After 10 years of trading with Pinkstone Pictures I’m converting the business into a Limited Company. I’ve been putting this off for years, but tax implications give me the nudge to “get on with it.
Let me explain all the pros and cons, why I’m doing it and what’s changing in my paper trails with HMRC for tax and VAT returns.
I’ll update this article as I go along with this adventurous journey 😉
I founded my sole trader business Pinkstone Pictures UK in June 2000 as a vehicle to start freelancing in the broadcast industry. It’s been going well and my (then) accountant recommended I keep an eye on my turnover: should it ever reach £60.000 or more I could make a significant saving in taxes by trading as a Limited Company.
Back in those days companies didn’t have to pay tax on the first £10k profit, a loop hole that’s been closed in 2006 – shortly after I founded my limited outfit Pinkstone Pictures Ltd. I had crossed the turnover threshold by then and had intended to use the new company for my broadcast work and many other projects i had diversified into. With the potential savings gone, and us withdrawing from high-profile art installations due to time constraints, I carried on being a Sole Trader until now.
Turns out that one of my biggest clients had a visit from HMRC about employment grades and which of those should be taxed at source. Unfortunately many of the TV jobs are not recognised as such by HMRC which means instead of gross payment, IMG would have to start deducting tax from now on.
That’s not necessarily a bad thing though since we all have to pay tax at some point. I’d still end up paying the same amount to HMRC and I’d never get to the point where I’ve already invested the money that I owe them… not too bad a deal then.
But my colleague Paul Weston from MTV knows a bit of a horror story to tell:
He had already paid many years worth of tax to the Inland Revenue back in the days, and because of a paperwork mix up at their end, they wanted him to pay those taxes again! I figure once they’ve got it, it may be more difficult to get it back than to keep it in the first place and only pass on to them what I’m owe.
Trading as a Limited Company has another benefit of course: “me” and “the company” are two different entities now, which wasn’t the case before. That’s where the word “limited” really makes sense: beforehand, if someone had sued the pants off me, my house/car/dog/wife would be classed as “collateral” and potentially be taken from me. A Limited Company however can only be taken to court over its own assets. In my case, that’s not a lot.
The downside of trading this way is the lack of “grey area” which there is now.
Say I buy a camera via the company then it belongs to the company. Strictly speaking, I can only use it for company purposes, not for personal things. That’s true for anything you buy through the company, like a car, laptop, work clothes, etc.
If you use your company assets for a personal engagement (say going shopping in your company car), then you’ll have to hire it from the company… it can get difficult, which is why I’m meeting my new accountant Mark Norden next week to discuss the ins and outs in detail.
My benefits certainly are lower tax payments if my turnover keeps growing and my personal assets are protected in case something goes horribly wrong. I’ll also be able to trade under different names (i.e. Pinkstone Pictures trading as Guru Hosting) which wasn’t possible before. And I’ll be paid gross without there being a PAYE discussion with any of my clients, past present or future.
However, I’ll have to do quite a bit to make that all happen:
- I’ll have to open a new bank account as I can’t convert the old sole trader account unfortunately due to the “separate entity” business. I’ll have to tell every client not to pay the old one anymore. And of course make sure that new account is linked to PayPal and my online banking.
- I’ll also have to transfer my VAT number over to the company, which is straightforward – but yet another form that needs to be filled out (and can’t be screwed up).
- In the future I’ll have to file TWO tax returns instead of one (for me and the company seperately) and I’ll have to work out some kind of salary scheme. And I mustn’t forget to file an annual return with Companies House, which means my earnings are now public property.
I’m sure it’ll be much easier in practice than it appears right now in theory, so I’ll keep you posted as to how I get on. Until then, it’s Business as Usual here at Pinkstone Pictures 😉