Company vs Sole Trade

IR35 was once again in the headlines this week with Gary Lineker’s solicitors telling HMRC they are “looking in the wrong place” for a reported £XXX tax liability.  IR35 relates only to circumstances where there is an intermediary company (be it an umbrella company or the individual’s personal company) but contracting directly with the customer as a self-employed individual doesn’t remove the risk that HMRC will deem their relationship to be one of employment [article on employment status].

We have covered at length the considerations which might be given when looking at incorporating a property portfolio, but what about another businesses?

One of the hardest things for people to grasp, is that the company is a separate legal entity from the people who own it (the shareholders) or manage it (the directors).  This means that all income and expenses belong to the company and it is responsible for paying its own debts.  Whilst this gives some level of personal protection should the company become insolvent, it also means that cash and assets owned by the company cannot simply be used or procured by the director/shareholder without tax implications [insert Tom article on director remuneration].

On the subject of directors and shareholders, it is worth pointing out that, whilst they can be the same individual, they are two distinct persons:

• A director must exercise reasonable care, skill, and due diligence to manage the company in such a way as to promote the success of the company for its stakeholders.  Stakeholders include employees, suppliers, customers, HMRC, and shareholders.
• A shareholder owns the shares in the company which they have acquired in exchange for a cash investment.  Depending on the rights attached to those shares, there may be an entitlement to voting rights, assets on winding-up, or dividends (or any combination of those things).

Certain details about the directors and shareholders are publicly available on Companies House and whilst some people may have security concerns regarding this (and the quantum of junk mail is phenomenal) it does give reassurance to potential clients of your legitimacy as a business .

Companies are required to file annual accounts and Confirmation Statements with Companies House – failure to do so may result in fines or the company eventually being compulsorily dissolved (in such cases all company assets become the property of the Crown and a court order is required to reinstate the company).  Corporation Tax returns must also be filed with HMRC.

Sole Traders currently have a single self-assessment tax return to file with HMRC and whilst accounts aren’t required to be filed with an Government authority, they are required in order to ascertain annual profits.  I say ‘currently’ because HMRC are in the process of implementing Making Tax Digital [article?] for individuals who meet certain criteria which will require quarterly filing and payment of tax (although this has been pushed back to April 2026).

Whilst tax is oftentimes an immediately tangible consideration when deciding whether or not to incorporate, it is important to recognise that tax legislation changes regularly (the past six months have been somewhat “extreme” in this respect, but my comment stands) and longer terms goals also need to be considered.  Corporation tax is currently 19%, lower than the basic rate of income tax (20%) but is increasing to 25% from April 2023.  When considering that profit drawn from a company (via salary or dividend) is subject to tax on the individual, operating via a company is not always the best option. If you would like to discuss whether or not to operate your business via a company we would be happy to help.  We can provide comprehensive advice on incorporation relief, loss relief, capital allowances, assets made available for private use, and exiting the business

If you would like to discuss anything in this article then please do get in touch with a member of our team here

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