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10 things you should know about Limited Companies

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You can form your own limited company for around £25 in minutes – simple, job done! Your mate down the pub probably told you that you pay less tax this way too. So now you’re a Director of your own company and you’re the boss. Do you understand your legal responsibilities as a Director? If not, spending that £25 may prove costly than you imagined!

It’s a familiar story. “I set up my own company last year and now I’m being chased for accounts, tax returns and annual returns – I don’t know what to do?!” The regulations involved in running a limited company can be complex so if you don’t know what you’re doing, get an accountant!

 

1. Registration
To ensure avoidance of penalties, companies should notify HMRC (HM Revenue & Customs) within 3 months of commencing trading which is normally done by means of completing form CT41G.

 

2. Annual Accounts
You will be required to produce annual accounts for your company. Two sets are required – a full set of accounts need to be submitted to HMRC along with the corporation tax return (see below) and an abbreviated version for Companies House (which will be held on public record).

 

3. Filing Date for Corporation Tax Return
The corporation tax self-assessment return (CTSA) must be submitted to HMRC along with the full accounts and tax computations. The filing deadline for the CTSA return (plus accounts and tax computations) is normally 12 months from the end of the accounting period. If the return is late there are penalties as follows…

■ Up to 3 months late – £100 (increasing to £500 for a third consecutive late return)
■ Over 3 months late – £200 (increased to £1000 for a third consecutive late return)
■ 18 to 24 months late – Extra tax geared penalty of 10% of the unpaid tax.
■ More than 24 months late – 20% of the unpaid tax.

Completing the corporation tax return can be complex and this is best left to an accountant to avoid mistakes.

 

4. Payment Dates For Corporation Tax
This is usually 9 months and 1 day after the end of the accounting period for small companies. However large companies (£1.5 million of profits) pay under 4 quarterly instalments, that commence 6 months into the accounting period, so they must use an estimate of their eventual tax liability for the year. Companies that form a group may fall into the definition of “large” and be required to pay corporation tax by instalments. Interest runs on late payment.

 

5. Companies House Annual Return
This is a completely different return to the corporation tax return but the two are often confused. The annual return needs to be completed each year and submitted to Companies House. It is a summary of company information such as who the current Directors and Shareholders are. The online filing fee is £13.

 

6. Annual Self Asssessment Tax Return
All Directors, regardless of their salary, are usually required to complete a self assessment tax return.

 

7. Payroll & Annual Paye as Your Earn (PAYE) Reporting
If you’re employing staff, you will need to register as an employer with HMRC and operate a payroll system. As well as quarterly tax and national insurance payments and returns, you will also be required to complete regular RTI (Real Time Information) submissions and annual reporting requirements including P60 and P11D.

 

8. Value Added Tax (VAT) Registration
You will need to register for VAT if your turnover reaches the VAT threshold (currently £85,000). You will then be required to complete quarterly VAT returns and in order to do this you will need to have accounts available. VAT returns are filed online with payment being made electronically.

 

9. Fines & Penalties
If you are late in submitting any of the above documents, fines and penalties will apply and can be hefty. Make sure your documents and payments are submitted on time!

 

10. Records
Records must normally be kept in support of the return for 6 years from the end of the accounting period. The penalty for non compliance can be as much as £3000 for each accounting period.

Finally, a couple of other things to consider. If you issue dividends then you will need to complete appropriate records to document these payments. Also, if you cease trading for any reason you will still need to submit dormant accounts. Likewise, if you register a company in order to preserve a company name, you will be required to submit dormant accounts for that company.

 

There are many advantages to operating a limited company but this trading vehicle may not necessarily suit all so make sure you’re aware of the responsibilities before taking the plunge! Be aware that accountancy costs will also be considerably more than a sole trader business.

Sole Trader or Limited Company?

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When most people have decided to set up their own business, the first issue they encounter is how to do this. This inevitably leads to the question, should I operate as a sole trader or start my own limited company? There is no right or wrong answer and it depends. There are many factors to consider and many advantages and disadvantages to setting up as either.

The decision often depends on the personal preference of the person who owns and runs the business and the type business they are operating. There is never one standard answer for all businesses so it is worth spending the time to consider this carefully. It is about finding the right business format for the individuals involved as there is no easy answer. The decision should always be made on the specific business and what is important to the individuals concerned.

