited liability

As a sole trader you are your business, so in the event of financial difficulties, your own personal assets could be at risk. A limited company is a separate legal entity which means that you are not personally liable for the debts of the company, and personal assets such as your home will not be at risk in the event of finanial trouble. It’s important to note, however, that the directors do have legal obligations to ensure that the company’s finances are in good order. Furthermore banks will often ask for a personal guarantee before lending you money, meaning that company debts may well still be secured on your own home or other personal assets.

3. Professional image

Your business may be more attractive to potential customers as a limited company, as it makes your organisation appear larger and more established.

There are a few disadvantages to incorporating:-

1. Extra laws and paperwork

As a limited company you must file an annual return and statory accounts at Companies House each year. You must also display your company name and number on all of your stationery, website etc.

2. Higher costs

These are usually more than offset by the tax savings, but accountant’s fees are generally higher, and there is the cost of forming the company and filing an annual return each year.

3. Separate legal structure

Because the company is a separate legal entity in its own right, the transfer of money and assets in and out of the company has to be accounted for properly. Borrowing money from your own company can have severe tax implications, and transferring of property and other assets out of a company can potentially land you with a sizeable capital gains tax bill.

Nevertheless, incorporation is usually beneficial for businesses making more than about £15,000 to £20,000 profit per annum. Contact us now if you would like more information on forming your own limited company.

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Personal Asset protection

We have teamed up with a leading asset protection company who provide access to free, impartial advice on a range of essential financial products designed to protect you and your family from financial risk. Below are just some of the products that are highly recommended and for which we can offer access to free professional advice:-

  • Inheritance tax planning – Every year billions of pounds of inheritance tax are paid over to the tax man unnecessarily. Many people believe this is a tax exclusively for the wealthy, but many ordinary people are hit with IHT, and in most cases this is entirely avoidable with some careful planning.
  • Trusts – These include life insurance, property, family possessions and business trusts and are designed to protect or ring fence your assets. This in turn protects your assets from the tax man, and ensures any money is passed quickly to its intended beneficiaries
  • Will writing – if you don’t have a will you are leaving yourself and your family open to potential uncertainty, this can cause difficulties for you and whom you are about most. Because of this, everyone should have a will. Wills are used for various reasons, to pass individual items of sentimental value to a relative, to leave a specific amount of money to a close friend or to support a good cause or charity.
  • Mortgage protection – A mortgage life insurance is a plan that provides you with a lump sum to clear your outstanding mortgage balance should you die or suffer a critical illness such as a heart attack, stroke or cancer during the term of the loan. This would give you peace of mind knowing that your home would be debt free for the benefit of you and your loved ones, whether you are named on the mortgage or not.
  • Income protection – This provides you with an income if you were off work due to an accident, sickness or disability. This means your lifestyle can be maintained and your bills would be paid whilst you recover stress free.
  • Critical illness cover – Provides you with a lump sum should you suffer a serious illness such as a heart attack, stroke or cancer during the term of the policy. This means you would have the financial stability to adapt to any necessary changes in your lifestyle if you were to suffer a serious illness.
  • Family protection – whilst life insurance typically provides a lump sum pay out, with family protection insurance you can choose to receive a regular tax free income instead of just a lump sum which keeps the monthly premiums down.
  • Business succession planning – As a business owner, you may be a sole trader or a director or partner of a larger firm that employs staff. In any event, there will almost certainly be a need to protect the business if a key person or a director or partner should die, suffer a critical illness or be off work through long term sickness. Business succession planning helps to determine who the company would be passed to or who would benefit from your share of the company after your death.

If these products would be of interest and you would like a free consultation of around 30 minutes, please get in touch and I will pass your details on.

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Welcome to the N S Bookkeeping & Accountancy blog

Welcome to the NSBA Blog. Check back soon for updates such as news & info on taxation, company law and more. In the mean time you can return to our main site using the link above.

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