Architecture is a highly diverse sector when it comes to tax. It’s partly down to the type of businesses that carry out architectural work, and partly down to the owner, manager, or employee’s place in the organisation. Tax for architects can be a real mixed bag.
In this article we’ll talk about some of the major taxation themes in this sector, but it’s a big topic so it’s always worth chatting to an accountant or financial advisor for more detail. We’ll cover:
Types of architect businesses
Personal taxation for architects
Architect practice taxation
Sole trader, partnership, or limited company?
Types of architect businesses
Outwardly, most architect businesses will appear to be the same. But, delve under the surface and they can actually be very different, which has a major effect on how they pay tax.
As with any sole trader enterprise, a sole trader architect is the business. You can ‘trade as’ a different name, but legally the business, the practice, and all of its assets and liabilities, are indistinguishable from you.
This has its benefits and its downsides. On one hand, registering as a self-employed architect is fairly straightforward, but on the other, any liabilities in the business become yours personally. So, if the business gets into financial trouble, it’s you who’s personally responsible for any debts.
You might also find that some clients or other businesses you work with don’t take sole traders very seriously, although there is no good reason for this!
Partnerships are particularly common amongst businesses that provide a professional service, such as architecture or accounting!
In a general partnership two or more partners work together to achieve their aims. The partners can be individual people, or other organisations such as a limited company or another partnership. Each partner is responsible for their own taxation.
It’s not just general partnerships that are on the table though. A Limited Liability Partnership (or LLP) is, as its name implies, a partnership that benefits from limited liability. This means that if the business gets into trouble, then the liability of each of the partners is limited so their personal assets should be safe.
Managing a partnership can be more time-consuming than being a sole trader, and the added responsibilities can mean that accounting takes longer. But you do have the benefit of more people helping to carry the load and if you use the LLP format, then you have some personal protection.
In the past, the majority of architecture practices were partnerships. These days we see an increasing number of business owners who prefer to use a limited company to run their enterprise.
In legal terms, the limited company is a separate entity to its owners. It has its own money, and there are strict rules for managing it correctly.
The shareholders of the limited company own the business and the directors manage it. It is entirely possible to have directors who are also shareholders, or shareholders who have nothing to do with running the business.
There’s more administration to do when you own a limited company, including submitting a Company Tax Return, accounts, and filing Self Assessment submissions as a director.
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How do architects pay tax?
Like most organisations, the way that you pay tax as an architect depends on how the business is set up.
Tax for sole trader architects
If you operate as a self-employed architect, and register as a sole trader for Self Assessment, then you and the business are legally ‘the same’. In essence, what happens in the business happens to you, so you can simply keep any profits that the business makes.
You report all of your income and expenses through Self Assessment, and pay tax and National Insurance on the profits. This is an important point! Deducting allowable expenses from your income reduces your profit, which in turn reduces your tax bill.
People can have more than one job, so you might run a personal practice whilst at the same time working a couple of days a week for another architect’s firm. If you work for them as an employee, they’ll deduct tax and NI from your wages when they pay you through PAYE. If you submit invoices to them, they’ll normally pay the full amount, and it’s up to you to pay the tax.
Partnership tax for architects
Tax in a partnership works slightly differently to being a sole trader, in that the partnership itself submits a tax return, but doesn’t actually pay tax as an entity. Instead, each partner also submits a tax return, and then pays tax on their share.
The partners don’t need to have an equal share. For example, three partners could have a 40%, 30%, and 30% share of the business, so a £100,000 profit would be split £40,000, £30,000, £30,000.
A partner which is a limited company will record the income in its Company Tax Return for example, and a partner who is a sole trader will include it on their Self Assessment.
Just to make it confusing, some partners might also receive a salary. They’ll receive a salary through PAYE just like any other employee, with tax and NI deducted at source.
Running your architectural business as a limited company
Again, setting up a limited company to operate as an architect is largely the same as it is for any other company. You can be the only director and shareholder, or you can appoint other people to work in the business with you as directors or employees.
Even if you’re the only one in the business, your limited company is still a separate entity to you as an individual. This means that you can’t simply keep the profits that the business makes, and instead will need to decide on the most tax-efficient way to pay yourself from your business.
For most owner directors this is a case of paying themselves a salary through the company (like any other employee), and taking their remaining income as a dividend.
The structure does mean that architects who operate as a limited company have a bit more admin to do in terms of accounting and finance. The company itself must submit returns to Companies House and HMRC, and as the director you must submit your own separate Self Assessment.
Should architects be sole traders, partnerships, or limited companies?
So, all of this begs the obvious question – which is best? Well, the truth of the matter is that there is no one-size-fits-all answer. Choosing your business structure goes beyond taxation alone. Instead, it is important to take a holistic view bringing marketing, legal, and personal preferences into the mix.
For example, we know practices that have moved to being limited companies simply because their large customers demand it. But by the same token, we have clients who are happy being a one-person band because it keeps things simple.
The important thing is to take advice before you make any decisions because far from saving you tax, the wrong choice could end up costing you money.