Should I Incorporate? How limited company status can benefit Barristers

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1 Should I Incorporate? How limited company status can benefit Barristers Tel: +44 (0)

2 Should I Incorporate? How limited company status can benefit Barristers Contending with the tax burden As a Barrister, your self-employed status has meant contending with the tax burden that this brings. At Silver Levene we have spoken with thousands of Barristers over the last 30 years about how they can better organise their businesses into tax efficient enterprises. We now act for over 1,400 members of the BAR, which has given us unrivalled insights into the pressure points that all Barristers feel when running their businesses. Better organise their businesses The Bar Standards Board (BSB) is seeking to introduce new regulations regarding Entity Regulation for Barristers. This will no longer restrict Barristers to having to trade as self-employed. The new entities can either be Barrister Only Entities (BOE) and/or Alternative Business Structure (ABS). I have been a client of Silver Levene for the last 6 years, having previously been advised by a large City firm. I have always found their advice practical and constructive and always available to deal with issues that arise at short notice. The changes to Barristers working practices have the potential to be far reaching and complex and I have no doubt at all that Silver Levene will exercise their usual care and expertise to ensure that they provide accurate and constructive assistance. Dean Armstrong Q.C 2 Bedford Row 1

3 The likely options before you will be a traditional partnership, LLP, or limited company. It is our view that the limited company gives the most opportunity and benefit to a Barrister and this document seeks to outline that for you and how you can find out more. This guide also explains the first steps that you will need to take in setting up your company and the compliance issues once the company has been incorporated. The first steps All of the Barristers we speak to on a daily basis understand that the new Entity Regulations are a dramatic shift for the BAR, but one that shouldn t be seen as complex or time consuming. Shouldn t be seen as complex or time consuming As specialists, Silver Levene has supported Barristers for decades, but also have many years of experience in converting clients from self employed to a limited company with the least of amount of stress and cost plus the maximum benefit. If you would like to learn more about how to incorporate your business, call Peter Grossmark or Mason Bloom for an informal chat. Silver Levene s advice and services over the past 14 years have been first-rate. They are genuine specialists for Barrister work. I have been looked after by Silver Levene, who are always so approachable and most resourceful. They will undoubtedly be my first port of call for advice on new business models for Barristers. Peter Grossmark +44 (0) /in/petergrossmark Mason Bloom +44 (0) /in/masonbloom Rodney Dixon Q.C 12 Kings Bench Walk 2

4 The regulators current position To ensure we can give the most up-to-date advice to every Barrister that we work with, we have kept a close eye on how the new Entity Regulations have been developing. Kept a close eye These new regulations will for the first time enable Barristers to practice outside of the sole trader structure. Once the proposals put forward by the BSB have been approved by the Legal Standards Board (LSB), which given current information should go live by Jan 2015; Barristers will be in a position to apply for registration of Barrister Only Entities (BOEs). The BSB will be responsible for authorisation of the new structures. Subsequent to this the BSB s next stage is to seek designation from the LSB, as a licensing authority for Alternative Business Structures (ABS). This will provide the framework for Barristers to also have non-barristers as shareholders in an ABS. Alternative Business Structures include: Partnership Limited Liability Partnership (LLP) Limited Company This guide focuses on limited companies because they give the best tax advantages. 3

5 Advantages of Trading via a Limited Company As well as offering limited liability status, trading via a limited company offers significant tax savings when compared to self-employment as a sole trader. Trading via a limited company Make additional tax saving by gifting shares Maximise the amount of money that can be extracted Typically, a self-employed Barrister would need to be generating a profit of 50,000 before considering converting to a limited company. In addition, a Barrister may have a non-working spouse, partner or civil partner that under the ABS rules; would also be able to own shares in the new limited company. Barristers that move to a limited company structure can also make additional tax savings by gifting shares to a spouse or civil partner (that you are living with) if their income falls into a lower marginal tax rate than yours. By doing this you would be able to make use of their unused tax allowances and maximise the amount of money that can be extracted from the company at the lower tax rate. Corporation Tax Rate (%) <300k 300k - 1.5m >1.5m Limited Company Profits ( ) 4

6 Advantages of Trading via a Limited Company (cont.) Only have to pay Corporation Tax once a year As we have helped many thousands of clients make the move from sole trader to limited company, we know that the tax savings can be significant. After your new limited company is established, you would then normally only have to pay Corporation Tax once a year. Corporation tax is generally payable 9 months and 1 day after the Company s year-end. Run your business successfully means balancing remuneration To run your business successfully means balancing remuneration (your salary and pension contributions) with the dividends your new company pays to shareholders. It is important to understand how your salary and dividend interact with each other when your new limited company is established. Extracting profits from your company Generally the most tax efficient method of extracting profits from your company is via a modest salary and the balance paid as dividends. Dividends do not attract employees or employers National Insurance, which a salary would. A further advantage is the ability to retain profit within the company. Because salary and dividend are paid to you separately, you have a great deal of flexibility with the timings of these payments. The practical upshot is that this flexibility enables you to minimise your tax liabilities. Profit can also be retained within the company and used to make Investments generating further income within the company. 5

7 Salary The level of salary that your new company pays to you is an important consideration when it comes to tax planning. The most tax efficient salary (in most cases) is one set at the personal allowance level ( 10,000 for the 2014/15 tax year). At this level there will be no income tax to pay, only a small employees National Insurance contribution, which we advise should be paid to maintain your rights to a state pension on your retirement. Also, employers NI will be covered by the 2,000 employer s exemption. Reduces your overall Corporation Tax bill And there is one final advantage to paying yourself a salary: The salary will be treated as a deductible expense for Corporation Tax purposes, which reduces your overall Corporation Tax bill! The most tax efficient salary (in most cases) is one set at the personal allowance level ( 10,000 for the 2014/15 tax year). 6

