Within the UK business tax system there is a split between incorporated and unincorporated structures.
The former – incorporated structures – are companies with shareholders and directors, paying Corporation Tax on business profits, and Income Tax, NI and Dividend Tax on extractions to the shareholders and directors.
The latter, unincorporated structures, are Sole Traders and Partnerships where the business owners declare their business profits on their Self Assessment and pay Income Tax and Self Employed NI.
In the 2023 Autumn Statement there were changes to Self Employed NI with a reduction in the Class 4 NI rate and abolition of Class 2 NI. Also the cash basis of reporting was extended for unincorporated businesses – note this is for reporting of profits under Self Assessment, not the VAT Cash Accounting Scheme which although similarly named is both separate and unchanged.
The desirability threshold for incorporation, ie at what profit level being a company is a benefit over being a sole trader or partnership, is hotly debated and it does depend on variables and assumptions. So has it changed? Does the Autumn Statement make an incorporation more or less desirable?
The answer is neither – nothing really changes.
Looking at tax and NI rates first, with the increase in Corporation Tax rates from April 2023, if you take some fair assumptions and model the comparative tax for a typical business as a sole trader or partnership on one hand versus being a company on the other hand then the relative advantage of either isn’t great, it swings between preferring one or the other structure at different profit levels and in the round the differences aren’t significant – this contrasts to the position in recent years when there used to be a definite skewing of benefit to incorporation as profits grew.
In many respects this is useful as it takes tax out of the equation as a major factor.
Likewise the extended cash reporting options for unincorporated businesses aren’t a significant difference – many unincorporated businesses will still need to prepare proper full accruals accounts if they have stock holdings, pay suppliers on credit or give credit to customers. And the businesses who aren’t impacted by these factors are the simpler ones who were on de facto cash accounting anyway.
However there are wider issues to think about. For example companies give enhanced risk protection via limited liability – in the modern business world of “unknown unknowns” this is probably enough to tip the balance in its own right. Likewise the image of being a company is often expected for credibility these days. Set against that, a company is still that much more complex and admin time and/or accounting costs are going to be higher.
So in summary, the Autumn Statement changes very little. The incorporated v unincorporated balance is one that needs to be weighed up for each business individually – there are few automatic right answers.
