Bootstrapping UK startup tax, VAT and Tax Credits?

I am on the verge of quitting my day job to work full time on a startup, solo initially. It seems that I could become eligible for a swathe of UK tax credits. These are pretty lucrative but they are designed for low-income working families, not tech entrepreneurs.

I have two children and will obviously work more than 40 hours per week so at first glance I should qualify. How should I structure my startup to take advantage of these benefits? I have two choices:

• Invest a lump sum in a new Ltd company and work as employee of that (for minimum wage)
• Register as self employed (but with zero income)

Either way, I should be eligible for benefits for the 2011-12 tax year, right? And either way, I think could register for VAT so that I can reclaim VAT on startup expenses.

Can any self-funded UK bootstrapper comment on their experience with tax credits?

Interesting question... you are right - UK tax credits were not devised with the entrepreneur in mind. They are meant to help families and low income workers - but I guess most entrepreneurs go through a stage that matches those requirements!

Company setup... you'll have to be careful here - even if you set up an Ltd company and paid yourself a low wage - if you take more money out of the business (say via dividends) it will probably decrease any tax credits you are entitled to. I can't really comment on registering as self-employed and taking no income...(actually you'd need to take some income, because the tax credits are just credits against tax you've paid). Remember also for the family tax credit parts it is joint income that is counted not just yours.