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1 Limited Company Guide - 1 -

2 Congratulations on your new company. If you are new contracting, you may feel overwhelmed with your new responsibilities as the company director. This guide is designed to give you a step by step breakdown of the things you need to consider. To discuss any topic in this guide further, please contact us on The company and you: Your Limited Company is a separate legal entity from you as the director and shareholder. As a director you will become an officer of the company and will be responsible for managing the company s affairs. In this capacity you can receive a salary at a level that you decide. As the owner (shareholder) of the company you are also entitled to receive a return on your investment. This will be in the form of dividend income from the company s taxed profits. The frequency and level of dividend income is decided by you as company director based on the available profits of the company. All of the cash held in the company bank account legally belongs to the company and the company s finances are separate to your own. Below are the ways that you can legally extract money from the company: Salary Dividends Reclaiming allowable expenses Loan (please discuss with us first) The company has to pay Corporation tax on its profits, where profit is calculated as sales less allowable business expenses incurred. Since dividends are paid out of taxed profits they do not reduce the company s corporation tax bill. As a director of a limited company you are obliged to complete a Self-Assessment Tax Return each year. This will record the income you have extracted from the company. The level of personal tax that you will need to pay will be dependent on the level of salary and dividends you Company First Steps Company bank account: One of the first things to do after the company has been formed is to open a bank account as this will be needed in order to receive money from trading. Please note that it is essential that the company have a separate bank account to you. If you need assistance with this then please contact us Registering for Taxes: There are three main taxes which you will need to ensure that the company is registered for: PAYE; VAT and Corporation Tax. In addition to this, any directors or shareholders (where dividend income stands to exceed 10,000) will need to register for a self-assessment tax return. 2

3 Numbermill Accounting are here to help. We will register you for the relevant taxes as part of our service Company Insurance: Professional Indemnity Insurance Many clients now insist that their contractors have sufficient Professional Indemnity Insurance cover in place. PI insurance will cover you for mistakes you make at work and claims for negligence, loss of data or documents, unintentional infringement of intellectual property, and other eventualities. If you are the subject of a claim from a disgruntled client, PI insurance will cover the costs of legal representation, as well as any damages and costs you are subsequently found liable for. Employers Liability Insurance Although employers liability insurance used to be a mandatory requirement for all businesses, the Employers Liability (Compulsory Insurance) Act 1969 was amended in 2005 to exempt limited companies with a sole employee (who owns at least 50% of the shares) from the terms of the Act. EL insurance covers the company s employees in case they are injured at work, and directors are highly unlikely to sue their own company s in the event of an accident. Public Liability Insurance Public liability insurance will cover your company in case you are sued by a member of public who suffers an injury as a result of action you have taken during the course of your contract work. It will also cover the cost of making good any damage you cause to property, e.g. damaging computer equipment on a client s site. We realise that purchasing the right insurance is important but can be time consuming. We have therefore linked up with a leading commercial insurance broker, to provide our freelance contractors with comprehensive and competitively priced insurance products. Appointing an Accountant It is important to appoint an accountant in the early stages of running a company, the knowledge and advice offered by an experienced accountant can be invaluable in guiding you through the compliance issues involved in running a company. Some factors to consider when choosing an accountant are: Qualifications: You should check the qualifications held by the firm that you intend to deal with to ensure that they are regulated by one of the main accountancy bodies, these are: ACCA, CIMA and ICAEW. Contractor Specialist: An accountant who understands the way that your business works is essential. For contractors, specific knowledge of IR35 and the rules relating to travel expenses are possibly the most important factors. Online Accounting Cloud computing has revolutionised the business world. Our cloud based software allows you to manage your accounts as it enables you to access your accounts from anywhere in the world 24/7 3

4 Trading as a limited company Now that the company is open and you have appointed an accountant who has registered you for the relevant taxes, you are now ready to trade through your company. This section, covers invoicing, claiming expenses and extracting funds from your company Invoicing In order to receive payment for the services provided to your clients, you will need to issue an invoice to the client or agency. An invoice should contain the following details: Company name, address and registration number; VAT number; Invoice date; Client/Agency name and address; Description of services supplied. Bank details for the client to pay into You may be required to raise your own invoice and send direct to your client or your Agency may operate a Self-billing system. If you provide your services to your end client via an agency, they may be operating a self-billing system whereby the agency creates an invoice for you based on a submitted timesheet. Expenses: An expense needs to be incurred wholly, exclusively and necessarily in the performance of your duties. The following are examples of expenses that you could claim from your company: Travel and Subsistence(subject to the 24 month rule) Accommodation Mobile Phone Costs Training Childcare Costs Annual Party Accountancy Fees Insurance Pension Contributions Please note that this is not an exhaustive list and you will need to speak to us for further guidance 4

