One business or two for VAT?

One business or two for VAT

A recent VAT Tribunal had to decide whether two hairdressing businesses should be treated as a single business for the purposes of VAT registration.

The distinction was critical as the two separate businesses were operating below the registration limit (currently £85,000) and the combined operation would have exceeded the limit meaning that VAT would need to be charged.

Note that HMRC have been successful in a number of cases aggregating the turnover of two businesses carried on by the same person(s).

However in this recent case it was established that the couple had never intended to run a single business in partnership. There was also physical separation of the premises, separate clientele, different stylists worked for each salon and separate books were kept.

Note that where the same person carries on several businesses, the combined turnover of all of those businesses need to be considered in deciding whether or not the VAT registration threshold is exceeded.

Which business structure is best for me?

Which business structure is best for me?

Starting a business on your own can be very exciting. You get to be your own boss, and plot your own course. There are lots of things to think about and you will need to make lots of decisions about many aspects of your business. One such decision you’ll need to take very early on in your entrepreneurial journey is the structure of your business.

In short, which business structure is best for me?

The decision is really between four different structures: sole trader, partnership, limited company or limited liability partnership.

Should I set up as a sole trader?

Setting up as a sole trader is the most simple way to start a business. It’s incredibly straightforward, with very little paperwork, less red tape, and fewer costs involved.

If you want to get going quickly, with less paperwork and compliance, it’s a great option.

There are, however, a few disadvantages. Namely, any business debt accrued is your own, there is no limitation of liability. And your profits are taxed as self-employment income. Tax rates for 2017/18 are 40% where your gross income exceeds £45,000.

To set up as a sole trader, you’ll need to register as self-employed with HM Revenue and Customs (HMRC) and complete a personal tax return annually too. One tip we would recommend is to open a separate business bank account to keep your personal and business finances separate enabling you to have better control over both.

Should I set up as a partnership?

Setting up a partnership is step beyond a sole trader model where you go into business with someone else. This is great to work together with someone and bounce ideas off each other.

It has many of the advantages of a sole trader business, being flexible and having less paperwork. But also has some of the same disadvantages. As a partner you are jointly liable for the whole debt of the partnership and again there is no limit on liability. Each partner is taxed on their profit share as self employment income. A partnership tax return will need to be completed in addition to each partners own personal tax returns.

We would recommend for most partnerships that a a partnership agreement is drafted to cover all the legal bases, including detailing how the profits, liabilities and ownership is split and what happens when a partner wants to leave the business.

Should I set up a limited company?

Setting up a limited company adds real credibility to a business. Even if you’re completely on your own, you can operate with the perception of scale and security; something many would-be clients will look for before handing out lucrative contracts.

The biggest advantages is as a limited company is its own legal entity, you liability as shareholder is limited (in other words, you won’t be liable for all business debt accrued (unless you have given personal guarantees).

However structuring your business as a limited company requires a great deal more paperwork than if you were to start as a sole trader, and the ongoing management can be onerous. This is something that puts some people off setting up a limited company

For example, there are certain legal responsibilities that you must fulfil as the director of a limited company, and being a limited company involves much more administration.

A limited company must prepare annual accounts at the end of the financial year, and complete a corporation tax return. A limited company must also submit an Annual Return to Companies House, outlining information regarding directors, shareholders, and the company’s registered office.

Another major plus for opting to set up as a limited company is the favourable tax landscape. Corporation tax is on its way down to 19% from 20% in April 2018, before dropping again to 17% in April 2020.

Consideration would need to be given as to how you would remunerate yourself and the tax consequences of this would need to be considered. Should you pay yourself a salary? Dividends? Or a combination of salary and dividends?

Should I set up a Limited Liability Partnership?

This structure is really a combination between a partnership and a limited company. It gives you the limited liability of a limited company but also gives you the flexibility of a partnership. But it is taxed in the same way as a traditional partnership which can be less favourable than a limited company. This structure is more typical of professionals such as solicitors or accountants.

Which should I choose?

The answer to this comes down to your circumstances.

Do you want the benefit of limited liability? Or are you happy that this would be a low risk.

What is your tax position? Which regime would be more tax favourable to yourself?

Are you testing the water with a new business idea? Well, it’s much easier and quicker to get started as a sole trader. That way you can see if there’s a demand for your product or service and perhaps set up a limited company a year or so down the line. Unravelling a limited company after a few months of trading if your venture is not successful, on the other hand, can be a costly endeavour.

But, if you’ve done your due diligence and you know there’s a market to be tapped into, setting up as a limited company can provide you with credibility and shield you from risk.

Still not sure? Let’s talk

If you’d like to discuss business structure options in greater detail, one of our friendly team members will be happy to do so.

Simply fill out our contact form, or visit www.saint.co.uk for our contact details.

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