Is MTD Making You Think About Setting Up a Limited Company

For sole traders, one of the biggest shifts has been the introduction of Making Tax Digital (MTD). If you're finding yourself wrestling with the work involved in making quarterly digital submissions and feeling the pressure, you might have heard people talking about incorporating your company –i.e. setting up a limited company. It's often presented as a magic wand, a way to escape the MTD burden. But is it really the solution you're looking for, or could it be a costly misstep? 

At Oblako, we believe in empowering you with the information you need to make the best decisions for your business. So let's peel back the layers of incorporation and see if it truly offers the escape route you've been promised, especially when it comes to MTD. 

One of the main arguments for incorporating, particularly for businesses with turnovers between £50,000 and £90,000 (hovering around the VAT threshold), is the perceived benefit of only needing to file one return annually. This sounds incredibly appealing, doesn't it? Imagine shedding those quarterly MTD obligations and enjoying a simpler year. However, this often glosses over a crucial distinction. While a limited company itself files one tax return and annual accounts with Companies House, your personal tax obligations, including your income tax and National Insurance contributions, still need to be managed. And this is where MTD can still catch up with you. 

The Hidden Costs and Complexities of Incorporation 

While the idea of annual filing might be enticing, the reality of running a limited company comes with a significant set of financial and administrative hurdles that are often downplayed: 

• Escalating Accountancy Fees: The most immediate and stark difference is the cost of accountancy. As a sole trader navigating MTD, you might be looking at a maximum of around £600 per year. In contrast, a limited company, with its added layers of compliance, typically incurs minimum accountancy fees of £1,500 per year, and often considerably more. This isn't just about filing accounts; it's about managing payroll, director's drawings that are initially treated as loans, and ensuring all the statutory requirements are met. 

• Director Salaries and RTI: If you decide to pay yourself a salary as a director of your limited company, this salary is reported under Real Time Information (RTI) monthly. This means you're not escaping digital reporting; you're simply shifting it to a different, often more demanding, monthly cadence. Missing these monthly submissions can lead to similar fines for late filing as you might fear with MTD. 

• The Dividend Dilemma: Many directors opt to take dividends instead of, or alongside, a salary. While dividends can be tax-efficient, they come with their own set of stringent rules. A current HMRC campaign is actively scrutinise dividend payments. If regular drawings appear to be used to cover personal expenses, HMRC can reclassify them as earnings, leading to unexpected tax liabilities. Crucially, dividends must be formally declared and backed up by a board meeting with documented minutes, along with a dividend certificate.

Drawings are never seen by HMRC to be a casual cash withdrawal; it's always been a formal financial transaction requiring proper record-keeping. 

• Increased Administrative Burden: Registering a company at Companies House opens a Pandora's Box of compliance obligations. You'll need to file annual accounts, submit a confirmation statement, and take on legal responsibilities for the management and governance of the company. This means more paperwork, more deadlines, and a greater understanding of corporate law and although you may be prepared to pay an accountant to take care of these matters, the buck stops with you, not them. 

• The Paperwork Paradox: Ironically, the push for digital tax, while intending to simplify things, can lead to an increase in paperwork when you incorporate. The formal requirements for dividends, board meetings, and statutory filings mean you'll be handling more documentation, even as the tax reporting itself moves online. 

The True Cost of "Escaping" MTD 

The narrative often presented is that incorporating is the only way to truly escape the MTD complexities. But at what cost? You're trading the stress of quarterly MTD submissions for potentially higher accountancy fees, monthly RTI reporting unless you can afford to live without a monthly salary, strict dividend rules, and a host of new corporate compliance responsibilities. For many, this is not a cost-saving or stress-reducing solution, but rather an exchange of one set of challenges for another, often more expensive, set.

A Smarter Solution for Sole Traders 

Before you rush into setting up a limited company solely to navigate MTD, consider a more practical and cost-effective alternative: hiring a dedicated bookkeeper. At Oblako Services, we understand the pressures sole traders face. By partnering with a professional bookkeeper, you can: 

• Eliminate the Stress of MTD Deadlines: A skilled bookkeeper will manage your digital 

submissions, ensuring you meet all deadlines without the anxiety. 

• Gain Expertise on a Day-to-Day Basis: You'll have access to ongoing advice and 

support, helping you make informed financial decisions throughout the year, not just at 

tax time. 

• Free Up Your Time: By offloading the bookkeeping and MTD compliance, you can focus 

on what you do best – growing your business. 

• Maintain Cost-Effectiveness: The cost of a bookkeeper is often significantly less than 

the combined cost of incorporating and higher accountancy fees, allowing you to remain 

a sole trader and still have expert support.

Don't Let MTD Drive You to Costly Decisions 

Incorporation might seem like an attractive escape route from Making Tax Digital, but the true costs and complexities can far outweigh the perceived benefits. Before you make a decision that could significantly impact your finances and administrative workload, explore all your options.Are you feeling overwhelmed by MTD or considering incorporation? Let's talk. At Oblako Services, we're here to offer clear, honest advice tailored to your specific business needs. 

Contact us today for a free consultation and discover how a bookkeeping partnership can simplify your tax obligations and help you grow your business more effectively, without the unnecessary costs of incorporation.