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HiOriginally Posted by ajbajb
Apologies in advance for the length of this post ...
If you are a higher rate tax payer, or would be if your new venture was as a sole trader/partnership, then forming a ltd company to shelter your income from 40% tax is a good idea. The company will pay (currently) 20% tax on its profits and you will effectively be building up a cash nest egg if you do not wish to draw funds out, or wish to draw at your convenience at a tax efficient time, or pay dividends in specie (eg a car) to minimise NIC. [You should take professional advice if you wish to pay dividends/bonuses in specie]
As a director of the company you will not be self-employed but would still be required to complete a tax return as you will have multiple sources of income.
If you are currently a higher rate tax payer as a result of your other employment salary, any wage paid by Ltd Co. will be taxed at 40% and if the wage is over the earnings threshold the company will pay NIC @ 12.8% of the salary. If you wish to withdraw monies as dividend you will effectively pay tax at a rate of 25% of the net dividend but no NIC. eg dividend of £10k gives a tax liability of £2.5k .
If you want to take a salary you will need a PAYE scheme as tax will be deductible from your wage, whatever level you pay (as you have another job).
Expenses: The rules for a sole trader/partnership are not as strict for tax deductiblity as you and the business are as one. However as an employee of the company you will only be able to claim reimbursement of expenses on the wholly, neccesarily and exclusively basis (ancient tax law). Therefore it is recommended that invoices for business expenses are made out to the company.
Home Office expenses: HMRC currently allow a miserly £2 per week! However you could rent the office to the company and would need a rental agreement. Although the rent would be tax deductible in the company it would be taxable on you @ 40% less costs. (There are potential CGT issues on this but would depend upon your particular circumstances and the floor area rented to the company)
Broadband, telephone, mobile phones etc: to get a tax deduction in the company, invoices need to be made out in the company name otherwise HMRC treat them as being reimbursement of personal expenses and therefore not allowable or worse still, taxable as a benefit in kind (with Class 1A NIC chargeable to the company at 12.8%). Company mobile phones are not currently a benefit in kind but are limited to 1 per employee. If you have children, then depending upon their ages, you could employ them to do admin tasks in the business at a suitable wage (eg minimum wage) and supply them with a company mobile phone.
If you do some business travelling I would suggest a p11d dispensation to cover
accommodation, subsistence etc. For travel by your car, you can claim 40p per mile (upto 10k miles per year). No other car costs can be claimed eg repairs, insurance etc as the 40p is meant to cover it.
Book-keeping. A limited company, by law, must maintain records which enable a full set of accounts to be prepared ie profit and loss account and balance sheet. So the records must be able to provide all this information including bank reconciliations. You can use a spreadsheet , or accounting software such as Quickbooks (I am an Authorised Quickbooks Professional Advisor) or alternatively use online software (eg HRBSonline Limited - Online accounting solutions from High Royd Business Service Limited, Fixed Fee Accountants and Small Business Specialists) which will automatically generate the accounts.
I would strongly recommend keeping your books at least monthly, particularly in a growing business as the VAT threshold of £64k sneaks up on you (as it includes Adwords expenditure). As soon as you hit the threshold you have to register otherwise, inevitably, HMRC will fine you (even though it can take over 15 weeks to get your registration number!).
If you were considering trading as a partnership, in addition to 40% tax you would also pay Class 2 NIC (which can be deferred as you probably pay maximum NIC in your day job) and class 4 NIC based on a % of profits (starting at 8%, reducing to 1% over the upper threshold).
So currently, a limited company route is preferred by many especially due to the NIC saving opportunity (paying low salary/dividends) and the credibility limited company status brings in the eyes of customers and suppliers.
I would suggest issuing share capital of no more than £100, the proportion to be split between you. Under current company law you need at least one director and a company secretary (does not have to be shareholder, many use their accountant and the accountant's office as the registered company address). The company secretary requirement is to be removed under the new Companies Act and replaced with authorised signatories.
Business startup: You will need a PAYE scheme if you want to take a salary, however small, as you are likely to have a tax code of BR as a director (your allowances being used in the tax code for your main "day" job). The company will need to submit end of year PAYE returns, but there is an online filing incentive which is tax free and for 2007/08 will be £100.00 [ HM Revenue & Customs: Tax-free payments employers with fewer than 50 employees ] .
CT41G: This a HMRC form requesting details about the company, its line of business, accounting year end date, trading commencement date, directors name/address/NI No and PAYE references etc. The same information can be provided to them in a letter but must be provided within 3 months otherwise there will be a £100 fine.
VAT: When calculating turnover for VAT registration purposes you also need to include Adwords expenditure. Register as a business with Adwords and you will not be charged the Irish VAT. (Adwords is not added to your turnover in your accounts. It must be added under HMCE/EC VAT rules to calculate whether you have exceeded the VAT registration threshold and must therefore register for VAT [explanation expanded after Nick's post]} - see VAT on Adwords Expenditure
Bank account: Company bank accounts typically take ages to set up due in part to the Money Laundering ID checks they have to do.
Credit card: Many banks require a personal guarantee (PG) for new businesses. If your bank requires a PG I would recommend that you use a personal card solely for business purchases (a cash back card or similar would be a good idea).
Pensions: If you wish to pay a large company pension contribution then it is usually advisable to pay a suitable level of salary, particularly as small businsses with low salary/high dividends are attracting the attention of HMRC/Treasury who consider this structure to be tax avoidance rather than tax efficiency.
Accounts: Company accounts must be submotted to Companies House 10 months after the period end (abbreviated accounts can be filed). A full set must also be prepared using standard accounting principles for the shareholders and HMRC.
Tax Return: A company tax return must be submitted to HMRC within 12 months of the period end together with accounts and computations. However tax must be paid 9 months after the period end.
Loans to directors: Loans to directors are forbidden under company law (unless authorised by shareholders). However, loans under £5k need not be reported to HMRC. If over £5k at any point in the year then they must be reported to HMRC on form p11d otherwise fines will be levied. Interest will be deemed to be charged at the HMRC published rate and must be reported on form p11d and the tax paid by recipient of the loan.
Dividends: Dividends can only be paid out of after tax profits otherwise they are illegal and HMRC can assess tax based on the fact that that the payments are in fact salary and therefore tax and NIC is due (or a loan dpending the local Inspector). I would suggest drawing accounts up to the date you wish to pay the dividend so that it can be shown to be legal (together with directors meeting minutes and dividend tax vouchers which are both legal requirements). It would be a good idea for your accounta to draw the accounts up just in case the company subsequently makes a loss and the dividend becoming illegal.
On a final note, HMRC have recently lost a highly publicised case (Arctic Systems) about husband and wife limited companies. It would be advisable for you both to work in the business and document what you do or have job descriptions in case HMRC change the rules (as they often do when they loose a court case), to justify payments.
If you would like any more info please PM.
I trust that the above is useful to you.
There are more tips at tips.hrbs.biz
Kind regards
Keith
High Royd Business Services Limited
Fixed Fee Accountants and Small Business Specialists - High Royd Business Services Limited
Small business and affiliate marketing specialists
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