5 Extracting funds from the company: In order to get the best out of your company, it is vital that tax planning achieves a balance between remuneration (salary and pension contributions) and dividends, which minimises the combined tax liability of the individual and the company. The main methods of extracting money from the company are explained below: Salary The level of salary that the company pays to you is an important consideration when it comes to tax planning. Directors are exempt from the National Minimum wage legislation where there is no written contract of employment in place this gives you the freedom to set your salary at the most tax efficient level. The most tax efficient salary (in most cases) is one set at the personal allowance, at this level there will be no income tax to pay, only a small employees NI liability and the employers NI will be covered by the 2,000 employers exemption (in most circumstances). The salary will also be treated as a deductible expense for Corporation Tax purposes. Dividends Dividends are the portion of the post-tax profits that are paid out to shareholders. Dividends are paid out net of a notional 10% tax credit and do not attract National Insurance. The 10% tax credit is not actually paid to the shareholder but is treated as a deemed payment of tax. Before declaring the dividend the company s directors must be able to demonstrate at the time of the declaration that the company has sufficient retained earnings to pay the dividend.. A board meeting then needs to be held to declare the dividend payment and dividend vouchers prepared to support the transaction. If the shareholder receiving the dividend is a basic rate tax payer then no further tax will be due on the dividend, the dividend received would be treated as having been taxed already. If the shareholder is a higher rate tax payer or additional rate tax payer, dividends paid at this level are subject to tax at 32.5%/37.5% on the gross dividend, though credit is given for the 10% deemed to have been paid, meaning that the effective rates of tax on the net dividends are 25%/30.56%. Another extremely effective tax planning method is to gift shares in the company to a spouse or civil partner (with whom you are living) if their income falls into a lower marginal tax rate than yours. By doing this, you will be able to make use of their unused tax allowances and maximise the amount of money that can be extracted from the company at the lower rate of tax Pensions Payments made into an employee s pension plan by a company are deductible for corporation tax. To qualify, the pension contributions must be wholly and exclusively for the purpose of trade rather than for the benefit of the employee/director, we advise that if the overall salary and pension does not cause the company to generate a tax loss then the contributions should qualify for tax relief. We would advise you to consult with a pension advisor prior to making any pension arrangements. 5

6 TAXES One of the main responsibilities that you have as a company director is ensuring that the company taxes are paid on time, the company tax returns are submitted to HMRC on time and your self assessment tax return is both submitted and paid on time This section outlines the taxes you need to be aware of and hoiw we can help to ensure that you are never caught out. Corporation Tax Shortly after a company is formed, HMRC will issue a notice Corporation Tax information for new companies (CT41G) out to the registered office of the company, this is an instruction to register the company with HMRC for Corporation Tax. The company must submit a CT600 (company tax return) form electronically to HMRC; this must reach HMRC within 12 months of the period end for the CT600. In most cases the CT600 period being the same as the accounting period, however in the company s first year it may be slightly earlier if the accounting period is longer than 365 days (the maximum length of a CT600 period). Corporation Tax is charged on the profits made by a company for a specific period. For small companies (profits up to 300,000) it is currently charged at 20% The company must pay its Corporation Tax liability within 9 months and 1 day from the CT600 period end. VAT VAT is a tax added to the value of the fees invoiced out to your clients, currently at 20%. Therefore if your fee for providing a service was 1,000, you would add 200 ( 1,000 x 20%), making the total value of the invoice 1,200. If your company is VAT registered, you will be required to charge VAT on each of your invoices, submit quarterly VAT returns electronically by the relevant due date, pay any VAT owing by the due date and to keep a VAT account within the company s accounting records. It is compulsory for a business to register for VAT if the annual turnover will exceed 81,000 (2014/15), though it may be beneficial to register voluntarily if the business turnover is below this threshold as you may be able to benefit from using the Flat Rate Scheme. On this scheme you will continue to charge VAT out to your clients at 20% of the net invoice value but will pay VAT over to HMRC at a lower percentage which is determined by the nature of the trade undertaken by the business. Paye If you intend to pay a salary, the company will be required to set up a PAYE (Pay As You Earn) scheme with HMRC and file returns to them each month. When an employee is paid, you will be required to deduct income tax and NI from their salary and pay it over to HMRC; a declaration of this will need to be made to HMRC under the RTI rules each time you pay an employee. If you provide any taxable benefits or make certain expense reimbursements to any individual within the business, these will need to be reported to HMRC each year on a P11d form. 6

