Dan Lucas wrote:
Marie-Celine Grech wrote:
The end of the financial year is approaching and it always fills me with dread, due to the large tax bill which I generally have to pay, to include NI, Class IV contributions as well as Payments on Account.
I may be able to help as I have gone through all this quite recently. I created a limited company in 2013 and since that time my business has always been conducted through this company. It is hard for me to imagine conducting that same business as a sole trader at this point in my career. Nevertheless, it is emphatically not for everybody.
One major motivation for me to establish a limited company was to signal to potential clients that the business is established, transparent and committed. It DOES take more work to set up and run a limited company, and so it should. The result is that anybody can find out where my company is located, who is managing it and even take a look at the balance sheet if they want to. I have nothing to hide. This appeals to a certain kind of client, the kind that places value on knowing exactly who they are dealing with.
As I've repeatedly argued in this forum, if you want to differentiate yourself, then perceptions of professionalism are important to new clients. With a limited company, certain actions must by law be taken every quarter or every year and the consequences of non-compliance within the permitted timescale can be serious. It does indeed take more organization and more professionalism to run a limited company.
A common straw man argument advanced by detractors of the limited company route is that none of the above means you will be a better translator. They are correct; there is no direct connection. If you're not a good translator, then operating out of a limited company will do nothing for you. (Often the same people make similar arguments about certification.)
However, if you are a competent translator, and you wish to differentiate yourself from others who are also competent, then working through a properly managed limited company with all that implies for commitment and professionalism can often - I believe - be helpful. Simply put, the baseline is higher. You are demonstrating that you can jump higher hurdles than other people. It's the same story with certification.
When I made the decision to set up a company, there were several other considerations, such as whether I wanted to employ people in the future, or develop the business in a different direction that would require more scale. I did not have a clear idea of exactly what I wanted to do, but the limited company route give me options I thought would be useful, and in that I was entirely correct.
One such benefit is being able to reclaim VAT, which was something I had in mind from the start but did not expect to implement as early as I did. Reclaiming VAT has been useful, because I have for various reasons had to buy spend quite a bit on company-related items over the past year and not paying VAT really helps, as does the capital allowance. I also travel to at least a couple of conferences every year, and the company covers my expenses for that.
The lower rate of corporate tax and NI do help when you are starting up, but if you are successful and profits hit a certain absolute level then the effect is diluted. So the tax gains are really only effective if you're "not making that much money". As I planned to be successful, I appreciated that the limited company would not have a major effect on my tax arrangements once it grew to a certain size.
Now that I'm used to it, I find that the much-bruited administration work is not such a big deal, partly because outsource the most difficult bit. As an example, I did the annual company return a few days ago and it took me literally 10 minutes, maybe less, all online. However, you will have to keep accounts, though you can do that in anything from an Excel file to an accounting package.
My company uses an online service called AccountsPortal that costs me about £10 a month. I enter all my transactions from the company bank account into this. This is made easier by being able to export transactions from the account and import them and have them automatically sorted in AccountsPortal. On the positive side, once the transactions are in the accounts, my VAT report becomes trivially easy to implement. This
I mentioned outsourcing above. I use a professional accountant, who also does my payroll and tax returns, and I probably pay her about £1000 a year. For some people that's a lot of money. I think you could certainly pay less or simply learn what you need to do in terms of bookkeeping and do it all yourself, but of course it depends how much time you want to spend on a non-core function.
If you are a full-time professional translator, and you're busy enough that you have difficulty dealing with demand, does it really make sense to take several hours a month out of your timetable to perform, perhaps ineptly, accounting work that a specialist will be able to do competently in a fraction of the time?
I think about this every few months and every time I come to the conclusion that it's better for me to pay the accountant the equivalent of a couple of hours of my time to do it for me and to get it right. I also email her accounting and finance questions whenever I feel like it and there is a definite "comfort blanket" factor at work. If you're only earning a couple of thousand pounds a month from translation, then clearly it's going to be difficult to justify paying much money for professional service suppliers. If your monthly revenue is, say, £5,000 or £10,000 a month, then it's no longer such a big deal. Horses for courses.
As to the legitimacy of sole traders setting up limited companies, the concerns that HMRC has (and has had for many years, by the way - this is nothing new) concern mostly people who work for one client by whom they are effectively controlled, and also control when and how they work. This is quite a common situation with IT industry contractors, and has been seen by HMRC, understandably, as a way of illegitimately lowering the tax burden of the client. Most freelance translators are genuinely independent, work as and when they wish and have multiple clients who have no say in how the translation is performed other than to evaluate the result, so this is unlikely to be a problem.
[Just as an aside, there are very few countries anywhere in the world that are as friendly to small business as the UK. It is indeed a nation of shopkeepers and others on the same economic scale. The current government (which, given the current and lamentable absence of a strong Opposition, is likely to remain the government for some time) has no interest in squishing the little guys. As you yourself point out, corporate income tax rates are trending down, which will take some of the sting out of any additional regulatory requirements. If anything, the policy pendulum seems to be swinging towards greater and (to my mind) entirely justified scrutiny of the larger multinational players.]
Nevertheless Marie-Celine, given your original post I suspect that a limited company may not be the right choice for you. You seem to be considering a limited company as a kind of defensive measure to make your life simpler. I don't think it will achieve that for you.
Ask yourself the following questions.
- Is your business is thriving and turning a decent profit every month?
- Are you still growing and acquiring new clients?
- Do you invest money back in the business in the form of purchases of equipment, professional subscriptions, conferences and travel?
- Do you have plans to maybe take on bigger projects and grow further?
- Do you, and this is perhaps the most important of all, have a certain mindset that derives satisfaction from the business side of translation?
If you answered mostly "no" to the above, it is likely that the benefits of running as a limited company would be more than offset by the disadvantages alreadyenumerated by several people in this thread. They changed back from limited company to sole trader status for sensible reasons. It is not the right route for everybody. Personally, I quite enjoy it all and it makes sense for the kind of business I want to run.
PROS
- Enforces greater transparency on the business
- Implies and signals a higher baseline of commitment and organization than a sole trader
- Company can reclaim VAT on corporate purchases
- Potential for lower tax rates, at least when the business is not turning large profit
- Makes hiring people and premises simpler if the company gets larger
- Shields directors from personal prosecution provided that they have not been negligent
- Can be established and run very cheaply if you are prepared to do most of the work yourself
CONS
- The company must comply with numerous additional regulations
- Certain information about directors and people with significant control must be made public
- Abbreviated accounts must be made public
- Increases costs for services such as accounting, certification and IT if the firm takes a "big company" rather than a DIY approach to such matters
Regards,
Dan