Should childminders change to become a limited company?

Childcare.co.uk has received a number of questions recently from childminders who are considering changing from sole trader to a limited company – in many cases to avoid moving to making tax digital (MTD) for income tax. Here are some of the main considerations:

Why are you doing it?

Do you want to change to avoid making tax digital or to separate yourself from the business? Are you concerned about legal claims or compensation cases? Do you want to invest profits back into the company or benefit from contributions to a company pension?

Bear in mind that if you do change to a limited company there’s more admin and potentially higher costs, less financial flexibility, a possible change in Local Authority planning status, new banking, re-registering with Ofsted and the need to buy new childminder business insurance. You might also have restrictions on running a limited company from your home on your mortgage, house insurance or house deeds.

Employ the right people

You will need to speak to a legal advisor, find an accountant and probably want to employ a company formation agent who will help you with the process. They will also write the Articles of Association and support you with all the formation paperwork. More information to follow…

Speak to your LA planning dept

Do you need to apply for planning permission before changing the status of your premises? Usually planning permission is not required for 1 childminder working on their own with up to 6 children under the age of 8 years, but if something changes – for example, changing to a limited company, you must check with your LA about whether planning is needed or not.

Check about mortgage / rent

If you have a mortgage the terms might change. If you rent your property you will need to speak to your landlord or rental agency and get permission to run a company from the property. This is different from childminding as a self-employed sole trader.

Get legal advice

You may need to ask a lawyer to check your house deeds for restrictive covenants and other legalities before you change to a limited company from home.

Register with Companies House

All limited companies must be registered with Companies House. Choose a name, pay a fee and appoint a director and shareholders (both can be you). Once registered, the company becomes a separate legal entity. You'll have to file an annual return, known as a Confirmation Statement every year and pay the relevant fee. You will also have to file annual accounts with Companies House. Lots of information about limited companies, and their directors are public and details of your company, directorship, shareholding and even some of your accounts can be found online for free by others. Your month and year of birth and even your address may be publicly visible to anyone, although you can pay a professional, such as an accountant to use their address.

Register with HMRC

You will need to file an annual Corporation Tax return and pay Corporation Tax, set up PAYE (even if you are only going to pay yourself) and stop trading as a sole trader once the transition is completed. You will pay national insurance (class 1) on any salary you take out of the business through PAYE.

Essentially you don’t own the money the company earns – it belongs to the company and you can pay yourself in wages and dividends (if you have made a profit). There are HMRC fines and penalties if you get things wrong.

If you pay yourself a salary, as an employee of the company, you will also have to pay personal income tax.

National insurance is slightly different to how you pay as self-employed – as a director you pay national insurance on your salary and your company also pays employer's national insurance on top. You should talk to an accountant to make sure you get things right.

Re-register with Ofsted

Ofsted will need to close your current registration and re-register you as the limited company. You cannot trade as a limited company until Ofsted approve you. Ofsted say you must ‘register again’ because your legal entity has changed – for example, changing from a sole trader to a limited company. This may mean the director (you) undergoing new suitability checks and receiving a new registration certificate; any family members and / or assistants who work from you may also need new suitability letters. I suggest you speak to Ofsted for clarification.

Transfer the business from you to the company

You will need to issue invoices, re-issue contracts and paperwork to parents under the new company name, change policies and other documentation to the new company name and transfer the assets (toys, equipment etc) to the company. Transferring assets can have tax implications – you might need an accountant to help with this.

Note that it is likely your accountancy fees will increase substantially and you probably cannot do it yourself – you have to pay for an accountant and possibly a bookkeeper to help you with your accounts.

Write articles of association

This is a legally required rulebook for how the company is run, covering directors' duties, shareholder rights and internal governance. Model examples are available online – you might want to take legal advice. If you use a company formation agent, they usually do this for you.

Set up banking

You will need a new business bank account in your limited company name to receive payments from parents including bank transfers, tax free childcare and voucher payments etc. Your bank will require you to have a business account, even if you have previously been using a personal account as a sole trader. Some banks charge for business accounts (a monthly fee and / or transaction fee). You should speak to your bank for more information.

Notify the local authority

Your local authority funding team will need to set you up as a new funding provider and renew your funding agreement. This might be delayed because Ofsted will need to notify the local authority before they can start the transfer, so consider carefully when you move things across so you don’t miss payments – your local authority might be able to advise you on best timing.

Change insurance

Most standard childminder insurance is for sole traders and will not cover you as a limited company. You may also need to inform your home insurance company.

Notify tax free childcare

Inform Tax Free Childcare and any other voucher companies about the new company name and your new bank details. They will need to move payments to the new company bank account.

Set up finances

In addition to a business bank account, you will need a payroll system for paying yourself salary (PAYE). You must keep personal and company income and expenses separate. You will probably need an accountant to help you setup and operate a PAYE scheme as there a complex tax/NI calculations each month, payslips to produce, and notifications to make to HMRC.

Note that the current childminder business income manual (BIM) will not apply to you as a limited company so you will not be able to claim, for example, wear and tear or other ‘working from home’ expenses. You will need to research corporation tax rates, allowances and reliefs on the HMRC website.

Close down as a sole trader

Submit a final self-assessment to HMRC as a sole trader, tell HMRC the final transfer date and retain sole trader accounting records as required in case you are audited in the future. You will be liable for filing the sole trader accounts on the date stated by HMRC.

New HMRC and Companies House requirements

Filing annual accounts and Corporation Tax returns, submitting a Confirmation Statement, running payroll each month (including providing directors with a pay slip), working out what dividends you are going to take from profits and keeping statutory income and expenses records. You are advised to use an accountant to help you set it up.

If you make changes

You must inform Companies House about any changes to the company. This includes changes to the name, registered address, directors, type of company, articles of association (how your company is run) and mortgages or loans.

Also note that MTD is likely to be introduced for limited companies in the future as HMRC continue to digitise their systems, so it might only be a short-term solution if that’s the reason you are thinking about changing.