Prior to the year 2000 Architects could work as unincorporated partnerships. However in 2000, the Limited Liability Partnership Act lead to many architects becoming incorporated as LLPs. The reason for the sudden shift to limited liability incorporation being that the architects were made aware of the tax savings that come from being an LLP.
The main outstanding benefit of trading as a limited company is how the profits are taxed.
Tax on profits as a limited company
Limited Liability Company
Running a Limited Liability Company can be more tax efficient for several reasons. As an architect or interior designer running an LLC you can pay yourself a salary as an employee, as you would with other directors, and then shareholders of the company can withdraw money from the business as dividends on which they pay income ta. The company is required to pay corporation tax on profits that was set at 20% in 2016 and has fallen to 19% and will continue to fall 1% over the next 3 years to 17%.
Limited Liability Partnership
As an architect or interior designers running a LLP members of the partnerships pay tax and National Insurance Contributions (NICs) on all profits of the business, very similar to as if they were operating as a sole trader. Therefore you are paying personal tax on the profits of the business that isn’t paid in a LLC.
Switching from an LLP to an LLC
If you’re an architect or interior designer considering transferring your LLX to a LLP it may well attract capital gains tax, however not Entrepreneur’s relief. It will take an expert accountant to identify whether it is a beneficial move as it varies from case to case. Land and buildings as well as goodwill are assets the LLP can charge to the company. There is opportunity to make a large gain on the transfer of assets to a company if you receive the correct advice.
Making the most of VAT claims
VAT can be quite complex for architects and interior designers due to the nature of their work. Typically architects and interior designers will source goods on behalf of clients and also buy goods from all over the world. In order to take advantage of potential gains from VAT planning is essential. You must be aware of the ‘place of supply’ rules and act accordingly.
Research and Development (R&D) tax relief
A large portion of the innovative architectural designs revolves around targeting universal problems head on, such a energy-efficiency, pollution and sustainability.
These architectural projects often involve significant risk-taking, the development and use of bespoke software, adapting the latest technologies to help solve a range of problems. Many of these areas qualify for tax relief under the R&D Tax Credit Scheme.
Cost incurred in an attempt to resolve ‘a scientific or technological uncertainty during the Research and Development stages of an architectural project are often tax deductible.
In routine projects where conventional design techniques have been utilised to create the end result Research and Developments expenses can be more complex to claim.
Claimable expenses under R&D
· Software development
· Development of visualisation (VR) technologies
· Tools and methodologies that aim to streamline the transition from digital design to fabrication.
Most Architect Practices are not claiming the maximum they are entitled to in Research and Development tax relief- if not any of it! The biggest reason being a lack of specialised architect tax advice.