Starting a business in the UK – Limited Companies, Sole Traders and VAT

The web is full of advice on how to start and grow a business. There are many guides out there that I’m sure go in-depth on the subject of whether to be a Sole Trader, Ltd Company or maybe a Limited Liability Partnership. But if you’re short on time and just wondering which one might be for you then here I present a brief summary.

Self Employed/Sole Trader

Being self-employed or a sole trader basically means that you are invoicing out for time spent consulting or products sold. You may be buying in products in bulk, splitting them up and selling them on for a profit. It is basically this profit that you pay your tax on. Another scenario maybe that you offer out consulting services, you invoice the employer for time, this can be like a regular job except you would typically have multiple employers and rather than paying tax via PAYE (Pay as you earn) you work out your tax yourself in your annual tax return after your expenses or running costs.

The take home on being a sole trader, especially in a product company rather than a consulting company is that you are fully liable for your trading companies debts and other liabilities. If you get in to financial difficulty you do not have the type of assistance available that a Ltd company would have. The end result often is bankruptcy which makes starting out again very difficult.

Limited Company

Starting a Ltd (Limited) company basically means you are incorporating a company at Companies House. A Ltd company is its own legal entity. You will pay corporation tax on your profits at the current rate (this rate can vary depending on government budget announcements and your turnover level, below £300,000 is around 20%, above this is around 24% typically). You must consider here that on top of your corporation tax that you will have to become a direct PAYE employee of your company and will attract the standard PAYE rate. You will be a Director of the company and one of any amount of shareholders. The minimum shareholding is £1.

Starting a Limited company means that the directors liabilities are limited. This means that in times of trouble and/or struggle the Directors are relatively safe from being pursued by creditors. This may not always be the case depending on how you operate your business affairs. Always be honourable and you won’t have any problems.

VAT

It’s worth quickly covering off VAT. You don’t have to register for VAT with HMRC until you turnover more than 79k per annum. You can register voluntarily under this amount. If you’re buying and selling this is probably the best thing you can do as your suppliers will surely be charging you 20% on your purchases which you will have to swallow as you cannot pass this on to the consumer unless you are registered.

Once registered for VAT you have to charge your customers VAT on top of your retail price which you must declare to HMRC and pay them once a quarter. However whereas before you had to swallow the VAT you were being charged by your suppliers you can now claim it back from HMRC which should help lower your quarterly VAT bill. In the early days of your business this can be a big help if you are making lots of large purchases to get going as this immediately reduces the cost of your investment by 20%. There are certain cases that would allow you to claim back pre-start VAT. This is complicated and you would need to seek the help of a VAT accountant to help you with this.

Before making a choice it’s best to really think about how your business is likely to look like in 12 months time. Some things to also think about is that for a Ltd company it must have a bank account in its own name with no exceptions. A bank will usually request some form of business plan and financial projections. If you are turned away then approach Natwest, they are a very friendly bank to do business with and I have found their approach more personal than other banks. You can use your personal account for your sole trader business, pop along and see your bank manager, they can best advise you on this but it does mean you can have a go with no major commitment.

2 Comments
  • Heather

    I personally was initially hunting for recommendations
    for my blog site and came across your article, “Starting a business
    in the UK – Limited Companies, Sole Traders and VAT |
    Liam Winder”, would you mind in cases where I really
    make use of a bit of of ur points? Thx ,Lyle

    November 5, 2013 at 10:56 pm
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