Should I start my own company so I can claim against tax?

Question

I live in the UK and I'm an employed web and mobile phone developer and very occasionally do some work on the side. I've been recently advised by a family member that I should look at starting my own company for several reasons, one being that I can claim against tax for things like computers etc. As long as I intend to make profit with the company, which I do eventually but probably not for a few years, then it's completely above board although I will probably need to get an accountant.

I'm a bit clueless when it comes to business and obviously I'm interested as I'd like to save some money. I want to know what are the implications of this? Is this good advice? Is there anywhere I can go to read up on this? I'm pretty much start from nothing here so some comprehensive guide would be perfect.

Answer 1

Only if your work on the side is making you at least £60,000 profit a year. The overheads are just not worth it if you make less. Working as a sole trader, you can still claim for expenses incurred in the course of your business.

You can also claim a percentage of your computer costs, even though you may use the computer for gaming. This is not unreasonable as the computer is necessary for your work. The Inland Revenue accept the fact that some assets are part work-related. In your case, as a web and mobile phone developer, I expect the percentage to be at least half, if not a lot more.

If you need to travel in the course of your work you can claim a percentage for your car. You can include other small expenses such as telephone, stationery, electricity etc but don't go overboard. The important point to remember is that you must be able to defend the expenses claimed as work-related, so long as you can do this there is no problem.

Remember to keep good records of all your expenses. This is on-going throughout the year and is much more work than filling out your tax return. The software on the IR self-assessment site is excellent, so it's conceivable that you may not need an accountant if you are prepared to do your own tax return. However, if you feel unsure employ an accountant initially and take it from there.

Answer 2

If you're doing a little paid work on the side I would think twice about setting up a limited company due to the expense and administrative overhead. A limited company has a couple of benefits (assets and liabilities of the company are separate from your personal assets and liabilities, which I see as a big bonus) but it's not worth it for a few hundred or even a couple of thousand a year.

You can get a lot of the tax benefits simply by working as a sole trader (and you'd have to do a tax return every year) as you're still able to deduct any expenditure incurred in the process of your side business from the income and thus lower your taxes on it. You'd also want to make sure that you have a separate bank account for the side business so you don't mix it with your personal accounts (makes it easier to admin). Just keep in mind that this is for expenses wholly incurred in the process of doing business - try to claim on a PC that also doubles as a gaming rig might be an issue :).

You're best off discussing this with an accountant who can talk you through the various alternatives and advise if it's worth the headache.

Answer 3

It is a great advice.

I would suggest going to the Companies House (it's in London somewhere), picking up all of their leaflets regarding requirements for different forms of corporate entity, and deciding if you want to have that burden.

It is not a lot of work, you can essentially claim VAT on all business purchases (the way roughly it works, is that your company invoices your client, your client has to pay the fee + VAT (usually that VAT is then deducted by your client from it's VAT, so no loss there), and you pay the VAT on the difference between the service sales price, and your costs (computers etc.) )

You have to be careful to avoid excessive double taxation (paying income tax on both corporate income, and then your personal income off said company), but it usually comes off in your favor.

Essentially, if you're making more than 50% of your income from services rendered, it is to your advantage to render such services as a business entity.

Answer 4

To take a different tack from qdot - it is advice. Maybe good, maybe bad.

In the early 1990s I did exactly what you are intending to do and was stunned at the expenses involved in maintaining the company - primarily the accounting costs. This would have all been different if I'd been making a lot more money out of the situation, but the work was on the side, a few hours a week here and there, and I closed the "business" after just one year. Probably broke even on the deal, but certainly did not come out in front.

I'd also strongly recommend you take a look at issues like basic book keeping, claiming VAT, setting up corporate bank accounts, and the like. Whether it is "not a lot of work" is purely a personal thing - some folks breeze through it all, some hate it.

Time Is Money.

My 0.02.

Answer 5

You should not open a company unless and until you want to continue operating your company for the longer term. If it is only for a year so so, refrain from opening a company. I am an IT contractor and operate through a limited company. Believe me it isn't that difficult to operate through a limited company. If you are afraid of doing your books, get an accountant and he will do it for you. Should not cost you more than a £1000 - 1500 or so.

Regarding what you can claim as an expense, it depends on how you can confirm that the expenses you incurred are for the company. Your accountant can help you out on that. If you claim false expenses and are caught, you have to forgo a lot to the HMRC.

Google is the best option, there are loads of sites which can help you on that.