8 Dividends A dividend is a payment you make to shareholders including yourself from your company s profits (after deduction of Corporation Tax). Dividends can be paid to any shareholders. The Income Tax rates on dividend income is as follows: Effective Tax Rate (%) I would be more than happy to recommend Silver Levene to anyone. They are knowledgeable, reliable, efficient and reassuring. I have used them for a number of years and have been consistently impressed. Ben Lynch Devereux Chambers 7

9 Dividends Illustrated below are the potential tax savings based on current tax rates (2014/15) with the Company being owned wholly by the Barrister. This assumes a salary of 10,000 p.a. from the Company. The above tax savings would be even greater if a non-working spouse or partner is a shareholder of the company and receiving dividend income. 8

10 How to run your own limited company The following steps outline the key stages in setting up and running your own limited company. Choose a name 1 2 Choose a name for the limited company Incorporate the limited company, appoint director(s) and issue shares Appoint director(s) 3 4 Nominate the registered office address Apply to the BSB for entity approval Office address 5 6 Set up the bank account for the Company Register the Company for VAT, PAYE and Corporation Tax Set up the bank account 7 Set up the required professional indemnity Insurance for the Company Set up the bookkeeping system 8 9 Notify Chambers of your new structure Set up the bookkeeping system to maintain the records of Company transactions 9

11 How to run your own limited company (cont.) Silver Levene offer a one-stop incorporation service for a flat fee, which includes the following to get you ready to start trading: Incorporate the Company Register for VAT Set- up payroll and register for PAYE Register for Corporation Tax Financial review with an independent financial advisor specialising in Barristers Cloud-based accounting platforms We will also advise on the best way to maintain your Company s books and records. One of the most efficient ways is to use an online system often referred to as cloud-based accounting platforms. We can help you set your accounts up, and help you gain the most from your cloud accounts. You will for instance, be able to check any aspect of your new company s financial position via any Internet connected device such as a smart phone or tablet PC. 10

12 Timing of incorporation and ceasing as a self-employed Barrister The timing of the decision to change your business from being self-employed to trading via a limited company is important. Corporation Tax is generally not payable until 21 months after incorporation. Timing of the decision Not payable until 21 months after incorporation At the point of ceasing as a self-employed Barrister, cessation accounts must be prepared. These are important, as they give HM Revenue & Customs (HMRC) a clear picture of your financial status at the time you stop being self-employed. When you intend to take your salary and dividend out of your new limited company is something that you must carefully consider, as this can potentially overlap with income from your previous self-employment. Talk to us about this important consideration to ensure you minimise the amount of tax you have to pay in your last year as a self-employed Barrister. Deregistration for VAT will be required and an application to join the Barristers deferment scheme will also be needed. The cancellation of the direct debit for Class 2 National Insurance must also be completed promptly. One important step We can help to make these stages of incorporation as painless as possible. One important step before beginning your incorporation process is to check that your Chambers will accept your limited company as a member of Chambers. Some Chambers may have to update their constitutions to permit this. 11

13 Advantages and disadvantages of incorporation The key advantages behind incorporation include: 1 Tax reduction 2 Flexibility with salary and dividend payments Tax reduction 3 4 Status as a limited company Reduced risk as your Company has limited liability The main disadvantages of incorporation include: More detailed accounts are necessary to prepare Accounting costs will be higher Limited company status may add an additional layer of complexity to mortgage applications Accounting costs will be higher In almost every case, the advantages of incorporation far outweigh the disadvantages. Plus terrific opportunities exist for both limited liability and increased tax efficiency. 12

14 Advantages and disadvantages of incorporation (cont.) These can seem complex There are also a number of important responsibilities that you ll have as a director of a limited company. These can seem complex, but we are here to help with every step of the process. Annual accounts need to be filed with Companies House and HMRC. Abbreviated accounts are required to be filed within 9 months to Companies House and are in the public domain. Full accounts need to be filed with HMRC within 12 month of the companies year-end. A P11D form detailing any benefits or expenses paid to or on behalf of any directors must be submitted along with any Class 1A National Insurance. Deadlines for submission of accounts An Annual Return confirming the details of the directors and shareholdings needs to be filed with Companies House. Missing any deadlines for submission of accounts or documents will incur penalties. Pension arrangements would need to be changed so that the Company contributes to the directors pension, which is a tax-deductible expense for Corporation Tax purposes. All funds taken from the Company must be identified as salary, dividends or reimbursed expenses. 13

15 How Silver Levene can help Think about last year. If you made a profit of at least 50,000, the advantages of moving your business status from sole trader to limited company are many. The key factor will be the ability to significantly reduce the amount of tax you are paying. Reduce the amount of tax You can also gain more control over your business financial life, and have greater flexibility with how your new company develops. Silver Levene have helped many thousands of clients make the transition from self-employed sole traders to limited companies. As you have seen in this document, there is a great deal to consider before making the decision to Incorporate. Don t forget our app We understand these concerns, as we have first-hand experience of supporting clients through this transition. Don t forget our app, which you can download now for free from either Apple or Android. It contains a handy should I Incorporate? calculator that will instantly show you how much tax you could save by moving to a limited company. +44 (0) You will of course have many questions that need answering. Why not give Peter or Mason a call to begin your journey to a more efficient and more profitable business. 14

16 Silver Levene 37 Warren Street London W1T 6AD DX: Tottenham Court Rd 2 Tel: +44 (0) Fax: +44 (0) Fax: +44 (0)

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