Coleman Bradshaw

LET'S INCORPORATE

2 men are in a bar - Dave and Simon. Both are self-employed, making profits of around £50,000.

Simon - "My accountant has advised me to incorporate. It's taken a while to get my head around this, but, basically, if I watch how much I take out, I can pay no personal tax, and even less on my profits!!"

Dave - "Really?"

Simon - "Yeah, and they say that they can give me a load of cash to draw out - tax free - whenever I wish!"

Dave - "Surely not!! How's that then?"

Simon - "Dunno - some sort of transfer of assets, they say".

Dave - "Isn't that a legal issue? Seems a bit too complicated and risky to me, I'd rather stay as I am!"

Simon - "Well, they said that all it involves is a word or two with the bank, a bit of jiggery with the spreadsheet that I do invoices on, some sort of payroll scheme to set up - seems pretty easy to me".

That evening, Dave pondered on the conversation he'd had with Simon. His accountant had mentioned something like this to him a few years ago, but he had not really taken their advice - he was too worried about the whole "transfer of assets" thing. Would he be set to lose his house?

The next day, Dave decided to give his accountant, Sam, a call.

Dave - "Tell me all about this incorporation thing again. My mate earns the same and pays less tax than me".

Sam - "OK then. Basically, what we do is call Companies House, who will create a company for you, and all the paperwork will be sent to me to complete. So, we'd set you up as director, your house as registered office - this means simply that they know where to send everything to! We'll need to change your payroll scheme - but don't worry, there's only yourself and your lad, so we'll sort that with the Revenue."

Dave - "What about this tax-free cash then?"

Sam - "Well, your business has goodwill in it - made up of the business name, contracts, customers, location and the sort. It's the amount that is above and beyond all those things that you can touch, like your premises and vans. When you put your trade into the company, we create a cash pot that is made up of this goodwill. When we do this, there will be an immediate tax liability, but it is cheaper in the long term. Say you had goodwill of £200,000. This would probably cost you around, for argument's sake, £20,000 in tax immediately, but you will have £200,000 to draw whenever you wanted without having to pay any further tax. If you were to be paid a net salary or dividend of £200,000, it would probably cost you £50,000 - so that's a saving immediately of £30,000!"

Dave - "Yeah, but that's a tax bill of £20,000!!!"

Sam - "Ah, but your profits will also be taxed at a lower marginal rate of tax - companies have a different tax regime with different rates and rules than you have at the moment. Overall, it will save you a lot of tax over the coming years. And it will give you a guaranteed £200,000 to draw this year alone, funds in the bank willing, that is! And whatever profit you make next year will be added to this pot. As long as you don't draw more than is ever in this pot, there will be no problems. But we will monitor this for you."

Dave - "Yeah, but all this sounds expensive for you. What will your bill be?"

Sam - "Well, we have a standard fee for incorporations - £175 + VAT, and this covers all the paperwork from Companies House. Your accounts fee at the moment is about £500 + VAT, so, I'd say the accounts fee for the company and doing all the filing of the accounts with Companies House will be an additional £120".

Dave - "Filing with Companies House? What does that mean?"

Sam - "All company accounts need to be filed at Companies House, and available on their databases for download".

Dave - "Yeah, but doesn't that mean all and sundry can see my turnover? I don't want Gary to be able to see them - he's trying to undercut my prices!"

Sam - "That's no problem, we can submit abbreviated accounts, that only show your profit, they don't show your turnover or costs separately".

Dave - "Yeah, but won't that increase your fees?"

Sam - "This process only takes half an hour or so, it's all part of the package".

Dave - "Yeah, but what about these payments on account, or whatever they are? I pay for next year's tax, don't I?"

Sam - "Not with companies, you just have the one payment, due 9 months and 1 day after your year end. If we go to the end of December like we always have done, it will be due 1st October the following year".

Dave - "What's this 'transfer of assets' thing all about? Will I lose my house?"

Sam - "We simply show all your income and expenses as being the company's - just put 'Limited' after your sales invoices, let your suppliers know, and then speak to Pamela at the bank, and she will sort out opening you a bank account in the name of the company".

Dave - "Yeah, but what about VAT?"

Sam - "We'll sort that out as well. Just tell your customers and suppliers that you are waiting for your registration number to come through. Put this sentence at the bottom of your sales invoices, and tell customers that you will re-issue these correctly showing VAT when your number comes through. I can even put this on for you if you mail me the template you use".

Dave "Yeah, but..."

Dave couldn't think of anything else to ask for now.

It all seemed to good to be true...

'Surely not!' he thought.

Dave - "Well, thanks Sam, I'll have to consider it this time".

If you want to know more about this - especially if you are running into high tax bills - please do not hesitate to give us a call, and speak to Sam.

(Well, we don't currently employ Sam - but doesn't he sound like a nice bloke?)

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