Sumit Agarwal, a specialist accountant and tax adviser for freelancers, contractors and small businesses, shares some pointers about tax for architects and interior designers.
In the past, architects used to work as unincorporated partnerships, but in 2000, the Limited Liability Partnership Act meant that many incorporated as LLPs. Recently more and more well-advised architects and interior designers have moved over to the limited company structure mainly because of the tax they save.
The most important piece of tax advice relates to how you practice, whether as a contractor, freelancer, as part of a partnership (LLP) or as a limited company. The main outstanding benefit of trading as a limited company is how the profits are taxed, and that’s why these days it’s become the most popular business model for architects and designers.
Tax on profits
Our recommendation to architects and interior designers is that it’s going to be more tax efficient to operate through a limited company rather than as a sole trader or partnership. The obvious immediate benefit is that limited companies are more tax-efficient even now that the government has curtailed some of the benefits.
How is a limited company more tax efficient?
If you run a limited company, you pay yourself a salary as an employee of the company, as do the other directors, and then shareholders of a company withdraw money from the business as dividends on which they pay income tax (over the £5,000 allowance as of 2017 taxed at 7.5 per cent (basic rate), 32.5 per cent (higher rate), and 38.1 per cent (additional rate). The company pays corporation tax at 20 per cent on profits for 2016, 19per cent in 2017, and tapering by one per cent increments over the next three years to 17 per cent.
Limited Liability Partnership
As part of a LLP, members of the partnership pay tax and NICs on all the profits of the business, a bit as if they were a freelancer operating as a sole trader. Obviously, this is not good news, why pay personal tax on all the profits the business makes?
Changing from an LLP to a limited company
If you were thinking of transferring an LLP to a limited company it may well attract capital gains tax but not Entrepreneur’s relief; again, you really need the advice of an accountant. Land and buildings as well as goodwill, are assets the LLP can charge to the company, and there’s opportunity to make quite big gains on the transfer of assets to a company if you know what you’re doing.
Is the business making the most of VAT claims, standard or flat rate?
Vat is quite complex anyway, but for architects and designers who typically might buy goods on behalf of clients and also source goods from the EU and all over the globe, then the system can get very complex. To take advantage of VAT planning obviously you must plan ahead, but this can have a significant affect on your cash flow. Make sure you know the “place of supply” rules and stay within them. If you don’t know the rules then definitely make sure you speak to someone who does, such as an accountant.
Is the business on top of all its expenses and other reliefs, benefits, and allowances?
Typical expenses for architects and interior designers fit into the regular list of allowable business expenses, but often also include quite a lot of travel, professional licenses, on-site work wear, and subscriptions to professional bodies, along with other items that could be claimed, as well as benefits and allowances the business may be eligible to claim, but which the layperson might not identify or be reluctant to start the process.
Is the business taking advantage of Research and Development (R&D) tax relief?
R&D tax credits are a case in point. The relief can mean firms are able to claim 230 per cent of expenditure on innovation against tax, but the uptake among designers and architects isn’t as robust as it might be. The low level of applications might be down to what some critics say is complexity in the application process: to qualify for R&D tax credits an activity must meet the definitions set out by the DTI, contributing directly to R&D in science or technology, or must be a qualifying indirect activity. Your company will qualify if it employs fewer than 50 people; and turns over less than two million pounds per year. Ask an accountant, who should be able to identify whether the business would meet the criteria and then guide you in the application.
Sumit Agarwal is the managing partner of DNS Accountants