6 July 2018

Barrister accounts FAQs: Sole Trader or Limited Company?

There are pros and cons of how you set up your business and the way you trade as a barrister. With over 30 years’ experience, acting on behalf of hundreds of barrister clients we often get asked which is the better option - Sole Trader of Limited Company?

In this, the latest article in our series of FAQs on barrister accounts, we look at the key considerations and which might be the right route for you.

Key things to consider when deciding on Sole Trader or Limited Company as a Barrister:

It generally costs more in accountancy fees and bank loans to trade as a Limited Company
Some Chambers may not permit Limited Company members
There is uncertainty of future tax rates for both Limited Companies and Sole Traders – what is tax beneficial today might not be after the next budget
Trading as a Limited Company currently can result in lower tax costs on retaining surplus profits for investments (including buying into Chambers’ premises).
in certain circumstances, there is the potential for spouses owning shares in Limited Companies
The preparation of the first 7 years under the concessionary barristers’ cash accounting scheme [https://www.rwbca.co.uk/news-barristers/47-barrister-accounts-faqs-what-is-cash-basis-accounting] is only available to Sole Trader barristers and not those trading through a Limited Company
If a barrister wants to become a Limited Company they need to apply with a fee to the Bar Standards Board
Barristers can fund debtors and work in progress without paying higher rates of tax. At the risk of losing business asset exemptions, funds could be accumulated for investment.

A snapshot of the main differences between trading as Sole Trader or a Limited Company are summarised in the table below:

Limited Company	Sole Trader
Risk	Risk
A company is a separate legal entity and offers limited liability status to the owners. The risk sits with the company, not the shareholders. However, banks may require personal guarantees for company borrowing.	The individual remains liable for the actions of the “business”.
Taxation of Business Profits	Taxation of Business Profits
The company pays corporation tax on its profits. The rate is currently 19%, but stated to reduce to 17% in 2020, therefore profits can be retained in the business at a relatively low rate.	A sole proprietor pays full income tax rates on their profits whether or not they withdraw them from the business. Thus, a higher rate tax payer will plough back profits into the business at a top rate of 40% or 45%.
National Insurance	National Insurance
Operating through a company makes the owner/director an employee of the company. Any salary taken is subject to Employers and Employees National Insurance.	A sole trader is subject to National Insurance through a weekly Class 2 payment and a Class 4 payment at 9% on profits between £8,164 and £45,000pa, plus a 2% charge on profits in excess of £45,000.
Profit Extraction	Profit Extraction
To maximise tax efficiency the standard approach is to take a low salary and then top up with dividends. Dividends are not subject to normal Income tax, but carry a separate dividend tax rate of 7.5% for basic rate tax payers, and 32.5% for higher rate (40%) tax payers. The first £5,000 (£2,000 from 2018/19) is tax free.	All profits earned belong to the sole trader, thus no further action is needed.
Pensions	Pensions
A company can make pension contributions (with tax relief) on behalf of the owner/director.	A self-employed individual can only obtain tax relief on pension contributions up to the level of their earned income.
Administration	Administration
A company requires accounts that comply with the Companies Act formats, which need to be filed at Companies House, and with HMRC along with a Company Tax Return. All directors are also required to file a personal tax return. Companies also have to submit a Confirmation Statement each year to Companies House.	The sole trader also has to prepare accounts, but these are less detailed and are declared on the individual’s tax return.

VAT considerations

Existing barristers will be able to merely switch their VAT registration number, (subject to certain conditions) or have the option of a new registration number.

Planning point 1: If you have a new registration number and are continuing on the Flat Rate Scheme (FRS) for VAT, you have to satisfy the entry limits, but if transferring an existing registration number only the exit limit applies.

Planning point 2: If using a new registration then under the VAT FRS you can obtain a second allowance of 1% for the first year of registration.

Cash basis accounting

Planning point: The limits for the general cash accounting scheme (which is different from concessionary barristers' cash accounting) have been raised from 6 April 2017 to £150,000 but businesses must leave if turnover exceeds £300,000. Many provincial barristers might feel it to be unlikely that their fee income will exceed £300,000 in their first 7 years.

For more information about Barrister accounts, download our helpful guide.

Still not sure?

If you are a Barrister or Pupil looking for help with your accounts and financial planning? We have specfic experience in barrister accounts. For a no obligation chat, contact us on 0115 964 8888 or email at enquiries@rwbca.co.uk.

The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.