1 accountancy Exchequer Accountancy Services Guide to running and managing your Limited Company Exchequer Accountancy Services Limited, 1st Floor, The Exchange, 1 St John Street, Chester CH1 1DA T E W
2 Exchequer Accountancy Services s Guide to Running and Managing your Limited Company Taking the decision to manage your own business as a limited company can be both empowering and financially rewarding. This decision, however, comes with the responsibility of being a limited company director. We have prepared this guide to give you an overview of the responsibilities you need to comply with. What is a Limited Company? A limited company is an independent legal entity that can be set up to run and manage business activity. The company s finances are separate than that of the owners and directors. Any profit made by the limited company, after Corporation Tax has been deducted, is owned by the company and not the owners. This profit can however be drawn by the owners in the form of directors fees and dividends once the businesses liabilities have been deducted. Setting up a Limited Company Setting up a limited company can be done either directly through Companies House or by authorising a specialist such as Exchequer Accountancy Services to do so. The steps to setting up your limited company are as follows: Contact Exchequer Accountancy Services on and speak to one of our business consultants Decide who will act as the company s director / secretary Choose a name for the company Authorise your personal accountant who will file the correct documents with Companies House for you Start trading The Responsibilities of a Limited Company Below is a brief guide as to what responsibilities you will have if you decide that working through your own limited company is right for you: The Role of a Limited Company Director: As an independent legal entity the company requires one or more directors to manage the affairs of the business. For small private companies one is sufficient. There are specific responsibilities and duties associated with the running of a company. This can carry potential risks personally, legally, and financially if the correct advice is not sought from a specialist firm of accountants such as Exchequer Accountancy Services. A director is essentially responsible for driving the business forward and exercises control and management of a company for the benefit of the company s stakeholders, shareholders and employees alike. A limited company director is bound by company law (Companies Act 2006) and before taking this step it is important that you fully understand the commitment you are undertaking as a director. Companies House have published two guidance booklets explaining the annual and event driven requirements of directors and secretaries in running a limited company: Life of a Company - Part 1 Annual Requirements - GP2 Life of a Company - Part 2 Event Driven Filings - GP3
3 The Role of a Limited Company Secretary A limited company secretary takes care of the administrative responsibilities of the company. Where there is only one director that person will often fulfil this role as well. This typically includes submission and maintenance of the statutory registers of the company and making sure that the company files statutory information to Companies House and HMRC as per the specified filing dates as set out by law. Exchequer Accountancy Services will take care of the company secretarial duties for you as part of our service and at no additional cost. We will take care of all your companies submissions and your personal accountant will proactively monitor your liability payments to ensure that they are paid on time. Year-end Accounts Year-end accounts or statutory accounts are prepared at the end of a company s financial period. This is usually a 12 month period signifying the official year-end of the company as recorded by the Accounting Reference Date (ARD) which is issued by Companies House. The year-end accounts have to be compiled in a way deemed fit for purpose by complying with the Generally Accepted Accounting Principles (GAAP). They must also be set out in a specified format (as set out by the Companies Act 2006) and are submitted to Companies House to go on public record. Included in the accounts are the balance sheet, the profit and loss account, and notes to support the company s accounts. The company s accounts will need to be submitted to Companies House 9 months after the company s year-end and to HMRC 12 months after the company s year-end. Submitting the accounts to HMRC will support the companies Corporation Tax Computation and Corporation Tax return (CT600). Annual Return Every limited company has a legal requirement to submit an annual return which ensures that the information held at Companies House is up to date. The annual return needs to be filed within 28 days after the companies made up date (this is the anniversary of incorporation or the date of the last annual return). It is the responsibility of the company s director, and or the company secretary to submit a company s tax return, failure to do so is a criminal offence. What information is required on your company s annual return? Company name and registration number Company s registered office Single inspection address Company s principle business activity Where appointed, the name and service address of the company s secretary Name, date of birth, service address, nationality, country of residence, and occupation of all directors Company s made up date A statement of capital with information on past and present shareholders Included in your monthly fee is Exchequer Accountancy Services company secretarial service so you no longer need to worry about filing your annual return, we will take care of this for you.
