- How they work
- Records to keep
- Salary & dividends
- Expenses to claim
- Deadlines to submit forms
- Our services
- What if I don’t need the company any more?
- What is IR35 anti-avoidance
1. How they work
A limited company takes a day or two to be formed. It is a separate legal entity and is controlled by its directors and owed by its shareholders.
Once formed you are then able to issue invoices to customers. You will need to open a business bank account to receive payments. You then decide how much to pay yourself as director and shareholder, which is made up of a combination of salary and dividends.
The company needs to register with HM Revenue & Customs for corporation tax and PAYE. It is often beneficial to also voluntarily register for VAT and it is compulsory to register when turnover is above £73,000 (registration threshold from 1 April 2011).
The limited company’s contract can either be with the agency or directly with the end client.
Your limited company can pay expenses direct to suppliers and reimburse you as an employee. The most common tax-free expenses are: – travel and subsistence, computer hardware and software, training, professional subscriptions, insurance, business telephone and accountancy fees. Most other business related expenses are also allowed.
It is often beneficial to register for VAT and savings can be achieved with the VAT flat rate scheme in the right circumstances.
Further tax savings can be achieved through control of paying income to avoid personal higher rate tax, especially during periods of no work, using a spouse’s tax allowances and the possibility of a 10% tax rate on part of the contract income when the company is no longer needed.
We suggest using our registered office to ensure all filing deadlines are met.
A day or two to form a limited company
- Open a company bank account
- Register with HM Revenue & Customs
- Consider VAT & flat rate scheme
- Consider tax planning with salary & dividends
- Claim business expenses
- Cash flow advantage as corporation tax due 9 months after year end
2. Records to keep
We will supply an excel spreadsheet to help you keep suitable records. This can then be emailed back to us so VAT returns can be prepared quarterly and then the annual accounts. If you have online banking you can download the transactions, which saves administration time.
If a more sophisticated accounting system is required then we can recommend a suitable commercial product eg, Sage.
Alternatively, you can post or email copies of your income and expenses and we will prepare the accounts and VAT returns.
You will need to keep the invoices or receipts issued by suppliers, should HM Revenue & Customs request them during an enquiry for 6 years.
3. Salary & dividends
The most tax efficient way of drawing funds from the limited company is by paying a low salary and the balance as dividends. We will set the appropriate level of salary for you at the start of the tax year depending on your personal circumstances (e.g. pension contributions) and provide the dividend paperwork. This leaves you to withdraw the funds from your business after you have put aside your VAT and corporation tax.
You can voluntarily register but you must register if your annual turnover is above £73,000 (from 1st April 2011).
The easiest way to understand how VAT works is to accept that your company is a VAT collector on behalf of HM Revenue & Customs.
You charge your customers 20% on top of your invoices and put that aside ready to pay to HM Revenue & Customs quarterly. You then look at all the expenses you have paid over the same period and deduct any VAT incurred and pay over the balance to HM Revenue & Customs.
If your customers are not affected by you charging them VAT (as they can reclaim in the same way as you), then the benefit of being VAT registered is that you effectively don’t pay any VAT on your expenses.
How does the VAT flat rate scheme work?
The idea is to make it much easier to do your VAT return, as it can sometimes be difficult to keep track of what expenses you have incurred that have VAT on.
The flat rate scheme works by you just paying a percentage on your total takings (i.e. invoice value plus the full rate VAT charged to customers) and you ignore reclaiming any VAT on expenses.
You therefore don’t have to worry about whether there is VAT on expenses, so it cuts down on potential errors and the liability is much quicker to calculate. There can be significant savings to be made, especially if you don’t have a lot of expenses with VAT on. We will send you the complete list of trade sectors to ensure that you choose the correct percentage applicable to your business.
If you spend over £2,000 (inc VAT) on capital equipment you are able to reclaim the full amount of VAT back on the expense.
What is VAT cash accounting?
For smaller businesses, VAT is calculated for the quarter on the basis of when you receive the money, rather than when you issue the invoice. Therefore, this helps with cash flow. There is no application form and you can use the cash accounting scheme as soon as you are VAT registered.
Usually beneficial to register for VAT as you can reclaim VAT incurred on your expenses.
- Further benefit possible from registering for VAT flat rate scheme and easier to administer.
- Must register if turnover above £73,000.
- Returns done quarterly & payment due 30 days after quarter end.
5. Expenses to claim: -
Most business related expenses are allowable. Here are the more common ones: -
- Travel expenses – train fares, parking etc.
- Business mileage (45p for first 10,000 then 25p thereafter). NB there is a restriction when you work at a site for over 2 years as that then becomes your permanent workplace and travel is not allowed there
- Subsistence – food costs while at or travelling to work
- Computer hardware and software – these are considered capital expenses but will get 100% tax relief up to £25,000 per year
- Training – courses etc.
- Professional subscriptions
- Insurance – professional indemnity, public liability & key person. NB, private medical insurance is a taxable benefit in kind on the employee so not worth putting through the company
- Company pension contributions
- Business telephone. NB it is important to ensure the contract is in the company name where all the costs are allowed, including line rental & free minutes. If is contract in your personal name then only business calls can be claimed and not the rental/free minutes
- Broadband – if in company name then all costs can be claimed. If at home and in personal name then do not claim unless 100% business use
- Accountancy fees
- Advertising costs
- Printing, postage & stationary
- Entertaining – can be paid by the company but there is no corporation tax relief
- Use of home as office – we will calculate a proportion of home expenses to claim
It is not possible to list all the business expenses claimable but the idea is that if there is a business element then the cost will generally be tax allowable.
6. Deadlines to submit forms
- Statutory accounts - 9 months after year-end
- Corporation tax return - 12 months after year-end
- Payroll - 19 May following tax year-end
- P11d benefit in kind form - 6 July following tax year-end
- Personal tax return - 31 January following the tax year
8. Our services
- Quarterly bookkeeping for VAT returns (You may prefer to complete these yourself)
- Annual statutory accounts & abbreviated accounts to go to Companies House
- Corporation tax return and filing with HMRC using iXBRL system
- PAYE annual return & P11d benefits in kind form (if applicable)
- Personal tax return (additional charge may apply if more complex e.g. if you have other rental income)
- Annual companies house return (we will pay the £14 annual charge on your behalf)
9. What if I don’t need the company any more?
You can close the company at any time and we will arrange that for you at no additional costs.
If you need a limited company again then you need to go through the set up procedure and open a new business bank account. It is therefore a good idea to keep the company dormant for some time and only close it down if you are certain it is no longer needed.
10. What is IR35 anti avoidance?
The Government introduced anti-avoidance legislation in 2000 to reduce the tax advantages by those operating through a limited company where they consider you to be no more than an ordinary employee of the end client. To be outside of IR35 you need to operate the limited company with the same level of risk, responsibility, liability and control that other directors accept when they manage their own businesses.
What does IR35 mean for you? If your contract and working practices give the impression that you are an employee of the end client, then you will have to pay full tax and National Insurance, but with a 5% limit of your turnover to cover expenses. You can still benefit from the VAT flat rate scheme savings.
As part of the service, we provide an opinion on whether you are within or outside IR35.