Firstly, lets get the formalities out of the way. Any individual of any nationality may register a limited company subject to a few conditions:

• They are not an undischarged bankrupt
• They have not been restrained by court order
• They are not subject to UK government restrictions

You can become a director of a limited company from as young as 16 years old.

The Advantages of a Limited Company

• Perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability. Essentially this protects the personal assets of the officers should the company run into financial difficulties. Financial liability is limited to what has been personally invested.

• There are potential tax savings in terms of remuneration. The most efficient strategy is to pay the directors a low salary which is supplemented through payment of dividends and subject to lower tax rates (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers). A dividend is is a payment made to the company owners from the profits of a company after corporation tax has been accounted for.

• The ownership of a limited company can easily be divided up through the sale of shares – the shares can be further used as a means of generating capital.

• A company is more than just the people in it, and still exists even when members resign, retire or die.

• Companies can create mortgages or floating charges over assets, making it easier to borrow money.

• Perception. Limited companies tend to instil added confidence in suppliers and creditors. Many large organisations will only conduct business with limited companies. An example of this is the IT sector where it can be difficult to obtain contracts unless you trade through a limited company.

The Disadvantages of a Limited Company

• Setting up a limited company means a lot of paperwork due to a higher level of regulation and legislation. There is also ongoing administration, such as filing annual accounts and the annual return with Companies House each year.

• Company accounts and shareholder details are publically available on Companies House website.

• Shareholders and directors may have to personally guarantee contracts entered into with lenders or suppliers.

• Winding up a company is more complex and expensive than a sole trader business or a partnership. Consideration should be given to the longevity of the business.

• Mortgages and insurances such as critical illness cover may all be affected by a typical Limited Company form of remuneration which involves the payment of a low salary supplemented by a higher level of dividends.

If that’s not enough, there are other considerations too:

• Losses can potentially be relieved sooner through a sole trader than a limited company.

• Company cars are rarely tax efficient – unless electric vehicles. Business use versus personal use of a car or van needs some thought and whether this is to be owned personally or by the company.

• The extent to which profits will be retained in the company to fund capital expenditure and expansion.

• It’s also important to be aware that companies pay corporation tax on their profits. The taxable profits of a company are arrived at after deducting all salary payments including those paid to the directors. Dividends are not considered a business expense when calculating Corporation Tax. Company law requires that dividends are paid out of a company’s retained profits – whatever is left after corporation tax has been charged on the profits. It is illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.

• You can earn up to £1,000 in dividends in the 2023/24 tax year tax free. This is reducing to £500 in the 2024/25 tax year.

• In a limited company the profits stay in the business until you pay them to yourself as a dividend. You can pay yourself a tax efficient salary below the tax and National Insurance thresholds, avoiding tax and National Insurance yet still qualifying for national insurance credits against your National Insurance record.

• Sole traders pay both tax and national insurance on their profits and are very restricted as to how they reduce these payments, a limited company gives you greater control and flexibility in how you pay yourself. Sole traders also have to make payments on account in advance of their next tax bill twice a year, which can create cashflow issues. Limited companies do not need to make payments on account (unless a large company).

• The amount of corporation tax depends upon the level of profits. From 1 April 2023 the main rate of Corporation Tax increased from 19% to 25% but the small profits rate of 19% applies to single companies profits of less than £50,000.

There is no ‘best way’ and all options should be considered in conjunction with professional advice to ensure your personal circumstances and preferences are fully taken into account.

Based in the Heart of Evesham, The Accountancy Office are here to help with all of your accountancy needs.

If you wish to discuss any aspect covered in this article please don’t hesitate to call 01386 366741 or email us here.

The Tax Advantages of Self-Employment

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There are a number of advantages of being self-employed, but you must also comply with various regulations including the tax law.

Form of Your Business

When you decide to work for yourself you need to choose which form your business will take. The most common forms of business are:

  • Sole-trader – you run the business on your own, usually under your own name
  • Partnership – you and one or more other people jointly run the business
  • Limited liability partnership – a special type of partnership that gives you and the other business owners more protection from creditors
  • Limited company – an organisation that you own and control, which carries out the business on your behalf.

If you run your business as a sole-trader or as a partnership you are classed as being self-employed.

