MTD for Self-Assessment – is it time to become a Ltd Company?
With the horizon of Making Tax Digital (MTD) for self-assessment very much on the landscape many small businesses are considering the benefits of incorporating a Limited Company to avoid the rigours of quarterly reporting and the new requirements of six returns being needed every year. There is much to consider when contemplating forming a limited company so let’s have a look at what this means and the benefits and disadvantages of doing so.
Firstly, to understand what Making Taxing Digital means for sole traders please read our previous article at:
Is it easy to transfer my business to a Limited Company?
You will need to firstly set up the Limited Company at Companies House. Although this can easily be done online you will need to have made decisions on the following:
- What’s my company going to be called?
- How much share capital should it have?
- Who are the Directors and Owners?
- What registered address should I use?
- What bank account should I set up for the new Company?
- How do I transfer my current business to the Limited Company?
You do need to properly transfer the operations and assets to the newly formed company, you can’t just start trading through it. For this you do need professional advice to ensure it is done properly and doesn’t breach any HMRC guidelines, for example, how you value the business. Another important consideration is having to novate or assign customer, supplier and other contracts (eg, landlord) into the new business.
Are Limited Companies affected by MTD?
Limited Companies are not affected by MTD ITSA because they don’t file a self-Assessment return for trading profits. Instead, they file:
- A Corporation Tax return (CT600) once a year to HMRC.
- Statutory accounts once a year at Companies House.
- Confirmation Statement which again is filed annually at Companies House.
- A Personal self-assessment tax return for dividends/salary will still need to be filed if you’re a director-shareholder. This is currently outside the scope of MTD for self-assessments.
If the company is VAT registered these do need to be filed quarterly under the VAT MTD which has been in place for a number of years now.
What are the advantages of incorporating to avoid MTD for self-assessments?
- No quarterly MTD submissions unless VAT registered.
- Potential tax planning opportunities, e.g. mixing salary and dividends.
- Limited liability protection.
- Perception of a more credible business.
What are the disadvantages of becoming a Limited Company?
- There are additional costs involved with running a Limited Company as the annual returns are more complicated and will require a professional to complete them properly.
- A Limited Company is a separate tax entity so the money in it isn’t automatically yours — you need to extract it as salary, dividend, expenses or loan.
- If profits are higher than £50 000 the corporation tax rate is 25% but remains at 19% below that threshold. There is marginal relief on the higher tax rate until profits are £250 000.
- MTD for Corporation Tax is expected eventually, so incorporation may only delay digital reporting.
What are the Alternatives to incorporation?
- If your income will stay below the £30,000 threshold by 2027, you may never need to comply with MTD ITSA.
- Even if above the threshold, using cloud accounting software, e.g. Xero, QuickBooks, FreeAgent makes MTD submissions fairly painless — so incorporating purely to avoid MTD may not be the best reason.
Incorporating to avoid MTD for self-assessment may seem like a good option it does come with its own complexities. If your main driver is to just avoid MTD it may not be worth it BUT if you’re already considering incorporating then now is a certainly a good time to do it. There are many positive benefits of being a Limited Company which do outweigh the additional costs especially if you are looking to grow and develop your business.
Do
contact us if you have any concerns about MTD for self-assessment or you’d like to discuss the merits of incorporating as we are specialists in both fields.