4 Financial Accounting Financial accounting is the production of financial information for the external stakeholders of the business; i.e. government bodies, banks, potential investors, etc. Objectives of financial accounting Providing information to the users for rational decision making To know the solvency position of the company Systematic recording of transactions Ascertainment of result of the above recorded transactions Ascertainment of the financial position of the business There are two main financial statements that are used to provide the above information: The Balance Sheet The Profit and Loss account A Balance Sheet is a statement of net worth that summarises a company s assets, liabilities, and shareholders equity at a particular point in time; essentially a snapshot of the business. The balance sheet follows the basic accounting equation: Assets Liabilities = Capital / Shareholder equity. The Balance Sheet gives the businesses external stakeholders an idea as to what the company owns (Assets), what the company owes (Liabilities), and the amount invested by the owners (Capital / Shareholder equity). The Balance Sheet is a very useful picture of the company s financial health and liquidity. However when the next business transaction takes place, the picture will change. This is why the balance sheet is often supported by the profit and loss account. The Profit and Loss account presents the businesses financial performance over a period of time, e.g. one year. Where the balance sheet is a snap shot of the company s financial position, the profit and loss account is a summary of the businesses activity over the same period of time, e.g. one year. The Profit and Loss account summarises the financial transactions that have taken place over this period and provides the external stakeholders of the business an understanding of how the company s financial performance. The main external stakeholder your company will face will be HMRC, and through completing the 64-8 form, Exchequer Accountancy Services will be able to liaise with them for you, so you won t have to. Under the Companies Act 2006 every company must prepare financial accounts and submit these annually to Companies House and HMRC, these are known as a company s year-end accounts. Year-End Accounts Year-end accounts or statutory accounts are prepared at the end of a company s financial year. This is usually a 12 month period signifying the official year-end of the company as recorded by the Accounting Reference Date (ARD) which is issued by Companies House. The year-end accounts have to be compiled in a way deemed fit for purpose by complying with the Generally Accepted Accounting Principles (GAAP). They must also be set out in a specified format (as set out by the Companies Act 2006) and are submitted to Companies House to go on public record. Included in the accounts are the balance sheet, the profit and loss account, and notes to support the company s accounts. The company s accounts will need to be submitted to Companies House 9 months after the company s year-end and to HMRC 12 months after the company s year-end. Submitting the accounts to HMRC will support the companies Corporation Tax Computation and Corporation Tax return (CT600).
5 Management Accounts Management accounts focus on reporting within the business and are drawn up to be viewed internally by the managers, owners, employees, etc. Management accounts are provided to forecast and budget for future business activity and take into account a degree of external abstraction to factor in the external business environment. Management accounts are an important tool in contractor accounting and they reflect the cumulative total of all business transactions that have taken place during a given month. These accounts will be produced on a monthly basis and should be used to monitor your personal drawings and to take note of how much money should be kept in your businesses account for your company liabilities. Exchequer Accountancy Services will provide you with monthly management accounts and your personal accountant will be happy to discuss ways for you to improve your company s performance and tax efficiency whenever is convenient for you. IR35 Explained In April 2000 the government decided to introduce the IR35 legislation. This piece of legislations function was to eliminate the avoidance of tax and national insurance contributions (NIC) through the use of a personal service company (PSC) where an individual worker would, for tax and NIC purposes, be regarded as an employee of the client. If you and your company are deemed to be operating inside IR35 then there are potential implications and legalities that will need to be adhered to. The obvious goal whilst contracting is to ensure that you are fully compliant under the IR35 legislation so we have provided some guidance to be considered ensuring you only undertake contracts that allow you to operate outside IR35. Operating inside IR35 From time to time you may take a contract that due to the nature of the work or the working practices of the client falls inside the IR35 legislation. However, this can still be a more financially beneficial option than working under an umbrella solution or returning to PAYE employment. The benefits to operating inside IR35 through a limited company are as follows: You only pay tax on 95% of your income, rather than 100% of your income under an umbrella company. HMRC provide a 5% allowance which is intended to help with the running costs of the business. If registered under the flat rate VAT scheme then your take home pay should be considerably higher due to the flat rate benefit. See Flat Rate VAT. Umbrella companies can cost just as much as Limited Company, if not more. Contractors can make use of wider employment schemes, such as: home office allowance, cycle to work scheme, child-care allowances, etc. You can run concurrent contracts under the same limited company that may be outside of IR35 so that you can earn both a salary and a more tax efficient dividend. For more information on IR35 please see: Exchequer Accountancy Services s guide to IR35.