 

Tax Advantages

Cash-flow 

As a self-employed person you only have to pay income tax twice a year on 31 January and 31 July. This means you can hang on to your money for longer than an employee who has tax deducted under PAYE from every pay packet.

You must make sure you have the money ready to pay the tax when it is due as you will be charged interest on any tax paid late.

If you work in the construction industry you may have tax deducted from each of your sales invoices by the contractor you work for, under the Construction Industry Scheme (CIS). You may be able to reclaim some of the CIS deductions each year when you submit your tax return.

 

Expenses to Claim

  • The cost of any goods or services you use fully for your business can be deducted from your sales revenue for tax purposes. Where an item is used partially for your business and partly for private purposes, such as your private car or home, you can claim the business proportion of the costs against your business profits. However, you must be able to justify the business proportion with evidence such as the miles driven, or space used by the business.
  • Capital allowances – if you purchase an item that is expected to last several years, such as a van, you can claim a special deduction known as a capital allowance. The first £200,000 you spend on equipment each year qualifies for 100% capital allowances in the year of purchase. This does not include cars.
  • Loan interest – if you take out a business loan the interest paid on that loan can be deducted from your sales revenue. The loan must be taken out to fund your business, rather than a personal loan or credit card borrowings.

 

Government Support

  • Government funding – if you live in an area in the UK that has been designated as a regeneration area you may qualify for a government funded programme to help people start their own businesses.
  • Charitable support is also available from the Prince’s Trust throughout Britain for those aged 18 to 30 who wish to start their own business.
  • Working and child tax credits – you may qualify for these while you run your own self-employed business. Your tax credit award is based on your family’s joint income including your self-employed profits, but it will also be determined by the number of hours worked by the adults in the family, and the number of children aged under 16

 

Your Tax Obligations
You must register as a self-employed person with HMRC. It is best to do this as soon as possible after you start to charge your customers for the goods you sell or for the services you provide. You can register online:

http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm

You must register as self-employed even if you make a loss from your business. Every partner in a partnership business must register separately as a self-employed person. If you do not register with HMRC by 31 January following the end of the tax year in which you started your business you may be charged a penalty of up to 100% of the tax and national insurance you owe.

 

National Insurance
As a self-employed person you must pay two types of national insurance contributions (NICs) known as class 2 and class 4.

 

Tax Returns
You must complete a self-assessment tax return every year to report the income and expenses from your self employed business and any other income you have to the Tax Office.

 

Register for VAT
When your sales for 12 months reach the compulsory VAT threshold, you must register for VAT within 30 days.

 

How We Can Help You
We can help you register with HMRC for tax, national insurance and VAT. We can show you how to keep accurate records for your business and complete tax and VAT returns. As you business grows we can discuss tax planning ideas with you to ensure your tax bills are kept as low as possible.

What is bookkeeping?

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What is Bookkeeping?

Bookkeeping is the process that involves keeping proper financial records for your business transactions – otherwise known as one of the biggest headaches to business owners!

Who came up with the bright idea of bookkeeping?

Benedetto Cotrugli is the true inventor of double-entry bookkeeping, although the Italian monk Luca Pacioli is often credited for the invention.

Our all inclusive bookkeeping service was designed to take away all of the stresses faced by so many, for an affordable monthly fee! So although you may be cursing at Benedetto Cotrugli for his invention, you don’t need to worry with ours!

Traditionally the records of each business sale or purchase transaction would have been written into large books, called ledgers, which is where the term comes from. It’s still possible to keep paper records but it’s far easier and efficient to use bookkeeping software such as Xero.

All businesses need to maintain good bookkeeping records – it’s the law. This applies to limited companies, partnerships and sole traders. Proper financial record keeping will enable you to manage your business more effectively, not to mention the legal requirement to keep your business’ financial records for a minimum of 6 years.

Do I really need to keep bookkeeping records?

Yes! All businesses need to keep accurate records of their financial transactions. It is a legal requirement and keeping good financial records will also tell you a great deal about how your business is performing.

The good news is that with the use of todays’s technology, bookkeeping doesn’t have to be a chore!

