A limited company is a legal body separate from the shareholders and has a number of obligations set out in the companies act.
The transfer of your business to a limited company will mean some changes need to be made to the way your business is run.
Keep Your Own Money Separate from the Company's Money
As a self-employed sole trader it was permissible to mix your business money and your private money. However for a limited company it is essential that you keep your business and your private monies separate. A Company bank account will need to be opened into which all of the income of the company should be paid. To open a new account you will need to take the companies certificate of incorporation to the bank as well as evidence of the existence of the directors. Instead of you drawing personal money out of your business as and when it is needed, as was done previously in your sole trader bank account, you will now need to pay yourself a regular salary and bonus and also dividends from time to time.
Your Relationship with the Company
You will become an employee of the company and as an employee you should have a contract of employment. If you have a salary this will be subject to tax and national insurance and a PAYE scheme will need to be set up with the Inland Revenue. Tax and National Insurance will need to be paid over either monthly or quarterly to the Revenue. Your net salary will then need to be paid out of the Limited Company's bank account into your personal account to meet your private expenses.
You can lend money to the company but loans by the company to you have other implications, they may be illegal and subject to an income tax charge. If you use the company's money to meet your private expenses you will owe that money to the company. If you are going to continue to pay for private items through the company a careful record of the private items will need to be kept and these amounts should be regularly repaid by way of dividend or additional amounts put through the payroll to cover the amount of the private payments.
Taxation of Company Profits and Dividends
The company will be liable to pay Corporation Tax on its profits and your salary, bonus, National Insurance and pension contributions are all deducted from the profit before Corporation Tax is calculated. If the company is profitable and has undistributed reserves them a dividend can be declared. If your personal gross income including the dividend is below the higher rate threshold then you will have no further tax to pay.
It is generally most tax efficient, with the current system of company taxation, for you to be paid by way of dividend if the company is profitable. This is because there is no liability for either Employers or Employees National Insurance on Dividend payments. However you will need to make some N.I contributions to qualify for the various State Benefits which include State Pension, Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP). The current tax regulations will be changing to remove the tax advantage that is perceived at present.
You will also need to have a salary to make pension contributions above the stakeholder level and some lenders stipulate that you must have a regular salary to repay monies they may want to lend to you.
Operating a limited company requires you to be more formal in your business procedures. Board Meetings will have to be held regularly and each year an Annual General Meeting may have to be held. Agendas need to be sent out and minutes of the meetings taken- for example in order to pay a dividend the directors need to hold a Board meeting to vote on the dividend and proper dividend vouchers will need to be raised.
There are also other statutory requirements now that you are a Limited company. An annual return will need to be completed and filed with Companies House. Statutory accounts will need to be prepared and filed with Companies House no later than 10 months after the year end date. Failure to file at the proper time will result in a fine of £100.The fine increases if the accounts are filed any later than 3 months after the due date. The corporation tax due on the profits of the company needs to be paid over to the Revenue 9 months after the year end. Interest will run on any amounts paid late. Accounts and Corporation tax return need to be sent to the revenue within 1 year of the company's year end. Again there is a £100 fine for late delivery. The Taxation of Benefits in Kind Many benefits that a director of a company receives not only from the company but also from suppliers and customers are taxable. The main area which is the subject of much tax law concerns company cars and motor expenses and we recommend that you review regularly you own situation. See below. All benefits in kind must be reported to the Inland Revenue each year on form P11D All benefits are subject to Income tax and some are also subject to some element of National Insurance. Again if these are filed late there are penalties Where you are a newly formed company there can be a lag between the start of you receiving a taxable benefit and the formal notification to the IR. There can also be a delay in their issuing a revised notice of coding which can lead to a build up of unpaid Income Tax which you may have to pay in a lump sum. Dispensation for Expenses If you have a strong system of expenses control it is possible to obtain a dispensation from the Inland Revenue so that you need not complete a P11D for the particular area covered by the dispensation. We strongly recommend you obtain a dispensation.
This is a tricky area due to the rules regarding company cars. If the company actually owns the car that you use and it is available for you to use, you will be liable for income tax on the value of the benefit in kind. This is an amount of money that the Revenue regard as an additional salary representing the benefit to you of the company providing you with a car on which you have to pay tax. These benefits can be quite substantial, up to 35% of the list price of the car, and the tax is generally paid through the tax code applied to your earnings from the company.
With a company car all the expenses of running the car, insurance, repair bills, road tax and of course the fuel costs will be met by the company. It is often more tax efficient for a director to own his own car and claim mileage expenses from the company. These should be paid at the following rates to be tax neutral on the individual. For the first 10,000 miles - 40p/mile, and for any mileage over 10,000 - 25p/mile. Rates paid in excess of these amounts will result in a taxable benefit which will need to be reported to the Revenue on a P11d. These are forms that need to be completed for each director and any employee who earns over £8,500 pa and should be submitted to the Revenue by early July each year. The P11d is the form that informs the Revenue of any benefits paid on behalf of the director by the company.
Obviously mileage can only be claimed for business journeys and expense claims should be submitted to the company giving details of each business journey undertaken. These records are important if there is ever an investigation by the Revenue either into the actual accounts or a PAYE Compliance visit as they provide evidence of the mileage claims. Incidentally travel to and from work is not counted as business mileage. If you are claiming mileage from the company you will need to pay for the running costs of the car from your own income. You will not be able to put all the costs of running the car through the business and claim mileage. However it is possible to pay for the running costs of the car through the business during the year and keep a record of total business mileage and then make an adjustment to reflect what should have been claimed on the mileage basis. The appropriate adjustment would then have to be made with either the company paying you the balance due to you on the mileage recorded, or you paying the company back for and expenses in excess of the mileage claimed.
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