In our previous blog, we explored the key considerations for setting up a limited company: how to name your company, things to think about when appointing shareholders or considering share capital, and all the information you’ll need to hand when submitting your application. In this blog, we’ll look at the tax implications for a limited company, and the pros and cons of setting one up.
The first thing you may be asking yourself is: ‘what is a limited company, specifically?’ For those who are already self-employed and operating as a sole trader, it can be hard to tell the difference. In essence, a limited company is a separate body: it’s responsible, as a legal entity, for its own activities – from finance to logistics.
Profits are owned by the company, rather than an individual, and these can be distributed to shareholders via dividends. Every company must have at least one director.
Forming a Limited Company: Pros and Cons
The decision to set up a limited company should not be taken lightly, and depends very much on your business aspirations and individual circumstances. However, there are some clear advantages to forming a limited company that will apply broadly to most situations – such as:
- Limited liability. A company is, as mentioned, its own legal entity – and is responsible for its own actions. As such, shareholders are only responsible for business debts up to the amount they invested.
- Tax benefits. A company is subject to different kinds of tax – and often the rates are preferable to those that apply to an individual paying income tax.
- The fact that a company is an ‘official’ entity and is governed by Articles of Association, possesses a registered address, and has to disclose certain types of information to the public lends it an air of credibility. This can prove beneficial when seeking new clients, business partnerships or external investment.
Whilst there are pros, there are a number of potential cons, too – including:
- Initial costs. Whereas a sole trader can make the decision to run a business and then simply begin to operate, a limited company has initial costs to pay prior to the commencement of trading.
- Increased transparency. Transparency has advantages and disadvantages: as mentioned above, the fact that a potential client or fellow business can access information about a limited company more readily than, say, a sole trader can have its benefits. However, public disclosure can cause anxiety, particularly when it comes to financial records.
- Personal liability. Directors of a company have a legal obligation to undertake certain duties; should these not be met, they could be held personally responsible for the company’s financial liabilities.
- More complex – and more time-consuming – reporting requirements. As a legal entity, a business is required to keep and maintain a variety of records, as well as submitting tax documents and other information to various official bodies on a regular basis. The owner of a new company may find the adjustment a struggle, but it’s important to keep on top of these obligations; as such, it’s strongly recommended that an accountant is instructed as soon as possible. Whilst some prefer to utilise an accountant only to file quarterly or end-of-year accounts, it’s advisable for new business owners to seek accountancy support without delay. A qualified tax professional can liaise with HMRC on your behalf, help to manage your financial affairs and ensure that everything is filed correctly – and on time.
Forming a Limited Company: Corporation Tax
As a new business owner, one of the first things an accountant will help you do is register for corporation tax. You must register to pay this within the first three months of business activity, and you will need to file a corporation tax (CT600) once a year.
Corporation tax is now levied at a flat rate of 19 , and the government has pledged to keep this as low as possible in the coming years.
Meeting the deadline for corporation tax – and working out what is due – can be a little tricky at first. You will be required to pay your corporation tax bill within nine months and one day after the end of your accounting period for the previous financial year (if it’s your first year, this tends to fall on the anniversary of the company’s incorporation). However, in order for you to work out how much tax is due, you’ll need to prepare your company tax return – but the deadline for this return is not until a year after the end of the corresponding tax period.
An accountant can advise on the best strategy, but it may be that you need to have two corporation tax accounting periods to begin with.
Forming a Limited Company: Value Added Tax
If your turnover is likely to exceed £85,000, you will also need to register your company for value added tax (VAT).
This kind of taxation functions in a different way to other taxes, because you are – in essence – collecting VAT on behalf of HMRC from other VAT-registered businesses you trade with. In turn, you add the appropriate VAT rate to your own invoices. When it’s time to file a company tax return, you balance the amount of VAT your business has paid over the year against the amount that has been collected from customers; the balance is then paid to HMRC.
How VAT is managed depends on the nature and scale of your business. If your VAT turnover does not exceed £150,000 per annum, you’re eligible to utilise the Flat Rate VAT scheme, which offers a simpler method of calculating the relevant tax by allowing you to apply a flat VAT percentage. There’s also the ‘cash’ accounting scheme (available to businesses with a VAT turnover below £1.35 million), which allows a business to repay VAT to HMRC only when customers pay VAT to it (or, vice versa, claim VAT only when the business has repaid its suppliers).
An accountant will be able to recommend the best scheme for your business, and will help you with all the necessary paperwork.
If your business has employees that receive a salary, your accountant will need to help you administrate your company payroll. Income tax and National Insurance Contributions will be deducted accordingly and paid to HMRC on a regular basis (monthly or quarterly); or, if the minimum thresholds are not exceeded (meaning that NICs/tax payments are not due), HMRC will need not be notified. It is important that HMRC are kept up to date with what is going on in your organisation, even if no monies are due.
In addition to tax liabilities as an employer, as a business owner you may also encounter the following types of taxation:
- Capital gains. If you dispose of any assets during the tax year, you may need to pay tax on the profits (18 or 28 for residential properties, and 10 or 20 for all other assets, depending on which income tax band you fall into [basic, higher or additional]).
- Tax on income. Depending on how you receive your income, you may need to pay income tax contributions according to the relevant rate (standard, higher, or additional) or tax on any dividends drawn from the company. All company directors need to submit a self-assessment tax return and make the appropriate payments by 31st January in the year following the end of the relevant tax year.
If you’re looking to set up a limited company, IBISS & Co are here to help. Our team comprises expert accountants and experienced chartered tax advisers, meaning that all your tax requirements are covered – from start to finish. Let us help you help your business grow.