By maintaining good bookkeeing records you should easily be able to determine the following:

  • how much money you are making
  • how much and where you are incurring your biggest costs
  • whether your business is making a profit or a loss
  • how much cash you have in the bank
  • who owes you money, and if you owe any
  • when you can pay your bills
  • if you’re getting near the VAT threshold and need to register for VAT
  • figures that will be included in your tax returns
  • information you need to report to any investors or shareholders
  • how efficiently you are running your business and whether you need to make any changes to improve its performance

If you’re experiencing any of the following, then your books aren’t doing what they should be and you will undoubtedly benefit from some bookkeeping support!

  • you’ve lost track of what you’re spending and what you’re earning
  • your receipts have been buried in the shoe box for so long you’ve forgotten what they’re for!
  • your cash flow is suffering because you’re taking too much time to issue invoices
  • you have no idea how much money is still outstanding from your customers
  • you have a backlog of paperwork
  • paperwork is taking up too much of your time
  • you struggle getting the right figures for your tax return or VAT returns
  • you just don’t like doing the paperwork and have better ways to spend your time

I don’t know where to start!

Feeling overwhelmed by maintaining the books is normal. Business owners who don’t have the time, the skills, the inclination or the right staff to ‘do the paperwork’ should consider appointing a professional bookkeeper. If your paperwork is in a mess and you don’t have a clear picture of your financial position, you should definitely get some help pretty quickly! Bookkeeping and accounting services are easy and practical to outsource if you don’t want the hassle yourself.

What our bookkeeping services does…

Your books should show details of all the money coming into and out of your business and split accordingly into sales revenue and expenditure.

Using cloud based software, we will record your sales invoices and receipts. Each transaction will be recorded with the date, amount, VAT (if applicable), the name of the supplier or customer. Purchases and expenses will be allocated to an expense category that helps to analyse the business costs such as rent, stock, insurance etc.

Managing the Bank Balance

Each month we check that the amount of money in your business bank account is correct and agrees to the transactions recorded in the accounts for the business. From the previous month’s bank balance, we will add all the sales income for the new month and deduct all of the payments that have been made. The total should then equal the amount in the business bank account. If the bank balance does not reconcile with the information in the accounts then we’ll work with you to work out where the error is and rectify it.

Our flexible bookkeeping service includes all of the following:

Maintaining your sales ledger(the goods/services you’ve sold)
– properly log each transaction
– create and send sales invoices and credit notes
– create and send customer statements
– chase unpaid invoices

Maintaining your purchase ledger (the goods/services that you’ve purchased)
– properly log each transaction
– record and file purchase invoices and credit notes
– record petty cash and employee expenses claims
– check supplier accounts and prepare payments at the appropriate time

Other aspects
– Reconcile your business bank account
– Prepare your Vat returns
– Prepare your management reporting and accounts (so you know how your business is performing)
– Prepare your annual business accounts
– Payroll services

The benefits of using a professional bookkeeping service:

– saves you time, enabling you focus on the core activities of the business
– help you avoid mistakes
– give you peace of mind knowing your paperwork is being done properly
– give you accurate and up to date information on your business performance
– speed up the completion of your VAT returns, annual accounts and tax returns
– help you avoid late filing penalties with HMRC and Companies House
– provide you with a reliable and confidential service

As well as the bookkeeping, we can also produce your annual business accounts and relevant tax returns to ensure that you meet all of the statutory deadlines and most importantly that all available tax reliefs are claimed and you pay only what is necessary!

Are your dividends legal?

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We’ve appointed new clients recently who had no idea of the legal requirements when paying dividends.

It’s also quite shocking that they’ve received little or no advice on this subject from their previous accountants. It’s another classic example of those believing that limited companies are only about saving tax.

It is essential that you have accurate and up to date information on the financial performance of your company before making dividend payments. Monthly or quarterly management accounts will be invaluable for this purpose and will ensure that any dividend payments are made legally.

A dividend may be ‘illegal’, in that it is contrary to Company Law, when the proper procedures are not followed. If the Taxman examines the paperwork and decides the payment from your company was not a legal dividend he may treat the amount paid as a loan, or even as a bonus payment.

In both cases additional tax may be due from the company and sometimes from you.

To pay a legal dividend it is not sufficient just to write ‘dividend’ on the cheque stub or against the entry in director’s loan account.