6 Operating outside IR35 In order to operate outside of the IR35 legislation, you need to be able to prove that you are working independently through your limited company. Unless you have evident autonomy within the role as a contractor, i.e. the client has no real control over your contracted duties, then it is unlikely that you will fall outside IR35. A contract for services can be written to fall outside IR35, however if it doesn t accurately reflect your working practices then it really isn t worth the paper it is written on. For example, if a substitution clause has been included in the contract, but, in reality, you don t know anyone that you could send in your place, the clause in the contract would have no impact on your IR35 status. HMRC would actually review your working environment and practices so a contract with conflicting terms wouldn t even be taken into consideration in an IR35 case! If it is ruled that you have been falsely operating outside of IR35, you would be forced to pay back all the previously underpaid tax, a penalty of similar value and interest for the time you have held onto the additional funds. The investigation window is 5 years and HMRC can look into your accounts at any point within this timeframe. The moral of the story is: only operate outside IR35 if you are absolutely certain of your IR35 status. It is important that you get all contracts / working practices reviewed by Exchequer Accountancy Services to ensure that you are operating outside IR35. We are here to help so please call us on and talk to your personal accountant Companies Tax Understanding the different company taxes can be a fairly arduous process, for that reason we have compiled a brief overview of the main company taxes you will face whilst operating as a limited company contractor. Corporation Tax Limited companies have to pay tax on their operating profits for each accounting period (this is usually a 12 month period and usually coincides with the company s financial year-end); this is known as corporation tax. The rate of corporation tax is set at 20% (as of April 2014) for companies whose operating profits are less than 300,000. From April 2015 the amount will be 20% regardless of the profitability of the company. The operating profits of a business are calculated by deducting the expenses incurred throughout the accounting period from the income generated. By taking into account the nature of payments from a limited company and accounting for all allowable business expenses you can reduce the amount of profit which is subject to corporation tax. If your company has been shown to make a loss at the end of an accounting period you, as a director, may be able to claim loss relief to reduce a future Corporation Tax bill and claim a refund of previously paid Corporation Tax for your company. A loss relief is created when the businesses expenditure exceeds the income generated. This trading loss is shown in your company s accounts and the loss relief is formed when this is offset against any other gains or profits made by the company in the same accounting period. If a trading loss has been made and it can be used in the same accounting period, you may be able to make an election to carry the loss back to earlier accounting periods or it can be carried forward to be offset against future profits.
7 PAYE The Pay As You Earn (PAYE) tax system is a method of paying Income Tax and National Insurance contributions. Your employer deducts tax and National insurance contributions from your wages or occupational pension before paying you your wages or pension. Wages include sick pay, maternity or paternity pay and adoption pay. You pay tax over the whole year, each time you are paid, rather than paying tax in one lump sum. Your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC). Each pay day you will get a pay slip setting out your pay, tax and National Insurance contributions and any other deductions from your pay. If you get a pension, you may not get a payslip for every payment. At the end of the tax year, you will get a form P60 which sets out the total amounts paid to you and deducted from you for the previous tax year. If you pay tax on your wages or occupational pension under PAYE, the PAYE system can also be used to collect the Income Tax on any other taxable income you have. For example, if you pay tax under PAYE on an occupational pension, the tax due on your State Retirement Pension is collected through PAYE by deducting tax from your occupational pension. The PAYE system can also be used to collect tax due on other sources of income such as untaxed interest or rent. Dividends