Tax, NI and all that….choosing your Isle of Man corporate entity (Practical guide)

If you are thinking of setting up or relocating your business to the Isle of Man, one thing to consider is whether you wish to be a sole trader, run a company, be in a partnership or be a Limited Liability Company (LLC). As part of this decision making, you need to know the different tax and national insurance rules for each entity. This short article details income tax (including income tax instalment payments (ITIP) and national insurance (NI) position for people with a trade, profession or small business.
 
Sole trader
 
The simplest entity, just yourself. You may have employees but we shall come to that. As a sole trader, your tax position is simple. At the end of your trading year (usually the same as the tax year but you can choose a different year as long as it is later than the end of June each year) you must have accounts drawn up which show your profit or loss for the year. These are attached to your personal tax return together with a tax computation (this article doesn’t deal with capital allowances – we’ll come to that next time). The return must be submitted by 6th October each year. If you choose to be taxed on the trading year, the year in question is that which ends prior to 5th April.
 
You will receive an assessment from the Income tax department which calculates the taxable profit having taken into account any other income you receive and allowable deductions (such as mortgage interest) together with an assessment on demand, both of which have to be paid by 6th January of the following year.
 
The assessment on demand in effect replaces the “ITIP” National insurance contributions for a sole trader are currently paid either weekly or monthly if by direct debit. These are called Class 2 contributions and from 6th April 2015 have been set at £5.40 per week. Class 2 contributions do not entitle you to jobseeker’s allowance. As part of your annual income tax assessment, you may be assessed for Class 4 contributions. If your profit is between £6,136 and £40,768, you will be assessed for Class 4 contributions at the rate of 8%. Like income tax, both a Class 4 assessment and an assessment on account will be raised and both must be paid by 6th January.
 
Partnership
 
In a partnership, the partnership agreement defines the split of the profits between the partners. Accounts have to be drawn up and a tax return submitted. However, the partners are assessed separately in their own right and the Partnership itself not taxed. The income tax and national insurance contributions are the same as for a Sole Trader for the individual partner’s share of the profit.
 
Limited Liability Company (LLC)
 
Originally, the LLC was very much like a Partnership, and indeed in many ways the LLC is to be much preferred to a partnership because the liability of the members is limited to the capital within the company whereas Partnerships and Sole Traders have unlimited liability. Additionally, since 2014, it has been possible to have a single member LLC which is a great benefit to the Sole Trader who wants to limit liability (ie all the member’s assets not within the company are otherwise protected should something go wrong financially).
 
The income tax and national insurance treatment is identical to the Partnership or Sole Trader as LLC’s are look-through for tax purposes. Therefore the returns, assessments and Class 2 and Class 4 contribution rules all apply in the same way as for a sole trader or partnership.
 
Limited Company
 
Limited Companies are the same as LLC’s in that liability is limited but it is important to understand the differences. Ordinarily, the member’s liability is limited to the share capital owned. There are two types of company in the Isle of Man, one is formed under the Companies Acts 1931 to 2004 (“1931 Act”) and the “new Manx vehicle” formed under the Companies Act 2006 (“2006 Act”) for which you need a registered agent. The income tax and NI treatment is the same for both types. In theory, companies are subject to income tax in their own right unlike the other forms of entities we have discussed. However, in terms of normal trading income, this is currently taxed at 0%. All trading companies on the Isle of Man must have accounts drawn up and submit a tax return. The tax year for a company is always the same as it’s statutory or trading year which might be quite different from the normal tax year. The calendar year is a popular choice. 1931 Act companies’ accounting rules are more onerous than for 2006 Act companies in terms of disclosure. Accounts for a 2006 Act company can actually be very simple.
 
1931 Act companies require two directors whilst a 2006 Act company requires only one. However, if directors’ fees are paid, these are subject to ITIP and NI in the same way as any other employee (there are no “drawings” as in a partnership or sole trader and contrary to what many might believe, directors’ fees are regarded by the Treasury as salary). Therefore, if you intend to pay yourself a salary as a director, the company must register as an employer with the Income Tax Division of the Treasury.
 
Let us say you decide to pay yourself £20,000 per year as a director of the company. This salary will be subject to ITIP deductions in line with your tax code, and you would pay (usually) Class 1 NI contributions from Table A of the NI guide. Moreover, the company would also pay Employer’s Contributions. There are no other contributions to be made, however. The company submits a return each year (T37) detailing deductions made in total for all its employees together with T14s for each individual.. Of course, it is perfectly possible, and legal, to pay yourself a minimum salary above the lower earnings threshold for Class 1 contributions (currently £112 per week), thereby paying your “stamp” and keeping NI contributions going for pensions and benefit purposes and then simply pay dividends to yourself as shareholder. These dividends are entered in your annual tax return as investment income and subject to income tax at the current rates. At the moment, investment income is not subject to NI contributions but bear in mind that whereas Class 1 contributions entitle you to the “additional pension” (the only class of NI contributions that does), if you pay very little NI and receive most of your earnings as a dividend, your eventual state pension will be affected negatively.
 
What if I want to employ someone?
 
Irrespective of the type of entity you choose, the rules here are the same. You must register as an employer with the Treasury. All employees are subject to deductions for ITIP and Class 1 NI contributions. Similarly, you as the employer, whether Sole Trader, Partnership, LLC or Company are subject to Employer’s NI contributions which within the relevant thresholds – £120 to £784 per week – are payable at a rate of 11%. An annual return, the T37 is submitted each April along with each employee’s T14.
 
If you want to contract out work, seek advice as to the treatment as depending on the trade and other factors, there are special rules which are too numerous to go into here. This is especially relevant to the construction industry.

 
 
photo credit: questions via photopin (license)

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