We recommend following these steps when paying dividends…

  1. The directors should first review the profits available for interim dividends. This is not the same thing as cash in the bank, as you have to take account of other assets and liabilities. Those deliberations should be recorded as a formal board minute, so if the Taxman ever asks, you can prove the profits were there when the decision to pay an interim dividend was made.
  2. If the final accounts for the year are complete and show the accumulated profit and loss account is positive, the directors can recommend that the profits, which are not required for investment, can be paid out as a final dividend to the shareholders. The shareholders can either accept the directors’ recommendation or suggest a lower figure of dividend. Both these decisions also need to be properly recorded at the time they are made.
  3. Dividend vouchers need to be prepared when either a final or interim dividend is paid, for each shareholder showing the total due, the tax credit attached to the dividend and the date of payment.
  4. The dividend should be paid. The cash can be transferred from the company’s bank account by bank transfer into the shareholder’s own bank account. If the shareholder is a director his account in the company books may be credited with the dividend due to him or her, but this needs to be done as soon as possible after the decision to pay a dividend is taken.

We can help you with all this paperwork, but it is important that the decision to pay a dividend is made in advance of any payment being paid out of the company.

New Business Starting Up? Check out our Check List!

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This checklist is for general guidance only. It considers key issues involved in starting up a new business but please seek advice tailored to your own circumstances.

 

  1. Check out what guidance and resources are available for new businesses.For example, https://www.gov.uk/business-support-helpline
  2. Decide on the business structure – sole trader, partnership or limited company
  3. Research a business name and make sure it’s available to use
  4. Research your business idea – does anyone want your services? Check out the competition. What’s your USP?
  5. Where are you going to operate your business from? Home or premises based and what are the costs?
  6. Prepare a business plan – include the business objectives, strategies, it’s market and financial forecasts. Seek help with this if you’re unsure where to start.
  7. How much money do you require to set up? Decide how you are going to finance your start-up business. Bank loan? Grants?
  8. Write a marketing plan. How are you going to target your potential customers and win business?
  9. Ask friends and family for help. Get independent feedback on your business plan as others can often see things that aren’t obvious to you.
  10. Speak to others who have set up their own business and learn from their experiences. A business mentor can be invaluable!
  11. Seek professional legal advice – do you need formal documents such as shareholder agreements, trademark registrations or terms and conditions for your customers? If you’re going to employee staff, make sure you’re up to speed on employment regulations such as national minimum wage, sick pay and holiday pay. Employees will also need an employment contract.
  12. Seek professional accountancy advice – do you need advice on bookkeeping and tax? Do you need to register for VAT? You will also need to run a payroll if employing staff. Get some early tax planning advice as well!
  13. Select and open a business bank account. Key things to consider are transaction and borrowing costs, facilities offered and the type of relationship you want from a bank.
  14. Arrange the necessary insurances for your business such as public liability and business property.
  15. Make sure you register with the necessary authorities which are relevant to your business and obtain the relevant licences.This may include data protection and professional or trade bodies.
  16. Put your IT and business telephone line into place.
  17. Organise your website and email address.
  18. Order your business stationery such as business cards.
  19. Start trading and enjoy!
  20. Review your business plan regularly to make sure the business is meeting the initial aims and objectives.

Employing Students in the Summer Holidays

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The summer holidays often bring a few familiar challenges — juggling workloads, family time and maybe even the odd “I’m bored” from your teenager. If you run your own business, you might have wondered… Can I pay my child to help out during the summer break? If you run your own business, you might have wondered… Can I pay my child to help out during the summer break?

The short answer is yes — but only within specific rules.

Let’s break down exactly what you need to know if you’re thinking of employing your school-age child over the holidays — whether it’s for admin support, deliveries, cleaning the office, or helping with your socials.

What’s Allowed?

Children aged 13 and over can be employed part-time — including during school holidays — but not before they reach 13.

Your local council sets the detailed rules (and issues permits), but the general framework is governed by the Children and Young Persons Act 1933.

You must apply for a child employment permit from your council before they start work. No exceptions. This applies even if it’s your own child.

Summer Holiday Working Hours

There are strict limits on how many hours they can work, even during the school holidays:

Age 13-14 – Maximum hours per day (Mon-Sat) 5 hours. Maximum hours on a Sunday, 2 hours. Maximum weekly hours, 25 hours.

Age 15-16 – Maximum hours per day (Mon-Sat) 8 hours. Maximum hours on a Sunday, 2 hours. Maximum weekly hours, 35 hours.

Important: They must also have at least 2 full weeks off during the summer holidays – a rest period that must be uninterrupted.

