Key Post Sole trader or limited company tax considerations

[Brendan Burgess]

Hi all,
I'm in the procedd of setting up a limited company for the purpose of IT comtracting. However for the first 3 months in order to give me ample opportunity to get the company registration, VAT etc in order I am operating as a sole trader. As Im only invoicing 3 times as a sole trader, Im not invoiceing for VAT. My question is how do I manage Tax, or when is it due? At the end of the 3 months when Im company director, I'll assign myself a salary and pay PRSI / PAYE on that. But on the PAYE do I include the amount paid to me as a sole trader in my gross sum or keep these as seperate entities and settle my tax bill as a sole trader at the end of the tax year?

Any help/ advice much appreciated as Im very confused at the minute

Thanks

 

[Tommy]

Re: Sole trader / contractor

Hi Leo

First of all, best of luck with your new venture.

If you operate as a "sole trader" (i.e. under your own name) for a period before the company takes over the business, then your earnings for this period will be taxed under your own name and tax number (as opposed to those of the company, which (in legal terms) will be a separate entity).

These earnings will be taxed under the Self Assessment system for the self-employed.

Under this system, you are obliged to calcluate your taxable earnings for the period of self-employment (or annually if the period extends for more than a year). This is best done by preparing a simple and straight-forward Trading and Profit & Loss account for your business, showing all earnings and deducting all allowable expenses. (Most self-employed people hire an accountant to do this work for them)

You are taxed on your net profits for the period, and you can avail of your normal tax credits and allowances (except for the paye tax credit) in arriving at your tax liability. You then need to complete a tax return reflecting this (and other) sources of income for the tax year, and file it with the tax office by the due date, which - for a period of self employment starting and finishing in 2002 - will be 31st October 2003. This is also the due date for paying any tax liability on your earnings. This is explained in more detail on the link I've referred to above.

You are correct in saying that you should not have to register for VAT for your temporary period of self-employment, assuming your total turnover for that period does not exceed the annual exemption threshold of €25,400. If you need further clarification on this, just ask.

You are also correct in your assumption that you should keep the PAYE/PRSI on your company earnings totally separate from your self-employment earnings - although both sources of income will be taken into account when your tax position is finalised at the end of the tax year.

On a wider point, I would recommend, if you have not already done so, that you should obtain professional advice from a reputable accountant or tax advisor before you start your business.

Specifically, I would definitely recommend that you should receive advice on the question as to whether you should trade as a limited company, or instead opt to remain self-employed. Many people, in my own experience, rush into setting up companies without considering all the implications and obligations of trading through a company.

You may also be interested in the [broken link removed] and [broken link removed] which I have posted on my own website. These guides cover, in more detail, some of the topics discussed above.

If you have any further questions, please feel free to post them here. On the other hand, if you want some specific, confidential advice on your situation, with no obligation whatsoever, phone or email me (my details are on the link below) and I’ll let you know what I think.

Tommy
www.mcgibney.com

 

[aine]

Re: Sole trader / contractor

"...you should obtain professional advice from a reputable accountant or tax advisor before you start your business."

I know this might be a silly question but I've no experience so how am I to know the accountant I ask is reputable?

I set up as a sole trader/contractor 20 months ago so I have to file returns and pay tax in October. Last year was easy because I never exceeded my tax free allowance so I didn't have anything to pay. I'm on the look-out for an accountant but it's hard when I'm working.

I imagine I'd be better off finding an accountant who has similar sole trader/contractors like myself on their books. What does anyone reckon?

Á.