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Starting a Limited Company Contents: Starting a limited company can be a great option for a freelancer, contractor or small business owner. This guide, developed by our experienced senior accountants and brilliant content team, teaches you about company formation, asks what is a limited company? and gives expert hints and tips on how to run a business If you re confused about the potential benefits and implications of starting a limited company, then this guide is for you. Learn about how setting up a limit can save you time and money. Find out the various ways to register. Get up to speed on what your responsibilities you have towards your limited company. Starting Tax Insurance Invoicing Expenses Salary & dividends IR35 Important dates Accoutancy timeline p.03 p.03 p.03 p.04 p.04 p.05 p.05 p.05 p.06 Included in this guide is a handy calendar, displaying all the important dates you ll have to remember, such as when to file your annual returns and when to send your end of year accounts to HMRC. The guide is downloadable as a PDF, so why not print this calendar off and stick it somewhere in your office? p.01
Starting The first step is to register your business with Companies House, and also to appoint yourself director - otherwise it s like having a ship without a captain and your limited company will not officially exist. We can do it for you Our sister company, GoLimited, offers a quick, easy and cheap service to get your company incorporated. We sort out everything below for you. Articles of Association, which are essentially the terms and conditions for your company on how it should be run. A Certificate of Incorporation which acts as official confirmation of your company formation. A Combined Register which lists all the directors and those involved in the running of the company. It will also detail any other company interests a director may have such as shares in additional companies. A Memorandum of Association which acts as a mission statement, declaring what your company must undertake and how it must do it. A Share Certificate which demonstrates how the shares are allocated and what they are worth. What s the significance of a director in a limited company? Once you ve created your limited company try to visualise it as a legal entity which exists separate to you, with its own responsibilities and accountability. As the director you are responsible for managing the company within the parameters laid out in the Articles of Association and the law. Appointing Shareholders Shareholders are the owners of the company and have certain rights, such as the ability to sanction changes, so make sure you re happy with who you appoint. This isn t an issue for you if you are the sole shareholder. p.02
A limited company is owned by its shareholders and run by its directors. If you re starting your own company then this means you can be both a director and a shareholder. More information on their roles and responsibilities is covered in Crunch s Director s Responsibilities Guide. Do you need a company secretary? If you re a small limited company we recommend against having a company secretary, it isn t necessary. Before you get started running your company make sure you have: The shareholders and directors you want. The registered address for your company you want (this doesn t have to be where you work from but will be where the legal correspondence from HMRC and Companies House is sent.) Articles of Association & Shareholder Agreement. Get a business bank account You are legally obligated to set up a company owned bank account regardless of whether you re the sole shareholder or sole director. Echoing what was said earlier, the company exists as a separate legal entity, it has its own legal rights and obligations, and any profits or losses incurred belong to the company. A company account is not your personal account. Youmust keep your personal finances separate and make your that you maintain a clear and transparent record of every transaction. Via bigmacsc99 p.03
Tax A limited company has a number of tax obligations that you may not be familiar with. Crunch can take care of all your tax payments for you and can also help register your company for any tax that you may be liable for. VAT Value Added Tax is an additional sum (currently standing at 20%) which is added to the price of most goods, services and invoices. Companies are not automatically registered for VAT and will not need to register or pay VAT unless their annual turnover exceeds 81,000 (2014/15). VAT Flat Rate Scheme For small companies with an annual turnover of less or equal to 150,000 the VAT Flat Rate Scheme was introduced. Essentially this allows you to pay HMRC a flat percentage of your sales depending on your industry, which often amounts to less than the standard VAT rate, but still allows you to charge clients at 20%. As an additional incentive to register for the Flat Rate you will be granted a 1% discount during your first year on VAT. Note that as of 1 January 2015 those that sell digital services directly to customers in EU countries will be required to pay VAT in the destination country. You can register for the VAT MOSS services to make this easier. When you come to reconcile your VAT, you pay HMRC a percentage of turnover rather than working out the VAT on all individual purchases, and your company can pocket any difference. Visit our blog for more info on the new EU VAT rules. However, one thing you need to consider when voluntarily registering for the VAT Flat Rate Scheme is whether your clients are themselves VAT registered. The additional sum you re charging may have a punishing impact on them financially and potentially lose you clients. p.04
