To incorporate or not to incorporate?

Re:To incorporate or not to incorporate?

The last budget did see the chancellor begin to close loopholes in incorporation and the tax advantages this brings. However, it would be unfair to dismiss incorporating altogether if there are clear taxation advantages to your client. The rate of corporation tax for SME's has increased to 20% this year and will see another increase to 21% next year and then 22%. The abolition of the 10% starting band for individuals and the eventual increase to 22% of corporation tax has seen the gap being closed. Broadly, the change favours middle earners at the expense of the lowest paid.

Incorporation could still be advantageous to some clients - particularly those in a partnership/sole trader company who are in the higher tax bracket. Quite clearly, if a sole trader/partnership is yielding profits of £90k then incorporation could be appropriate as this would avoid a large proportion of tax being paid at 40% and would also save class 4 national insurance contributions. Also, incorporation brings with it limited exposure in terms of claims being brought against the firm by creditors (limited liability). Whilst this is somewhat a hidden advantage (masked by the tax advantages of incorporation) it is worth pursuing if your clients partnership/sole trade business is lucrative.

Charges levied by accountants for company secretarial work have to be taken into consideration when dealing with the incorporation or not issue. There is the fee for actually doing the work (most firms charge per hour): formation costs, completion of annual returns, annual filing fees at companies house and the preparation of abbreviated accounts. Professional fees for the above would, however, be fully tax deductible (except for formation costs which would be deemed capital in their nature). These charges have to be built in to your calculations as these are the issues which put a lot of clients off incorporation.

Incorporation should not be dismissed in its entirety by professional accountants. However, it is true to say that the tax advantages have been somewhat melted down in the last budget.

Another key considering to incorporation is how appropriate it is for your client. I have one client who is a partnership, yields a lot of profits but does not want to incorporate for certain reasons. You say that you have done some preliminary calculations proving incorporation would save them money. A key part of the incorporation planning is undertaking planning work to see exactly how such a route would affect your client and these issues need to be discussed with your client and their accountant. It could well score you brownie points in the process!

Kind regards
Steve

Re:To incorporate or not to incorporate?

Under the companies act they have to keep proper books and records. We have Ltd company clients on our books that keep appalling records but we can still work with them.

As long as he keeps records he is still keeping books of account - he doesn't have to prepare a balanced trial balance. It has to be recognised that clients want to run their business and usually approach the services of accountants/accounting technicians to assist them with their record keeping. The fees for company secretarial can vary from firm to firm. Typically, £80-90 for completion and submission of annual returns, the filing fee is £15 if done on line, £30 if not and approximately £200-£250 for forming a company - though this can be done much cheaper by the client/bookkeeper online using a formation agent.

I would like to point out that I often take advice from accounting technicians and bookkeepers who are more "in tune" with their clients day to day bookkeeping and finances than I am. Qualified accountants can sometimes divorced from the "nitty gritty" stuff, mainly due to charge-out rates versus work requirements so it is essential to work together for the client - not to throw away ideas from others also involved with the clients affairs.

Best regards
Steve

p.s. I did forget to mention that the 10p starting rate abolition takes effect from April 2008 as does the reduction in the basic rate tax rate.

Re:To incorporate or not to incorporate?

Unfortunately, Siany, the profession always has had (and always will have) professionally qualified people who feel a sense of inadequacy if they have to ask someone who isn't fully qualified about matters which need clarification.

Asking a question or confirming an issue does not mean that person is inadequate. The partners at my firm are always me questions about audit/tax/accounting standard issues and vice-versa because we can't know everything 100% off the top of our heads. Similarly, only last week did I ask our AAT qualified girl a VAT question because I did not have the time to search the website or trawl through books when there is an sufficiently able person downstairs who I can speak to!

Kind regards
Steve