7 Self Assessment Self Assessment Tax Returns are filed at the end of every tax year. If any of the below relates to you then you will be required to file a tax return You are a company director; You have income from a self-employed trade; You have un-taxed income; Your income is in excess of 100,000; You have capital gains tax to pay; HMRC have sent you a tax return (for whatever reason); Income of 10,000 or more from savings and investments The self-assessment return requires you to detail all of your income (typically salaries, interest and dividends) and any tax which has been paid (or deemed to have been paid) on the various forms of income. The income tax year runs from 6th April to 5th April, this is the period for which HMRC require the return to be prepared. The tax return is due to be submitted to HMRC by 31st January following the end of the tax year, this is also the date that any tax owing is due to be paid. If the amount owing from self-assessment comes to 1,000 or more, then you will need to make a payment on account for the following year. The payments on account are made in two instalments, the first on 31st January and the second on 31st July. Any payments made on account will then be offset against the total tax liability for the following year. The payment on account will equate to the current tax bill. IR35 IR35 is a piece of anti-avoidance legislation aimed at preventing disguised employment; this is where someone who would otherwise be employed performs their duties through a company and enjoys the tax benefits associated with this. If you are caught by the legislation then IR35 will prevent you from using traditional tax-planning techniques (small salary and high dividends) to minimise your tax obligations instead it will require you to pay 95% of your turnover out as a salary so that you are taxed essentially the same way as an employee would. The IR35 status of an engagement is determined by looking at whether the engagement would be one of employment or self-employment. Determining Employment Status There is no definition in law over what constitutes employment or self-employment; we therefore refer to case law judgements to establish the components of what makes up employment or selfemployment. The leading case in this area is Ready Mixed Concrete (1968); it was found in this case that in order for employment to exist, there must be three factors: Personal Service, Control and Mutuality of Obligation. If any one of these factors is absent then the engagement cannot be considered one of employment and the individual will be seen to be self-employed. 7

8 Personal Service The need for one particular person to carry out a role is an essential element of a contract of employment. It therefore follows that if a contractor has the freedom to choose whether to perform his/her duties themselves or to hire somebody else to do it (on a reasonably unfettered basis) for them, is self-employed Control Control concerns what has to be done, when and where it has to done and how it has to be done. In an employment relationship, each of the above is dictated to the employee, if a person maintains autonomy over these things it would therefore indicate self-employment. If the client can move the contractor according to their priorities or exercise significant control over how they perform their duties (through supervision, monitoring, checking and appraisal) as opposed to complete freedom over how to complete a project, then they would be seen as employed rather than self-employed. Mutuality of Obligations The expectation for continuous work to be provided to a person and the expectation for all work provided to be completed characterises an employment relationship. If, therefore, there is a clause contained in a contract setting out an obligation for the client to offer further work and for the contractor to accept it, there would be a mutuality of obligation in the contract and it would be caught by the IR35 legislation. Rolling contracts or indeed contracts that are continually renewed could therefore fail this test. It is important that the working practices reflect the wording of the contract. HMRC are now placing greater reliance on the working practices themselves. Numbermill Accounting: here to help: As you start your business it is essential to obtain specialist advice from a suitably qualified and experienced contractor accountant to ensure that not only are you compliant but you also receive advice tailored to your personal circumstances. Our all-inclusive accountancy package includes the following benefits to make running your limited company straight forward for you: Registering the company with Companies House and HMRC; Production of the accounts and tax returns to ensure compliance with relevant legislation; Dedicated accountant to be on hand to answer any questions and offer advice; Regular notifications of the amount of tax to pay and when to pay it. Tax planning to ensure you are as tax efficient as possible 8

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