When calculating what you owe HMRC for your return we will deduct all the VAT you pay on expenses from the VAT you charge on invoices and the difference is what you owe. At Crunch we submit quarterly VAT returns and for more information on registering, either talk to your Crunch Accountant or register directly on HMRC s website. Corporation Tax You will also need to register for Corporation Tax, which we can do for you, but will usually be conducted through your company s formation process. This tax is applied to your company s profits after you pay your employees salaries but before you are able to withdraw dividends as a shareholder. Personal Income Tax In addition to the tax your company is liable to pay, you must personally pay tax on any income you receive, usually in the form of dividends and salary from your company. If completing your return online you are legally required to complete a selfassessment by the 31st January following the tax year in question. If posting your self-assessment you must submit it by 31st October in the same year to the tax year in question. So for the tax year 2013/14 you will need to file a paper copy by 31st October 2014 or an online return by 31st January 2015. You will need to register with HMRC and notify them that you are liable to personal tax. You can do this on their website. All limited companies are required to pay tax on their profits and must submit an annual CT600. The initial tax return after starting your company needs to be filed within 12 months of your company s first year end and payment must be then made within 9 months and 1 day of your company s year end. Although it s not essential to submit the form immediately, when it comes to tax, it s always better to do things sooner rather than later. Need more tax advice? The Crunch blog is full of articles that explain the tax situation for limited companies in more depth. Click here to discover. See the end of this guide for a handy timetable showing you what forms are due and when. Please note that although these are the main taxes you will encounter but you may be subject to other taxes. p.05
Insurance Insurance can offer peace of mind and security to a company. There are three fundamental insurance covers you ll need to provide unless you re exempt. Professional Indemnity To insure you against any claims made against your work, e.g. negligence. Employer s Liability Insurance A compulsory insurance if you are employing people which will protect you against claims by an employee for injury etc. If you are the sole employee of the company and own over 50% of the shares then you are not required to have this cover. In addition to these insurances you may want to also consider Tax Investigation Insurance which covers the costs that may be incurred during any potential investigation by HMRC into your company, which can take up a significant period of time and money. Public Liability To insure you against death or damage to third parties and their property by your actions. Although it s not compulsory you have a duty to protect anyone who might be affected by the provision your services. p.06
Invoicing To receive payment for your company s services you need to raise an invoice and issue it to your clients. When creating an invoice there are legal guidelines you have to adhere to and certain requirements you must include to validate the invoice. The bill must include the word invoice on it. A sufficient description of the goods or services being provided. The time of supply (tax point) if different from the invoice date. You need to supply an itemised breakdown showing the unit price before and after VAT, the rate of VAT, the total amount payable and the total VAT charged. The invoice number. If you re VAT registered this must be a sequential number which begins with the following number to that which ended the last invoice. You may also consider putting on the payment terms so that your client knows when the deemed payment is for, and also how to make the payment. Your company s name/business address/registration number (located on your Certificate of Incorporation). To help you out, we ve designed some invoive templates, made up to spec with all the required information field. Click here to dowload for free. Your client s name/address. p.07
Expenses Via Ben Osteen One of the foremost questions asked by new companies is what they are entitled to claim back. We can t provide a complete overview of every possible expense because the list is so extensive and the decision will often depend on your personal situation. What we can do is provide you with the parameters within which HMRC entitle you to claim and the most common expenses you re likely to encounter. When you re claiming back your expenses don t expect to be compensated with a cash sum, instead, the amount you accrue in business expenses will be compensated via tax relief on your annual revenue. Note that this is an isolated tax example to demonstrate how expenses affect your tax bill whereas in reality your tax bill will also accommodate for PAYE salaries, VAT flat rate and income thresholds. Expenses must be wholly & exclusively for business use and you can hit murky ground when you start wading into personal expenses under business time, so keep it legitimate and locate our Expenses Guide if you re unsure. Any expense that holds a dual purpose is unlikely to be accepted as it s not exclusively for business use, so buying an Armani suit for work which you re likely to use personally is not going to cut it, whereas buying a specialised outfit for use on a building site is. This simply means that the collective cost of your expenses is deducted from the total revenue which you can be taxed on, for example, if you have 10,000 in profits and 1,500 in business expenses, you will only have to pay Corporation Tax on 8,500 of your company s revenue. You are however able to claim personal expenses for business purposes which were incurred during or before the formation of your limited company. For a detailed list of allowable expenses please refer to our expenses guide. p.08
Salary & dividends Your buisness profits are deemed to be the property of the company. If you intend on withdrawing an income from the company this has to be done through either dividends if you re the owner, or a salary if you re the employee. The most tax efficient salary for your company to pay you in 2014/15 is 7,956. This is the highest sum before you are required to pay National Insurance and over the 5,772 minimum to qualify for state pensions. As both an owner (shareholder) and employee (director) of the company you can generate the most tax efficient way to receive an income by splitting your payments between dividend and salary, as follows. Salary Dividends This is the money you may withdraw from the company s post-tax profits as a shareholder. Make sure your company has the profits available to withdraw dividends otherwise money paid will be recorded as a director s loan! If your limited company falls outside IR35 legislation you can pay yourself a salary at either, the level below the NIC & Tax free thresholds, or in accordance with the national minimum wage, it s your choice! Remember that national minimum wage need not apply to limited companies that do not hold a contract with their employees, as the case will usually be with one man companies. Dividends avoid National Insurance taxes but are subject to Corporation Tax at 20%. Additionaly, until your income exceeds the higher rate tax threshold (a total salary of 41,865 for 2014/15) dividends are taxed at only 10%. However, the tax man has decided that it would be unfair to tax this money twice, so you can claim a tax credit on this amount. After you have accounted for the nominal tax addition, the maximum dividend available to you before your total income reaches the taxable p.09
