With Making Tax Digital (MTD) for Income Tax coming into play for many sole traders, new research suggests it’s having an effect not just on accounting. In fact some businesses are considering whether it’s sensible to restructure to better manage the changes.
A recent survey by Taxfix found that almost one in four sole traders have already started, or are planning, to incorporate their business into a limited company because of MTD. More than half have at least considered doing so, while many have even questioned whether to remain self-employed at all.
Should you change to a limited company?
Given that MTD for Income Tax doesn’t currently include limited companies, it’s clear why some business owners are looking at incorporation. But it’s worth remembering that incorporation isn’t always a way to reduce administration.
Running a limited company comes with its own responsibilities, including annual accounts, corporation tax returns, Companies House filings and different legal obligations. Depending on your circumstances, it can also mean higher accountancy, software and compliance costs.
Every business is different
Deciding on whether a sole trader or a limited company is more tax-efficient depends on a range of factors, including:
- Your annual profits
- How you take money from the business
- Your future growth plans
- Your personal tax position
- The additional administration you’re prepared to take on
While MTD might be one factor in the decision, it shouldn’t be the only one.
Thinking about your options?
If you’re wondering whether remaining a sole trader is still the right choice, now’s a good time to review your business structure. In many cases, the most suitable option isn’t the one that simply avoids quarterly reporting.
We can help you understand the financial and practical implications of incorporation, take a look at the tax differences and recommend the approach that’s right for your business both now and as it grows.
If you’d like to discuss how MTD could affect your business, get in touch with our team. We can help you make a decision based on your circumstances.