Should I Still be a Limited Company?

Hands up who runs their business through a limited company? Those with one, probably feel quite content knowing they are saving a bundle of tax.

It is always dependant upon individual specifics but it is fair to say that almost all accountants were advising limited companies as the 'best' method in years past. I agree that this was almost certainly the case a few years ago and your company will probably already have saved you a significant amount of tax. But that does not mean it is still the 'best' method now.

Sadly, there have been a number of legislation changes; corporation tax rates have increased gradually and will be 22% in 2009/10; income tax rates have now decreased to 20%. So what does this all mean? Well, in all likelihood, there are now only marginal savings between being a company and being self-employed when we look at ongoing profits.

However ongoing profits are not the complete story if you are a clinic as there is also an asset called Goodwill. One of the single biggest opportunities to incorporating was the payment of some Capital Gains Tax (CGT) upon the entrance into a company. Those who regularly view our website will know about Goodwill and it is the crystallisation of this asset and the paying of some CGT initially which actually saves significantly more later down the line.

Every now and again we see a clinic's set of company accounts with no Goodwill represented in the balance sheet and there are sometimes good reasons for this (and sometimes not), but even if there are you should be aware that this is a massive time-bomb waiting to be set off.

Appreciation of any asset within a company is a bad thing. A very bad thing; and you will often hear about keeping properties away from companies. Outside of a company you will now pay a flat-rate of 18% on any gain of any capital asset (e.g. properties and goodwill) whereas inside a company it will firstly pay the 22% corporate tax mentioned above; and then you will pay a minimum rate of 10% (probably 25%) to get the money out of your company.

When we are talking about goodwill in the tens of thousands you can see that this can very quickly unwind previous savings. So even if you had your company set-up correctly, once you have enjoyed the spoils of your tax planning, you should be mindful of your exit route. If you still have a director's loan account there are still some fruits to be eaten, however if you plan to carry on trading for another 20 years, appreciation of assets may be an important issue. It may just be that your company is no longer the correct tool.

With some 'best guess' information on the future of your clinic we use a model which can calculate the total tax charge for the entirety of your business up to, and including, its sale. Using of all of this information, not just some aspects, provides the true clear picture on which to base your business decisions.

Ross Martin ACA
finance4chiropractors