Inside Story: All good fun and jolly good companies: Buy one off the peg or tailor made. Not the Armani suit but the company itself. With you as chairman, your spouse as secretary, you can save a fortune, Steve Boggan discovers

IT'S ALMOST as cheap as buying a suit off the peg but it's much easier. Just pounds 139, a telephone call and a first- class stamp will get you your own company within three days; you can be the chairman, your spouse the secretary and your accountant can begin saving you lots and lots of money.

'You could have had one for pounds 95 but the name would have been a bit weak,' said the company fixer, Michael Brown of Fast Limited Companies Ltd. 'But, well, Independent Enterprises UK Ltd, now that's a bit special.

'You'd have paid about pounds 250 for something with an International in it. People like Internationals. Sounds big, reliable. Something with an Amalgamated Multinational would have cost even more. Bit like car number plates really . . .'

Or, like John Birt, you could wait an extra four days and incorporate a limited company with a name of your own choice instead of one of the thousands of ready-made shells waiting for an owner to come along.

It was with the use of such a limited company, John Birt Productions, that the Director-General of the BBC managed to avoid tens of thousands of pounds in taxation. Put simply, companies can claim far more expenses than individual employees - Mr Birt claimed for his Armani suits - and even when they finally arrive at a net profit figure, the first pounds 250,000 is taxed at 25 per cent instead of the top personal rate of 40 per cent paid on taxable income of more than pounds 23,700.

'Your story about Mr Birt has certainly been good for business,' said Mr Brown. 'We find that more and more people are setting up their own companies for the same reason. Receive your income gross, deduct lots of expenses, pay your wife as a secretary and pay yourself as an employee. It's all legal and it makes a lot of sense.'

The sense has not been lost on Britain's top earners. Senior business people, especially those who hold multiple directorships and are paid from more than one source, have also not been slow to make themselves limited companies.

Professor Sir Roland Smith, the former British Aerospace chief, who sits on the boards of nine organisations, has his own company, Roland Smith & Associates. It has two directors, Professor Smith and his wife, Joan.

That is perfectly legal. Much depends - in this and any other case - on the expenses claimed. Unlike Mr Birt, Professor Smith goes not give a detailed account of his private company accounts - there was no need for Mr Birt to do either because the law requires only a brief summary from very small companies. Likewise, one of the best-known personal companies - Parallax Enterprises, formed by Sir John Harvey-Jones - gives no details of expenses. Formed in 1987, after Sir John left ICI, Parallax Enterprises operates from his house at Ross-on-Wye. As well as making the Troubleshooter television series, Sir John sits on the boards of four companies, and can argue for freelance status.

You could turn to a solicitor to form your company for you, but by far the cheapest and easiest option is to buy one from a company like Mr Brown's. His and dozens of other off-the-shelf company vendors provide a fast service through the maze of company law that ensures the proper establishment and running of limited companies at Companies House in London and Cardiff. Their advertisements - by the hundred - are in the Yellow Pages or weekly in Exchange and Mart. A hundred thousand limited companies are set up each year and a similar number fold, leaving the total constant at around a million.

Provided you are not bankrupt, you can start up your own at Companies House by filling in some forms, paying pounds 50 stamp duty and providing an affidavit (cost: pounds 3.50) from a solicitor confirming your identity. Or you can pay the extra pounds 40 or so to have someone like Mr Brown provide you with everything, including the memorandum and articles of association that set out your company's objectives and limitations. If you are in a rush and have a spare pounds 500, most company formations specialists can give you a limited company within two hours.

'Lots of people who are not purely employed by one employer set up their own companies and get paid gross,' Mr Brown said. 'We get many freelance computer workers because agencies won't give them work unless they have their own company. And builders who work on a casual basis. Lots of them.'

According to the Inland Revenue, you are an employee if you have to take orders, if you have fixed hours and regular pay rates (by the hour, week or month) and if you work at the premises of your employers or at a place chosen by them.

You are self-employed if you have the final say in how the business is run, if you risk your own money and bear losses as well as profits, if you have to put right unsatisfactory work at your own cost and in your own time, and if you provide the equipment required to do your job.

If you are an employee, you will most likely have to be paid on a Pay As You Earn basis. Most tax specialists will tell you that they were surprised to hear of Mr Birt's arrangement.

However, if you are self-employed or in an arguably grey area, you can form your own limited company to loan out your services for a fee, and your 'employer' can pay that company for those services without deducting tax.

Your employer, who then becomes a 'client', may be more accommodating than you might expect - particularly as it would be relieved of the responsibility of paying more than 10 per cent of your salary in National Insurance contributions. Alex Green, a senior partner with the Greenback Partnership of accountants in north London, handles the tax and financial affairs of a number of show business personalities.

He said: 'There is certainly nothing wrong with forming your own company and nothing wrong with invoicing another company for your services. The advantages can be considerable. If you receive gross payments and your home is also your place of work, then you can deduct a proportion of your domestic lighting, heating, telephone etc as expenses.

'If your wife or husband takes business calls for you, then he or she is entitled to a weekly wage of pounds 54 before tax and National Insurance have to be paid. When you do arrive at a figure for net profits, you pay only the 25 per cent small business rate of corporation tax on the first pounds 1/4 m'

There are other advantages, too, according to Mr Green. If, for example, you had an unexpected windfall that could take you into a higher tax bracket, your company could invest it in a pension for you, which is tax-deductible. The company would then be entitled to take out a loan against the pension. So the money comes back full circle and no tax is paid.

'If you made your spouse a director and 50 per cent shareholder of your company, then you could distribute profits as a dividend instead of remunerations,' Mr Green added. 'For example, if the profits were pounds 40,000 and they all went to you as a remuneration, you would pay 40 per cent on earnings above pounds 23,700 and you would have to pay National Insurance. But if you took pounds 20,000 each as a dividend, you would pay only 25 per cent tax, and no National Insurance would be chargeable.'

And don't forget, accountants' fees are tax-deductible too.

One item that is usually not deductible for a business person is clothing. Yes, the tax inspector will agree, you do need to look good for your work; you may not like wearing Armani suits; but no, you cannot claim them as an expense. But, somehow, Mr Birt did.

The argument over claiming clothing expenses should have been settled in 1983 when Ann (now Baroness) Mallalieu, a barrister and now a Labour spokeswoman on Home Affairs, lost a landmark case in the House of Lords. She argued that she had to wear black suits as a barrister that she would never otherwise have to buy.

But, after winning her case with the tax commissioners and then with the Court of Appeal, the Lords ruled that she could not claim her clothing as an expense because it had a duality of purpose: as well as acting as an erstwhile uniform, it also provided her with 'warmth and decency'.

'If I had been able to find clothes that fitted the Bar Council's rules but were neither warm nor decent, no doubt I could have claimed for them,' Baroness Mallalieu said this week.

'That was the tortuous reasoning behind the decision, but the real reason is that they were afraid of opening the floodgates. I know actresses and models who claim for their personal wardrobe and usherettes who claim for make-up; many tax inspectors allow a degree of leeway and compromise.

'I wasn't a bit surprised that Mr Birt was able to claim his suits. I wasn't able to claim for mine, but somehow he was. And good luck to him.'

If you want to form your own company, though, there may be one snag. Such has been the furore over Mr Birt that the Government may try to close the loophole in the Budget on 16 March.

(Photograph omitted)