Step Ahead Business Club

Our Step Ahead Business Club is a IoCP and CoFH members networking group for private practitioners. It is open to all members across the organisations. We meet quarterly to discuss topics raised by yourselves with the aim to offer peer advice and support to your career and business.

Our last meeting was held on 22nd July in which we were joined by accountant Jenny Tobin to discuss the pro’s and con’s of sole-trader vs Limited Company. Below we give an overview of the main differences and share some important questions raised during the meeting. A full recording is available to both IoCP and CoFH members via the secured area of our website.

Sole-trader vs limited company

We’ve completed our healthcare training and know the anatomy and workings of the lower limb inside and out, but whether you are new to this profession or looking to change your career direction, the one thing we all have to do when setting ourselves up as independent practitioners, is have a general understanding of the legal obligations for setting up a business.

When setting yourself up to work independently you have 2 options:

1 Sole-trader – self-employed individual responsible for themselves as a business. Simplest legal business structure

2 Limited Company – Creates a business structure. The structure can include shareholders, directors, employees etc, but it can also be just 1 person. Figures by the Department for Business, Energy & Industrial Strategy list the following statistics on businesses in the UK at the start of 2021 on the Government website:

UK private sector business population comprised 3.2 million sole proprietorships (56% of the total), 2.0 million actively trading companies (37%) and 384,000 ordinary partnerships (7%)

1.1 million companies were employers, as were 221,000 sole proprietorships and 98,000 ordinary partnerships 2.9 million sole proprietorships, 951,000 companies and 286,000 ordinary partnerships did not employ anyone aside from the owner(s)

Sole-trader

Pros

Easy set-up

Be your own boss

Less admin involved

Funds are not published. Self Assessment required each year

Business structure can always be changed later

Cons

You are responsible for all legal liabilities including debts

Can be harder to obtain funding/loans from banks, as their preference is often for Limited companies

Business may be less appealing to clients and investors Less flexibility when it comes to tax

Limited Company

Pros

Tax efficiency. More tax benefits are available

Limited Liability. Personal finances are safe. Business would incur any debts

More professionally appealing/attractive

More attractive to clients and investors

Cons

Costly to setup

Funds are published via Companies House / Less privacy More complicated accounts - accounts issues that limited companies need to deal with include payroll, bookkeeping, and tax planning – not to mention tax returns, business expenses, and keeping company accounts up to date. Additionally, failing to fill in tax returns correctly can result in fines & other punishments Potential issue of ownership – if you have shareholders they have equal say in your business.

Q&As

Q I’ve been advised to stay as a sole-trader to renew my mortgage, why is this?

Currently there is a nervousness from banks to lend. Banks look for consistency, if you are setup as a sole-trader you would have a history as a sole-trader and they will look into that history to find consistency. They want to be sure that you have a secure income whereas if you move to be a limited company your company wouldn’t have that history at that point in time, plus limited companies offer a greater level of flexibility, you may choose to take one income from the business one year and another from the next, the company would pay corporation tax as opposed to you as an individual. It all comes down to consistency and history to ensure lending is secure. There are lenders available who will lend to you as a Limited company but currently that market place is smaller and you may not have access to the best rates available.

Q

Is it better to be a sole-trader in private practice?

Not necessarily. Tax benefits change over the years, if we go back approx. 7 years there was a 0% rate of dividends up to £40,000, that led to a lot of people registering as a Limited Company, after corporation tax you could take up to this amount from the business tax and national insurance free. This then went to 7.5% up to £50,000 and next year we are expecting an increase in corporation tax from 19% to 25%. So there is no set rule on how to set yourself up in private practice, this all depends on your earnings and current tax rates.

Q Are accountants fees a lot higher for Limited Companies than sole-trader?

Generally they are more expensive because of the level of filings required. It’s not just a set of accounts and a tax return, it usually involves a payroll scheme, corporation tax return, statutory accounts, and other accounts that need filing with companies house and HMRC.

Q

What is Making Tax Digital?

Making Tax Digital (MTD) is a Government initiative to move tax online, the Government says “this will be more effective, more efficient and easier for taxpayers to get their tax right”. This already applies to VAT and is expected in 2 years time on income tax and with the aim to include corporation tax in 2026.

Q If I’m setup as a Limited Company can I be the only person in that company, i.e. secretary, director, employee etc?

Prior to 2013 this couldn’t be done. Now One person can form a limited company. Whilst the application form requires you to have a minimum of one director and one shareholder, it is commonplace for the same individual to hold both of these positions. This means you can set up a company on your own. There is no longer a requirement to have a company secretary.

Q Can you employ someone if you are setup as a sole-trader?

Yes but you have to setup a pay as you earn (PAYE) scheme. There are no differences in the rules between sole-trader and Limited Company when it comes to employing someone.

Q If I move my Limited Company into a dormant state do I still have to pay the £13 annual returns fee?

Yes unfortunately and you will have to file dormant accounts too.

Q

If you work in a private medical practice and you offer a medical procedure and not cosmetic and are HCPC registered, are you exempt from paying VAT?

The subject of VAT is a minefield! It can change quite a lot. Currently healthcare procedures are exempt from VAT. Under the Value Added Tax Act (1994) it states that services are exempt from VAT if “ their primary aim is the protection, preservation or restoration of health”.