Starting a small business or remaining sole trader? [UK] ios apps

Hiya,

(please don't reply if you don't have any real life experience in these matters)

I'm finally solo and have one partner on the team developing apps. We are due to meet with an accountant to help decide the direction of the business, and whats the best business startup.

Does anyone have experience in the field of indie software development and if so, what to you recommend, particularly in the UK and how that deals with the US sales plus US sales tax?

I am currently sole trader, but I am not sure, tax wise this will work out, particularly as I do a clean 50% profit split with my business partner. As we are now growing, I need to know what the best "fit" would be for this online software business.

I am thinking limited company might well be the best choice tax wise. But would prefer to hear reasoned opinons only from people with experience in these matters for consideration.

I don't expect many if any replies though, since its a fairly narrow set of information. Thanks in advance!

 

I am a sole trader. The advice I got from an accountant was that while I am starting out, the extra hassle of being a limited company far outweighs any small benefits. That changes as turnover increases. The crossover point is best determined by an accountant, so you are doing the right thing speaking to one.

EDIT: It isn't well publicised, but the tax office does a series of free courses for the self-employed, each lasting a couple of hours. Do as many as you think appropriate (the foreign trade one is for physical goods only, so don't bother).

 

Hi, depending on your exact situation ofcurse your accountant will have the answers but yes if the business is just starting out and is not growing really fast in terms of turnover/profits you may be better off without the additional chores of an LTD and/or VAT registration. Well vat registration is simple, but the maintenance can be boring and stressful due to the mess HMRC (UK section dealing with vat) is in. Almost every month I receive letters from HMRC and Inland Revenue with notice of penalties for things I have actually done properly and on time, both LTD stuff and VAT stuff. It takes a number of phone calls/letters from me and my accountant every time and it is always their mistake (Inland Revenue and HMRC) indeed you may have heard of this (many cases) on TV/news a few weeks ago. Without LTD and VAT you wil have less reports to deal with/submit

Your accountant may even mention partnership status instead LTD if depends. I' ll be in the same situation with my game dev business soon, and wil have to consider same options (me experience with LTD so far relates to online business and retail).

If your numbers are decent or growing fast then LTD and VAT registration will be the way. Otherwise you may delay LTD formation and vat registration until later

P.s. I used to know/think that is only worth being Vat registered if your turnover is over £50,000 per year, but I'm pretty sure an accountant told me it is roughly £50,000 profit (not turnover) per year, if less you may be better off without VAT.

 

For two of my three businesses I started in the UK, which had nothing to do with video game development, I remained a sole trader even when I had a couple of employees and contractors working for me. This was 20 years ago so things may have changed sinc then. I can forward your details to my brother if you like, he has a couple of large-ish companies he is managing director of in the UK, though his advice may not be directly applicable. He used to be a high muckety muck at HM customs and excise dealing with tax issues. When I was doing freelance ork, I was also a sole trader. Accountant is right, keep it simple, tax man won't care so long as he gets his proper cut. With just the two of you working you just don't want the headache. Don't make the mistake that I saw othr people doing of trying to get too big too fast.

ProjectOne is correct, it's all about your profit amount when you are that small.

Please excuse typos, posting from my iPad waiting for my fiancee to get done at the arts and crafts store.

 

Thanks for the replies guys. I've been looking deeper into this subject and its really the fact that you can just be subject to a flat 20% tax. If you pay yourself a low wage, say 7k untaxable income, you can pay yourself the rest in dividends, for example up to 35k - and you'll be able to get around 10% back on that once the cash moves.

There's a lot of ways around it - but as sole trader, you only need one appstore hit to see 40% tax kick in (50% if you're blessed) and thats just pissing money away that a LTD company could prevent.

The real sticking point is I get 50%, and don't want to pay tax at a higher rate for both of us, when we could be splitting and getting a lower bracket of tax if possible.

Also there's two of us splitting it 50-50. So that means say I earned 400k? It would be a nightmare, tax wise and subject to 50% tax over 150, which would pretty much ruin things a lot. I think partnership is a good idea you mentioned - so will give that a look tommorow on monday.

Thanks again for suggestions and advice.

 

JustinLloyd, I would love any advice really even if its just off the cuff and a bit of text posted at me - all is welcome and I really appreciate it, thanks!


Also not sure if I need to be VAT registered being in the uk but apple is selling in the us?

 

Feel free to pm me or email Justin@IMF.la or Justin@otakunozoku.com.

Cannot speak to the vat registration if you are in the UK and apple store is in US. Bad advice here: what they don't know doesn't hurt them

 

I can post here if other people want to read it, but I am on iPad right now so I will probably come across as a rambling moron. More so than I normally do, I mean.

 

*whistles*

 

Like ProjectOne described, the hassles and chores of being a LTD company put us off taking that route when we decided to become a legal entity - a partnership, or LLP (the option we chose) where much simpler on the legal requirements, and still offer some legal benefits. The biggest downfall is that if you do make a game that sells very well, you can get a bit screwed on the tax!

As for US tax: I'm not sure about the App Store, but when working for MTV we filled out some US tax paperwork that makes us exempt from US tax because of an existing tax treaty between the US and UK (or we'd effectively be double taxed). But this may be different to the App Store as what we have is technically a licensing agreement, while the App Store is a traditional sale. A good idea to ask your accountant about this one

 

Also, this is true for LTD but it may be true for other business models I am not sure, if you start the business with a directors loan, e.g. you put £30,000 in the LTD as directors loan, you can have the LTD to pay you back monthly as loan repayments. As a owner director of the LTD you can do a salary sacrifice (no salary) and only take loan repayements back from the business to you. This means that becaue you have no real salary, personally you pay no taxes, the money you get back from the business e.g. £2000 per month, is simply your loan money coming back to you. Until of course the loan is fully repaid back to you from the LTD

Of course if you are VAT registered, all VAT you paid on purchases (software, hardware, office stuff) even before the Company was formed you can claim back and the purchases will be costs against taxable profits, again assuming it is worth for you to be Vat Registered.


As far as I can remember from when I was looking into it, when you sell to EU countries, you should apply that Country sepcific VAT rate. but each Country has a threshold, above that you have to register locally with that EU Country and pay VAT to that Country local VAT office

If selling to US, as far as I know you do not charge VAT, it is zero rated. Now, I guess in our case it is Apple selling to US iOS/OSX users, therefore Apple does not charge VAT... but I do not know if US sales include some form of US taxes applied by Apple. Fact is you made the product in UK, when something is made in UK but sold to US there is no additional tax you need to apply. So you should get your full 70% cut of apps sales and that would be your IN money, which of course would be subject to UK taxes on your Company profits...

This is all rumbling from what I think I know, but because I have not started selling yet and have not setup my new Company for app-Dev/sales yet I could be wrong

 

The US tax paperwork can be done for App Store sales. There are also Japanese tax forms.

 

Nice to know. Thanks!