vs. Salary (PAYE) Dividends Dividends are how a limited company distributes its profits to its shareholders. Dividends can be claimed at any time, provided of course that the company is in profit. If the company is not in profit and a dividend is taken then this would be classed as an illegal dividend. A contractor operating through a limited company calculates its profits by deducting business expenses from the sales income of the business, this leaves the operating profit. Corporation tax is charge on these operating profits at 20% and the retained profit can be distributed to the companies shareholders; i.e. the contractor and the contractors spouse (see Exchequer Accountancy Services s guide to Second Shareholders). The basic rate of tax on dividends is 10%, but because corporation tax has already been deducted from the company s profits, dividend income up to the higher rate tax threshold is considered to be franked by a dividend tax credit, meaning that HMRC considers that corporation tax already paid covers the 10% tax due on the dividend. On dividends paid from the high rate threshold to the top rate threshold of 150,000 contractors are liable for income tax at a rate of 32.5%, but this is once again discounted by 10% because of the corporation tax already paid. So what a contractor actually pays is 22.5%. Dividends paid above 150,000 have a gross rate of 37.5% tax, discounted to 27.5%. Most importantly, dividends do not attract NICs, so a contractor taking a dividend pays no employee NICs, and their limited company pays no employer s NICs. Salary Contractors taking a minimum salary and the balance in dividends will end up paying significantly less tax and NICs than contractors paying themselves just a salary. In both cases a contractor can earn up to their personal allowance of 10,000 tax-free. But from 10,000 to 41,865 ( 31, , to 2015 figures) a salaried contractor pays 20% income tax and 25.8% NICs. Remember a limited company contractor s company also pays 13.8% NICs, which comes out of the contractor s fee income. Contrast that with a contractor who pays no tax on dividend earnings up to 31,865, and it becomes clear that taking the low salary and dividends route is hugely advantageous for maximising net income and minimising tax liabilities.
8 Capital gains tax Capital is wealth in the form of property or money that is used to create greater wealth for the owner. When capital increases in value (the capital owners wealth increased) this is known as a gain. Capital Gains Tax (CGT) applies when the capital with the increased value is sold or given away by the owner. Assets that attract CGT include but are not limited to: Property (separate from your main dwelling) Stocks and Shares Art works A gain occurs when the capital asset is sold for a greater value than it was originally purchased and a profit was made. For example, if you bought a painting for 1,000 and later sold it for 3,000 a gain of 2,000 has been made. This gain would then be subject to CGT. If the ownership of an asset were to be transferred into the name of a spouse or civil partner then CGT does not apply. If this asset were later sold, CGT would then be applicable. The rate of CGT depends on the level of income of the owner of the assets and can be charged anywhere between 18% and 28%. For month information on CGT please click here VAT Value added tax (VAT) is a form of consumption tax that is charged on most goods and services provided by VAT registered businesses. If your company is VAT registered you can charge VAT on the goods and services you provide and reclaim this when buying products for your business. There are three main VAT rates in the UK; standard rate at 20%, reduced rate at 5%, and zero rate at 0%. The majority of goods sold will be at the standard rate of 20%. VAT returns are submitted to HMRC at regular intervals, usually on a quarterly basis and these tell the revenue how much your business owes. As of April 2013 all businesses with a turnover of, or in excess of, 79,000 have a legal responsibility to register for VAT, failure to do so could result in penalties. Your dedicated personal accountant will actively monitor your company s turnover, and when we feel you will reach this threshold, we will register your company for VAT and complete your quarterly VAT returns completely free of charge. There are two main types of VAT registration in the UK: Standard Rate VAT and Flat Rate VAT. Depending on which type of VAT your business is registered for will depend on how your VAT liabilities are calculated and ultimately how much your business will owe the revenue at the end of the quarter.
