Making Tax Digital (MTD) for income tax was supposed to modernise the tax system.
A survey of 1,000 in-scope sole traders found that 23% had already set up, or begun setting up, a limited company partly or wholly due to MTD. A further 57% had explored or considered incorporation at least partly because of the reforms.
Meanwhile, just under 45% of affected sole traders say the reforms have made them consider leaving self-employment altogether and returning to salaried work.
Limited companies are not currently within scope for MTD for income tax, making incorporation an alluring way out of the quarterly reporting regime.
It appears that incorporation is increasingly being viewed as an escape route from MTD but in the end it isn’t a shortcut to less admin. Limited companies face their own complex filing obligations with a broader set of tax, accounting and filing requirements.
From a tax perspective, the benefits of incorporation have been steadily eroded, to the point where there is no longer a point at which it clearly makes sense to incorporate. All the circumstances need to be considered and modelled, including the profit level of the business and what will be withdrawn, how and by whom.
A limited company may sit outside MTD for income tax and swerve the quarterly filing requirements, but incorporation brings corporation tax returns and computations, statutory accounts and Companies House filings, alongside additional time, professional fees and software costs.
Incorporation in itself is not the answer, but MTD might just sway someone who is already considering incorporation. An alternative is to make your business a partnership, which at least delays the evil moment you are liable to MTD. Something to consider.
