(as published on the Gibraltar Chronicle)

I’m starting a business.  From a tax point of view, am I better to be self-employed, or to form a company?

As a self-employed person, your profits from trading will be taxed as your personal income, with tax rates of anything up to 40%. 

A company’s trading profits will be taxed at only 10%.  If and when you take money out of the company, for example as a dividend, salary, or directors’ fees, that income will be taxable at personal tax rates.  If you receive a dividend from the company’s profits, then you can offset any tax paid by the company on profits that can be matched with the dividend.  If you receive a salary or directors’ fee, that will be a deductible expense for the company and reduce the taxable profit of the company accordingly.  Therefore, if all profits are paid out to you in this way, the total tax bill would generally be the same whether you use a company or not.

However, if profits are kept in the company, this delays the impact of higher personal tax rates.  Indeed it’s usually necessary to keep profits in the company to fund working capital, investment in fixed assets and to provide a “cushion” for any downturn in business.

In terms of social insurance costs, self-employed contributions are between £520 and £1,569 annually.  This compares to combined employer’s and employee’s contributions of between £1,040 and £3,023 per annum for a company director (subject to certain exceptions).

There are, of course, non-tax related factors to consider.

Later in the series we’ll look at some practical issues for self-employed persons.

What are benefits in kind?

Benefits in kind (“BIK”) are goods or services – or the use of goods or services – provided by an employer, which are viewed as being part of an employee’s remuneration.

Is this new?

No, but what the new Income Tax Act does for the first time is to spell out what is and is not included, and how they are taxed.

What sort of things could they include?

Examples are the provision or payment by the employer of living accommodation, company cars, fuel, cheap loans, vouchers, Christmas parties, meals, and health insurance.  This is not an exhaustive list, and the Act includes any other “benefit or facility” which is not specifically mentioned in the Act.

How are they taxed?

First the value of the benefit for tax purposes is ascertained.  There are different rules for this, depending on the type of benefit.  

This amount is included as if it was additional salary, and tax is deducted from the employee through the PAYE system.  

Alternatively, the employer can obtain a dispensation from the Tax Office, and the employer pays the tax, which is based on the value of the benefit.  The advantage of this is that the employer pays the tax for the employee, but that tax is not included as a BIK.  Also, the tax rate applied here is 20% (for benefits up to £15,000), which is usually lower than the rate the employee is paying on his/her salary.

Any exceptions?

Yes – where benefits are less than £250 per person per annum, they are not taxable.  

Also, the exclusion of accommodation and other expenses, where an employee relocates to the area to take up employment in Gibraltar, can be very generous.  

Other notable exceptions include motorcycles and scooters.  So, if you see your accountant is now driving a Ducati, you know why.