9 Flat Rate Scheme The flat rate VAT scheme was introduced by the government to help simplify your taxes. The majority of contractors that operate limited companies will benefit from being registered under the flat rate VAT scheme as they don t process many VAT chargeable purchase through the business. Businesses operating under the flat rate scheme charge VAT on services provided at 20% and pay this back to the revenue at a lower rate which is determined by the trade sector your business operates in. The difference between these two amounts is known as the flat rate benefit which increases the revenue of your business. Once the appropriate taxes have been deducted this additional revenue will be available for you as a director to draw from your business. See the below table to see which trade sector your business would qualify for: Trade Sector Appropriate % from 1 Jan 2010 to 3 January 2011 Appropriate % from 4 January 2011 Accountancy or book-keeping Advertising Agricultural services Any other activity not listed elsewhere Architect, civil and structural engineer or surveyor Boarding or care of animals Business services that are not listed elsewhere Catering services including restaurants and takeaways Computer and IT consultancy or data processing Computer repair services Dealing in waste or scrap
10 Trade Sector Appropriate % from 1 Jan 2010 to 3 January 2011 Appropriate % from 4 January 2011 Entertainment or journalism Estate agency or property management services Farming or agriculture that is not listed elsewhere Film, radio, television or video production Financial services Forestry or fishing General building or construction services* Hairdressing or other beauty treatment services Hiring or renting goods Hotel or accommodation Investigation or security Labour-only building or construction services* Laundry or dry-cleaning services Lawyer or legal services Library, archive, museum or other cultural activity
11 Trade Sector Appropriate % from 1 Jan 2010 to 3 January 2011 Appropriate % from 4 January 2011 Management consultancy Manufacturing fabricated metal products Manufacturing food 8 9 Manufacturing that is not listed elsewhere Manufacturing yarn, textiles or clothing 8 9 Membership organisation 7 8 Mining or quarrying 9 10 Packaging 8 9 Photography Post offices Printing Publishing Pubs Real estate activity not listed elsewhere Repairing personal or household goods 9 10
12 Trade Sector Appropriate % from 1 Jan 2010 to 3 January 2011 Appropriate % from 4 January 2011 Repairing vehicles Retailing food, confectionery, tobacco, newspapers or children s clothing Retailing pharmaceuticals, medical goods, cosmetics or toiletries 7 8 Retailing that is not listed elsewhere Retailing vehicles or fuel Secretarial services Social work Sport or recreation Transport or storage, including couriers, freight, removals and taxis 9 10 Travel agency Veterinary medicine Wholesaling agricultural products 7 8 Wholesaling food Wholesaling that is not listed elsewhere
13 To put this into perspective, the below example has been drawn up to demonstrate how the additional profits will be calculated. This example is based on an IT contractor in their first year of trading with a net turnover of 48,000. Net amount you invoice your client 48,000 VAT charged to client at 20% 9,600 Gross amount 57,600 Flat rate VAT of 13.5% (includes a first year discount of 1%) 13.50% VAT to be paid to HMRC % of 57,600 7,776 VAT received from client 9,600 Additional profit for you 1,824 Exchequer Accountancy Services can set you up to pay your VAT by direct debit meaning there is one less liability that you need to worry about. Call one of the team on and we will be happy to advise how we can do this. Standard Rate Under the standard rate VAT scheme your business can reclaim VAT on purchases that you have been charged VAT on. Operating under this scheme you will be required to submit a VAT return to the revenue on a quarterly basis which must include: All output VAT this is the VAT that has been charged by your business to your customers or clients. When operating under invoice accounting this VAT must be declared regardless of whether your debtors have paid for the goods or services that your business has provided. All input VAT this is the VAT which your business has been charged by suppliers on goods and expenses incurred by your business in the quarter. The same principle applies as with the incoming VAT that this must be declared regardless of whether your business has paid for the item. Call Exchequer Accountancy Services on for a free VAT consultation and we will advise you on which method of VAT would most benefit your business. Limited Company Tax Deductable Expenses As a limited company director you are entitled to claim expenses for purchases/costs that have been incurred for the running of your limited company. These are commonly known as tax deductible expenses as they reduce the operating profits of your business which will reduce the amount of corporation tax that your company will need to pay. The majority of expenses that you incur will be paid directly from your businesses bank account; however your limited company will reimburse you personally as a director for the expenses that you incur whilst performing the daily duties of your company.
