Our client came to us as a sole trader builder. They had no employees and a turnover of circa £50K with limited assets including a van. They were keen to grow their business and employ staff.
After a year trading as a sole trader we incorporated the business and turned it into a limited company. The sole trade business was therefore effectively sold by our client to the limited company. The former sole trader is the owner and director of the new company. The sale price included the market value of the assets in the company plus an element of goodwill which was below the level at which capital gains tax is payable.
The value of the assets including the value of the goodwill was added to the new owner director’s loan account which created a sizeable credit amount.
We set up a payroll and the new company employed the director on a wage below the NI and income tax threshold.
The director was able to draw both his salary and the value of the balance on his director’s loan account. This has meant he has not paid any income tax in the 2 years since incorporation.
His turnover in the year following incorporation was £160K, profit was £60K and he has taken on an employee. The ongoing annual tax saving comparing what he would have paid in income tax and class 4 national insurance as a sole trader as opposed to the corporation tax and income tax payable as a limited company is £2,000 after taking into account additional accountancy fees.