Sunday 27 December 2009

Limited Company or sole trader for professionals?




Sole trading is the most popular, and simplest way to set up in business in the UK. 

What is a sole trader?

Setting up as a sole trader is an easy process. After informing HMRC of your intention to become self-employed, you can get going right away. Unlike using a limited company, you are personally liable for the finances of the sole tradership, and your liability for any debts incurred is potentially limitless.

For taxation purposes, your personal and business affairs are treated as one, and you account for your business income via the self assessment process each year.



Once you have told HMRC that you have started out as a sole trader, you are in business. 

Unlike the limited company structure, your business and personal finances are combined, and you will be taxed under the self assessment system.

Sole traders do not have to undertake most of the administrative tasks
required of limited companies (such as dealing with Companies House and corporation tax), however should anything go wrong with your business affairs, your liability is not 'limited' (as it would be using a limited company).


However, despite the popularity of the sole trader business structure,many IT contractors or other professionals prefer to work through a limited or umbrella company.

Why don't IT contractors or other professionals  set up as sole traders?


There are several reasons why this is the case:

1) Fundamentally, the Income Tax (Earnings and Pensions) Act 2003 - and previous Acts - prevent 'self employment' when an agency is involved, as the obligations of the Act would mean the recruitment agency would have to treat the contractor as an 'employee' and deduct PAYE and national insurance at source.

Chapter 7, s44 states:

"all remuneration receivable under or in consequence of the agency contract (including remuneration which the client pays or provides in relation to the services) is to be treated for income tax purposes as earnings from that employment."

2) Additionally, the agency (or client) could potentially be liable to pay any tax liabilities of any contractors who defaulted on their payments to HMRC.

3) From a contractors' point of view, your personal finances are protected if you work via a limited company and something goes wrong (assuming you run it in an above board manner), whereas as a sole trader your business and personal assets are treated in the same way.

In the absence of the tax legislation mentioned above, this reason
alone would probably be enough to dissuade contractors from becoming
sole traders.


The Income Tax (Earnings and Pensions) Act 2003 - and previous Acts -
prevent 'self employment' when an agency is involved, as the obligations of the Act would mean the agency would have to treat the contractor as an 'employee' and deduct PAYE and NICs at source.


Additionally, any agency or client who took on a sole trader contractor could also be liable for and tax on which the contractor had defaulted.

Even in the absence of any legislative reasons why you could not contract as a sole trader, the limited company route is far more tax efficient. Even if you are caught by IR35, you would still be better off as a limited company contractor.

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