14 Some of the more common expenses are as follows: Business travel and accommodation Salaries Employer s N.I. contributions Business telephone calls Mobile telephone and calls Equipment purchased for business purposes Computer software Technical books and journals Certain professional subscriptions Accountancy fees Postage for business Stationery for business Contributions to a pension plan Motoring expenses using fixed rate allowances (e.g. claiming the distance travelled) Use of a home as office Company bank charges and interest 24 Month Rule As a contractor you are now able to claim main site travel and subsistence expenses subject to a time limit on the period of attendance. Introduced in 1998, this change in legislation stated that as a contractor you are able to claim travel and subsistence expenses whilst attending a contract at a qualifying work place for no more than a 24 month period. The 24 month rule however is based on the assumption that the contractor knows that the length of the contract will last no more than the stated 24 months. If at any time through the duration of the contract that it is known that the contract will last 24 months or more then you will no longer be able to claim main site expenses through your company. Where a person moves from workplace to workplace, and doesn t return to a workplace previously attended, the 24 month rule is reasonably straightforward. However, the legislation has to take into account contractors who return to or keep returning to the same workplace. This happens frequently in the engineering construction industry and is where the 40% rule comes into play. 40% rule As a typical PAYE employee you do not qualify to claim main site travel and subsistence expenses when travelling to and from your ordinary place of work. However, as a contractor you may qualify to claim such expenses provided that you satisfy the strict guidelines which are governed by HMRC. These guidelines have been imposed to determine whether your main working site is classified as a temporary place of work. A temporary place of work is classified as such when an employee / contractor attends said working site for a limited period of time or for what is deemed to be a temporary purpose. As a contractor, your travel and subsistence expenses are potentially claimable if your place of work is, indeed, deemed temporary. This however is determined by the limited duration rules that restrict the reimbursement of these expenses. A temporary place of work ceases to be temporary when, or if, it is intended that the contractor will spend 40% or more of their time on a continuous basis for a period of 24 months or more at their working site. This being the case, the work place will be classed as permanent from which point onwards you, as a contractor, will be unable to claim main site travel and subsistence expenses. It is important to realise here that the expenses cease to be allowable at the point that you become aware that you will be at the temporary site for 24 months or more, not when you reach 24 months. At Exchequer Accountancy Services we appreciate that this may be a little confusing. This is why your personal accountant will be on hand 6 days a week to guide you through the expenses that you are able to claim through your limited company.
15 What are claimable expenses? Knowing what expenses you are able to claim through your limited company is a science in itself and for this reason we have summarised below the typical expenses that you will be able to claim through your limited company. Business Travel Travelling whilst conducting business activity is an expense that is eligible for tax relief; this includes travelling to and from your temporary working site and travelling to other working sites on business activity. Tax relief does not usually apply to travelling to and from your normal place of work so it is important that the 24 month rule is enforced at all times. Depending on how you travel to your temporary working site will determine the amount of tax relief that you are entitled to. A brief summary has been given below: Road Travel using a personal vehicle: You are eligible to claim the cost per mile for eligible business travel in your own personal vehicle. Depending on the amount of miles travelled during your company s financial year will determine the monetary value of your claim. Below is a table which summarises the main travel types using your personal vehicle and the monetary value of eligible claims. Type of Vehicle Motorcar Motorcycle Bicycle First Miles 45p per mile 24p per mile 20p per mile Miles 25p per mile 24p per mile 20p per mile It is important that you retain your fuel receipts in support of your mileage claims. If HMRC were to audit your business they may request that these be presented to evidence your claim. Air or Rail Travel: The cost of air and rail travel is a claimable expense business provided the journey is in performance of your company s duties. This cost can either be met personally and then reimbursed by the business or paid directly from the businesses bank account. Where applicable a receipt will need to be retained to evidence the transaction. Other Allowable Travel Costs: Whilst travelling on business you may incur additional costs such as toll roads, bus and taxi fares, car parking charges etc. Provided that these costs are incurred whilst performing business activity then these are also eligible for tax relief if accompanied by a supporting receipt. Accommodation When staying away from home on business duties you may claim the cost of your accommodation provided this is separate from your main dwelling. This cost may be in the form of a hotel, a guest-house, or you may rent a room or flat during the week. As long as this cost is incurred whilst performing your business duties then it will be eligible for tax relief.
