Limited company basics
Why own a limited company?
Every year thousands of people decide to set up in business. They do it for a variety of reasons, but taking control and changing lifestyle is the motivation for many. The biggest attraction of setting up a business is the independence provided by being your own boss and the chance to have the lifestyle you want.
· Starting a business can offer a career with built-in independence and flexibility.
· Being your own boss can give you the choice to work more convenient hours - such as working around your children's school hours and holidays.
· You will be able to choose to do some professional development or training.
· You will be the one in the driving seat, making the decisions that enable you to lead your chosen lifestyle.
What does limited liability mean?
Limited liability gives the owners of the company (its shareholders) protection if the company fails. This means that if a company is put into liquidation, the people who own the company will only be required to pay what they have already paid or agreed to pay towards settling its debts - usually what they have paid or agreed to pay for their shares.
Can anyone be a director?
Generally it is up to the members to appoint the people they believe will run the company well on their behalf. The only restrictions that prevent anyone becoming a director are:
· They must not have been disqualified from acting as a company director (unless the court has given them permission to act for a particular company).
· They must not be an undischarged bankrupt (unless they have been given permission by the court to act for a particular company).
· From 1 October 2008 any person who has not reached the age of 16 will cease to be a director.
What are the Directors’ duties to the company?
A director’s general duties to the company are set out in the Companies Act 2006 but the relevant provisions are being commenced in two stages. Most of Chapter 2 of Part 10 of the 2006 Act (General duties of directors) was commenced with effect from 1 October 2007, but the sections relating to the duties to avoid conflicts of interest, not to accept benefits from third parties, and to declare an interest in a proposed transaction or arrangement with the company (and related provisions) will be commenced with effect from 1 October 2008. See the Department of Business, Enterprise & Regulatory Reform website www.berr.gov.uk for further details.
What responsibilities does a director have towards Companies House?
Every company director has a personal responsibility to deliver statutory documents to Companies House as and when required by the Companies Acts. These include, in particular:
· Confirmation Statements (Annual returns).
· Notice of change of directors or secretaries or in their personal details.
· In addition, it is usually the directors who will give notice of change of registered office.
What happens if accounts or annual returns are not submitted?
Companies House can prosecute you for not submitting these documents on time. This is a criminal offence and upon conviction the court can fine a director up to £5,000 for each offence. There is a separate, civil penalty imposed on the company for the late filing of accounts. If Companies House believes that the company is no longer carrying on business or in operation, it can, after writing to the company to check whether that is true, strike it off the register and dissolve it. If this happens all the assets of the company, including its bank account and property, generally become the property of the Crown. Once a company is dissolved you can only restore it to the register by means of a court order.
What if the accounts are delivered late?
If a company files its accounts with Companies House late the company will automatically incur a 'late filing penalty'. The amount depends upon on how late the accounts arrive and whether the company is private or public. These penalties are in addition to any fine imposed by a court.
How can prosecution and late filing penalties be avoided?
Make sure your company complies on time with all its filing obligations, not only in connection with its accounts and annual returns, but in connection with all other documents required under the Act.
What are the directors' powers and financial liabilities?
The company's Memorandum and Articles of Association limit what directors can do. Although they usually give you a great deal of freedom, you must check. For example, you might:
· Be restricted by the company's objectives to running a particular type of business
· Not be allowed to borrow money.
The Companies Act 2006 requires company directors to act in a way most likely to promote the success of the business. You must exercise a degree of skill and care. You must:
· Show the skill expected of a person with your knowledge and experience.
· Act as a reasonable person would do looking after their own business.
· You must act in good faith in the interests of the company as a whole. This includes:
· Treating all shareholders equally.
· Avoiding conflicts of interest.
· Declaring any conflicts of interest.
· Not making personal profits at the company's expense.
· Not accepting benefits from third parties.
· You must obey the law:
· Company law requires you to produce proper accounts and send various documents to Companies House.
· Other laws include areas such as health and safety, employment law and tax.
· You may be responsible for the actions of company employees.
If in doubt, take professional advice. Acting improperly can lead to fines, disqualification from being a director, personal liability for the company's debts or a criminal conviction.
Drawing a salary
What elements of pay are in my payroll?
As an employee of your company you are entitled to draw a salary, and as the director you may decide on the level of salary you require. If you incur personal expenses whilst in the performance of your duties, you may claim these expenses back from your company. As a shareholder in your company, you may draw a dividend from your company provided that you have distributable profits and allowed for corporation tax.
How often should I pay myself?
You can pay yourself weekly or monthly, but you should let your accountants know so that they can set up your payroll to function on the correct cycle. Whatever you decide, you should maintain this cycle for the whole tax year.
What is the most tax efficient way to pay myself?
This is something you should decide on advice from your accountant, but most individuals will draw a salary equal to or slightly more than the minimum wage and draw the remainder of their income as expenses and dividends. This structure will ensure that you keep up your NI contributions and will ensure that you minimise your tax obligations.
What are dividends?