higher earnings threshold is 38,948, which is taxed at 20%, leaving you 30,158 in income. So the most tax efficient income we can suggest is a combined 38,114, although you may want to take more than this, if you re happy to pay the higher rate of income tax. Use our Personal Tax Estimator if you are considering taking in additional of the advised sum. PAYE/National Insurance If you intend on paying a salary then you are required to set up a Pay As You Earn scheme (PAYE) with HM Revenue & Customs (HMRC) and also deduct any National Insurance liabilities. Failure to do this properly or within the given time parameters can result in financial penalties, so it s vital to get this set up correctly from the outset. If you re unsure what PAYE is exactly, it s a compulsory method of tax collection which you have to deduct from staff salaries. It s applied to anyone earning an annual salary of more than the Employee National Insurance Threshold, which stands at 10,000 for the 2014/15 tax year. HMRC need to be notified every time you pay an employee, this will be taken care of by Crunch software which is RTI compliant. For more information on RTI visit HMRC s website. The level of salary you pay is a decision you should personally make after taking into consideration the tax benefits of paying under the minimum thresholds for taxable salaries and dividends. p.10
IR35 IR35 legislation acts as a barrier to prevent permanent employees disguising themselves as self-employed or as limited company s in order to receive the lower tax benefits. Don t be alarmed if you re confused so are most of HMRC and the MPs overseeing the legislation that s why it s best to make certain your limited company s position with some professional help. It can often tie people up in confusion but its use is fairly straightforward. It s simply in place to determine whether you are employed by your client in the role of an employee, or if you maintain your position as a contractor whilst providing your services to the client. To help you navigate the IR35 minefield, use our IR35 calculator based on HMRC s own Business Entity Tests to determine your risk of being caught by the legislation. Essentially it boils down to how much involvement a client has in the corporate running of your company and how much regulation is exercised over your work. Ultimately, you are the authority in your company and the parameters for how you work should be drawn out and answerable to you. Need more help with IR35? We ve got a full guide dedicated to unravelling the mystery that is IR35. Check it out here. Check out our Help Centre for a comprehensive guide to the differences between an employer/self-employed and a worker. p.11
Important dates As the director of a limited company you are required to file various forms Annual return and returns to both Companies House and HMRC. Knowing what to file and Not be confused with your annual accounts, the annual return is in fact when can get a bit confusing. a completely separate filing requirement. Whereas your annual accounts contain mainly financial information, your annual return is more like a Self Assessment snapshot of your company at a particular moment in time. The director of a limited company is legally required to carry out a Self Assessment of their personal finances once a year. Abbreviated accounts You must file a set of abbreviated accounts to Companies House every year, P60 including information on cash held in the company, assets, debtors and The P60 is a summary of what salary you ve paid yourself through your limited creditors. Your first set of abbreviated accounts are due nine months after company, and the tax that s been deducted from it in the previous tax year. your first company year end. P11D CT600 A P11D is a form required by HMRC that details any benefits and expenses This is a return filed to HMRC once a year containing details of your that have been claimed during the past tax year (6th April 5th April). See company s income minus any tax allowances and expenses. Your first our benefits in kind guide for more info. Corporation Tax return is due 12 months after your first year end. Timetable On the next page you ll find a timeline showing what you need to file and when, based on forming a company on 1 January. p.12
Limited company deadlines Based on a company being set up on 1st January Filing your company s first set of accounts to Companies House: If you are filing your company's first accounts and those accounts cover a period of more than 12 months, you must deliver them to Companies House within precisely 21 months of the date of incorporation, or 3 months from the accounting reference date, whichever is longer. Glossary Limited company formation Date a company is incorporated. Year end Last day of a Ltd company s accounting year Tax year 6th April to 5th April Annual return Statutory return required by Companies House giving a snapshot of company information Companies House year end accounts Company s annual financial statements Corporation tax Tax needing to be paid to HMRC on any taxable profits of the company HMRC year end accounts: Company s annual financial statements & corporation tax return (CT600) Self-Assessment: HMRC return detailing personal taxable income, also known as a Personal Tax Return P11D Statutory form required by HMRC detailing cash equivalent of benefits and expenses provided to a Director and employees during a tax year. P60 End of year tax certificate provided to every employee confirming earnings for the year. Other dates: VAT (Value Added Tax) Returns: Return made to HMRC to show how many vatable transactions. For Crunch clients these would be on a quarterly basis. RTI (Real Time Information) Payroll submissions: Real time payroll run submission to HMRC. For Crunch clients these would be on a monthly basis. PAYE payment: Payment of any PAYE, or NIC s contributions if paying electronically needs to be with HMRC by 22nd of each month. Year 1 365 days preceeding first year end Year End Year 2 and each year post first Year End (based on the preceeding year s activity) Year End Deadlines Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Limited company formation Day 1 Annual return 28 days Companies House year end accounts filing Corporation tax payment HMRC year end accounts filing 9 mths 9 mths + 1 day 12 mths Self Assessment filing 31 Jan 31 Jan P60 19 May 19 May P11D filing 6 Jul 6 Jul p.13 p.17
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