16 Overnight allowance: When you are away on business you may incur personal costs such as toiletries, telephone calls, newspapers etc. These costs are classed as personal expenditure and are not claimable as tax deductable business expenses; however you are able to claim an un-receipted overnight allowance whilst staying away on business duties. There are two overnight allowance rates: 5 per night if staying in the UK or 10 per night when you are overseas. Meals When working away from home meal claims are an acceptable tax deductible expense. You are eligible to claim either a breakfast or a lunch, and an evening meal. Under the revenues guidelines the cost of these meals must have been incurred after your journey commenced so pre-packed lunches taken from home are not claimable. IT equipment IT equipment, peripherals, and business related software is claimable for tax relief through your limited company. This type of expense would fall into one of two categories; hardware or software and other IT costs. Hardware: the typical freelancer or contractor may claim for desktop or laptop computers, tablet PC s, or smart phone devices. Depending on the value of these items then they may need to be processed as an asset of the business and paid for directly from the businesses bank account. See Capital Expenditure. Software and other IT costs: the cost of computer software, printers, and small office equipment are eligible for tax relief through your limited company. It is recommended that these costs be purchased directly through your businesses bank account. Mobile Phone Costs Whether or not you can make a claim for a mobile phone under your limited company is a common cause of confusion amongst freelance professionals and contractors. However this is a tax deductible expense providing the following: a) The mobile phone is in the name of the business b) The mobile phone is paid for directly out of the business account c) The majority of calls made on the phone are for business use Stationery, Postage, and Telephone Costs The cost of stationery, postage, business telephone calls etc, are tax deductible business expenses provided the cost of which were incurred wholly, exclusively, and necessarily in the performance of business duties. It is advisable, where possible, to provide receipts or invoice statements in support of your claims. The cost of a landline telephone and broadband costs may also be claimable through a limited company provided the use of this is solely for businesses purposes. It is advisable that a second telephone line be used to ensure that there are no discrepancies between your personal and business telephone and broadband usage. If you choose to claim broadband costs from your own home then this is something you should be wary of as this may attract benefit in kind charge which will affect your tax free allowance. See Benefit in Kind. Personal Protective Equipment (PPE) Personal protective equipment (high visibility jackets, steel toe cap boots, etc) are tax deductable expenses as long as they are purchased to be used by the business. It is advisable that this type of expense is purchased directly out of your businesses bank account to avoid any confusion.
17 Training Putting yourself through extra training can significantly improve your chances of winning new contracts. However, only training courses that are directly relatable to the income being generated by the business will be claimable through your limited company. For example: take a Java developer operating through their own limited company working on a Java development for their client. If this contractor were to pay for a daily refresher course in Java then this would be classed as a tax deductible expense as it directly relates to the income currently being generated by the business. However, if the contractor were to take a course in Objective C, then this would not be classed as a tax deductible expense as this programming language is not currently used in any way to generate income for the business. Paying for training can be a great way to win new contracts and reduce your corporation tax liability; however you must be sure that the training you intend to undertake is a legitimate expense for your line of work. Before undertaking any training courses it is always advisable to query this with your personal accountant to ensure that the training course is tax deductible through your limited company. Subscriptions and professional fees Claiming subscriptions and professional fees to approved professional bodies may be an allowable tax deductible expense provided that the professional body is directly related to an income source of the business. A full list of the approved professional bodies can be found by following the below link by clicking here. Business Entertaining Meals or events that involve more than one person that are held with external stakeholders of your business (clients or customers) are described as business entertaining. The provision of entertaining does not usually attract a tax charge for you as a director when the cost of the event is incurred wholly, exclusively, and necessarily in the performance of business duties. Expenses claims in relation to entertaining must be supported by a valid receipt accompanied by a list of those being entertained, the organisation they represent and the reason for the entertaining. Business entertaining is not a tax deductible expense. When a claim for entertaining is submitted to your personal accountant they will likely call you to confirm how you would like the claim to be treated and to request any supporting documentation. Tools and Equipment The cost of the upkeep, replacement, and repair of tools and equipment (including computer equipment) is a tax deductible business expense provided the items are: a) Wholly, necessarily, and exclusively used in your day to day work (no personal usage of the items is allowable) b) The tools are not classed as fixed assets. See Capital Expenditure
18 Capital Expenditure Capital expenditure refers to items that have an enduring benefit to your limited company. Examples of capital assets could be: a) Computer equipment b) Office Furniture c) Motor vehicles If such items are owned by the business then capital allowances will be claimable for tax relief rather than the full cost being an allowable expense in the year of purchase. The capital allowance rate for plant and machinery, and equipment costs is 100% of the value of the asset in the year of purchase, up to the value of 25,000. The capital allowance rate for a motor vehicle will depend on the CO2 emissions of the vehicle. If a capital allowance item is bought on HP (hire purchase) then the cost of the interest payments can be claimed as a revenue expense. Before purchasing a capital asset through your business it is always worth consulting your personal accountant to ensure you are getting the maximum benefit through your limited company.