Dividends are payments made by a company to its shareholders. It is the portion of company profits paid out to stockholders. When a company earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend.
What are expenses?
Personal expenses are those expenses incurred Wholly and Exclusively in the running of your business and may be claimed as long there is no personal benefit attached.
Why should I claim expenses?
Expenses are off-set against the income of your company and thereby reduce its taxable profit. If the Corporation Tax rate is say 20% and you claim £100 worth of expenses, your Corporation Tax will reduce by £20.
What types of expenses can I claim?
You should refer to the Guide to Expenses for a detailed description of the types of expense that are allowed, but in general you should be able to claim for:
· Travel to and from your temporary place of work.
· Mobile phone bills (business rentals or calls only).
· Telephone bills (business lines or calls only).
· Business internet connections.
· Equipment & tools.
· Computer hardware and software for business use.
· Subscriptions and Professional fees.
There are essentially two main types of expense - a Claimable expense and a Reimbursable expense. Claimable expenses are those where you pay for the expense from your personal funds and then claim it back from your Company; Reimbursable expenses are those which are incurred by your company but your end-client reimburses you under the terms of your contract with them.
Do I need to keep receipts?
You should keep your receipts for all your expenses. Your accountant will request copies of them from time to time to ensure that they are all valid, but more importantly HMRC may request to see them.
Accounting and taxes
What are my responsibilities as the director?
A company director is responsible for ensuring that all the necessary statutory returns, financial statements, tax returns and tax payments required by law are submitted and paid to the relevant authorities on time. These authorities are mainly, but not limited to, HMRC (Her Majesty's Revenue & Customs) and Companies House.
As a director you must ensure that your company complies with all statutory requirements as applicable to the company and act in compliance with your company's Articles of Association.
What is PAYE and NIC?
PAYE (Pay As You Earn) and NI (National Insurance) are taxes levied on your salary as an employee of your Company. These taxes are based on tax bands and initial tax free amounts and are not easy to calculate without specialised payroll software. You will be liable for these taxes only if your salary exceeds the tax free thresholds, and your accountant will have advised you of the tax most efficient salary structure for you. PAYE/NIC is normally paid every 3 months to HMRC (if your company has a quarterly PAYE scheme) or annually (if you have an annual scheme). At the end of each tax year (which runs from 6th April to the 5th April) your accountant will review the PAYE/NIC payments for the whole year and will submit the P14 and P35 returns to HMRC.
What is Corporation Tax?
Corporation Tax is the tax your Company will be charged based on the profit of your Company. This tax will be calculated by your accountant after your Company accounts have been finalised at the end of each financial year. Corporation tax must be paid at the latest nine months after the company financial year end date or penalties and interest will be charged, but you have twelve months to file your company tax return.
What are my company accounts?
A company's financial accounts consist mainly of an Income Statement (showing the profit or loss of the company), a Balance Sheet (which shows how the money in the company is structured) and a Directors Report. These accounts must be signed off by the director and are then submitted to Companies House (where they become Public Records) and to HMRC (in support of your Company Tax Return).
What is VAT?
VAT (Value Added Tax) is a tax levied on the supply of goods or services. Input VAT is charged to you when you make purchases and Output VAT is charged by you for your services (but only if you are VAT registered). Note that you cannot charge VAT unless you are VAT registered. You must register for VAT if your company's annual turnover exceeds (or is expected to exceed) £85,000. If you are VAT registered then you are entitled to claim back the difference between your Output VAT and your Input VAT (under the normal VAT scheme).
You may apply for a Flat Rate VAT scheme, which means that whilst you charge full rate VAT on your sales invoices, you calculate the amount of VAT to be paid to HMRC according to a percentage applied to your company's principal activity. Any surplus against the amount VAT charged to your end-clients is income to your company. If you are interested in this scheme, please talk to your accountant. Note that to register for this scheme your annual turnover cannot exceed £150,000. From April 2017 the introduction of limited cost trader rules makes use of the Flat Rate scheme by service oriented businesses none viable.
VAT is payable one month after your VAT quarter ends, and if the payment is late you will incur penalties and interest charges. The amount of VAT paid is the difference between the VAT your business has charged on its sales and the amount of VAT it has paid on its purchases.
Do I need to submit a personal tax return (self assessment)?
As the director of your own limited company you are required to submit a Personal Tax Return. This tax return discloses all the income you have received in the tax year in your personal capacity and includes your salary, dividends and expenses you have received. The tax period runs from 6th April to 5th April each year.
The due date for submission is 31st October (for paper submissions) or 31st January the following year (for online submissions). Note that you should allow a month or two to register for online submission if you are not yet registered. If you fail to submit your tax return on time you will face penalties and interest on any overdue payments.
What happens when I no longer need my company?
If you no longer need the company it should be formally wound-up. If you wish to do this please contact us for further advice as the company must be in an acceptable position (i.e. with no outstanding debts or creditors) to enable this to happen. We can advise and send you the forms to begin formal winding-up and the dissolution of the company.