12 month contract should I set up a Ltd company?

ccc

I have been working as an IT consulant - sole trader, for the last year. I have been advised that my current contract will end in December or next February at the latest. In my area I don't expect that there will be enough work to keep me busy full time next year.

If I stay as a sole trader I will have a large tax bill this year and potentially no income next year. Would it be worth switching to a Ltd company so that I can spread my earnings by drawing a smaller salary in 2009 and still have income 2010? Any advice greatly appreciated.

swanvill

Hi Switching to a company means that the company will have to pay Corp. Tax 12.5% on all its earnings, you in turn will have to pay Income Tax on what salary you draw out, so there will be two sets of taxes to pay on the same earnings. You cannot leave funds in a private company indefinitely as there is the 'undistributed income surcharge' to consider
http://www.revenue.ie/revsearch/search.jsp

If you incorporate it will cost approximately €300, you will need to VAT register and open a company bank account, there is also a lot more regulation and unless your comfortable with accounts, you will have to pay an accountant to ensure that you meet your company law obligations.

My suggestion would be that you seek the advice of a professional accountant / tax adviser. You need to estimate this year income tax bills versus the cost of incorporation,Corp. Tax and the ability of you too manipulate your income so that you end up paying yourself a salary at the lower tax rate. Then way up the cost & effort of incorporation or not.

ccc

Thanks for that swanvill. I will definately seek advice from an accountant. Last years budget had an exclusion on Corp. tax for new companies within certain limits. Do you know if this is going ahead? I think it could make the differrence for this approach.

thecleverone

the company will have to pay Corp. Tax 12.5% on all its earnings,

Feel free to correct me if i'm wrong, but my understanding is that corp tax is payable on the profits only.

If you incorporate it will cost approximately €300, you will need to VAT register and open a company bank account, there is also a lot more regulation and unless your comfortable with accounts, you will have to pay an accountant to ensure that you meet your company law obligations.

Yes, it will cost you about €300 to register a company, but you will not be obliged to register for Vat unless you reach certain thresholds (although you can elect to be vat registered even if you do not reach the thresholds).

As a sole trader you will also have to register for tax and open bank accounts so theres not much difference there, but as a limited company you will need to file accounts annually with CRO.

Also remember, if you just need the company for a year, you will also need to close the company down officially which will also incur additional costs.

Last years budget had an exclusion on Corp. tax for new companies within certain limits. Do you know if this is going ahead?

Yes, its going ahead but has not been enacted yet, and the rules and regulations surrounding eligibility are still being ironed out. Not sure when it will go through.

swanvill

Hi, The Cleverone is correct my mistake:) it is profits not earnings that is subject to Corp. Tax, so you will be able to deduct your salary and your normal business expenses (as you have been doing under sole trader) to arrive at your profits.

Regarding the Corp. Tax exemption for first three years of a new company, it has to be a new business so transferring a sole trader into a company would not qualify, according to a tax seminar that I attended recently.Perhaps you might consider ringing the Revenue for clarification.

flash harry

OP there is some nifty way of getting some very tax efficient money out by valuing the goodwill of the Sole Traders when the LTD buys it - sorry to be so vague but read about it a while ago and cant remember specifics

ccc

Thanks everybody for the feedback. I'll follow up with the Revenue and an accountant.