What Work Can They Do?

Children must not be exposed to risk, and certain types of work are banned. These include:

  • Commercial kitchens or food preparation in restaurants

  • Industrial sites, construction, or warehouses

  • Work involving chemicals, dangerous tools or machinery

  • Collecting money or selling door-to-door

  • Anything with adult content, gambling or alcohol

For most business owners, simple admin, stock checking, filing, packaging, content scheduling, or tidying workspaces can be appropriate — but you must carry out a risk assessment and be sure the environment is safe and age-appropriate.

Wages, Tax and Payroll

You’re allowed to pay your child a wage, but let’s get real: this isn’t a tax dodge, and HMRC will expect it to be reasonable, justifiable, and clearly documented.

  • Children under 16 are not entitled to the National Minimum Wage, and usually don’t trigger PAYE or NIC obligations.

  • Once they hit 16, they must be paid at least the NMW (£5.28/hour in 2025–26), and payroll, PAYE and NI rules apply.

  • Regardless of age, they must be added to your payroll system and receive payslips.

  • You cannot pay them cash-in-hand or fudge the hours. HMRC doesn’t care if you’re related — they want records.

Tax Tip: Wages paid to your child can be tax-deductible for your business if the work is real, the amount paid is commercially reasonable, and you keep records of hours worked and tasks completed.

Insurance, Risk, and Admin

Before they start:

  • Apply for a work permit from your local council (you’ll need their school’s consent too).

  • Complete a risk assessment.

  • Check your employer’s liability insurance covers employees under 18.

  • Make sure they’re properly supervised, trained and understand their tasks.

  • Keep everything documented — hours, pay, tasks, permissions.

Can You Employ Your Own Child?

Yes — but it’s a red flag for HMRC if it’s not done by the book. You must treat them exactly as you would any other employee:

  • No overpayment

  • No made-up hours

  • Clear duties

  • Real supervision

  • Proper records

That also means paying them through payroll, not in cash or gifts.

Golden rule: “Wholly and exclusively for the purposes of the business.” If HMRC sees it as personal, not business, they’ll disallow the expense.

Final Thoughts

Having your child help out during the summer holidays can be a brilliant way to teach them the value of work — and yes, reduce your tax bill if done properly. But this isn’t something to fudge.

Whether it’s your child or someone else’s, the rules around employing school-age children are strict for good reason — and the consequences for getting it wrong aren’t worth the shortcut.

Students must be paid at the appropriate minimum wage for their age which can be found on the Gov.uk website.

If you want to explore this properly — or need help setting it up correctly — get in touch. We’ll help you do it the right way, with no surprises down the line.

Briefly….your Director responsibilities

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Your responsibilities as Director…

The Companies Act 2006 confirms existing case law and requires company directors to act in a way which is most likely to promote the success of the business and benefit its shareholders.

Company Directors are responsible for the management of their companies. Shareholders own limited companies but they don’t run them – that job is given to the directors. All limited companies must have at least one director and a company secretary is no longer required.

The company is a separate legal entity from its directors, shareholders and employees. The best interests of the company are not always the same as the best interests of the shareholders. You must consider the interests of other stakeholders such as creditors and employees and the long-term prospects of the company and its reputation.

As a director, you must exercise a degree of skill and care by showing the skill expected of a person with your knowledge and experience and act as a reasonable person would do looking after their own business.

You must act in good faith in the interests of the company as a whole. This includes:

  • treating all shareholders equally
  • avoiding conflicts of interest
  • declaring any conflicts of interest
  • not making personal profits at the company’s expense
  • not accepting benefits from third parties

You must obey the law:

  • company law requires you to produce proper accounts and send various documents to Companies House
  • other laws include areas such as health and safety, employment law and tax
  • you may be responsible for the actions of company employees

Directors’ powers and financial liabilities

The company’s Articles of Association limit what directors can do. Although they usually give you a great deal of freedom, you must check them. Some people are debarred from becoming directors which includes people who have been disqualified by a court from being a director and undischarged bankrupts.

You will be guilty of wrongful (or even fraudulent) trading if you allow the business to carry on, and incur debts, when you know there is no reasonable prospect of the company repaying them. If you do, you could be held personally liable for the company’s debts if it subsequently becomes insolvent. The fact that the company is making losses does not in itself mean that the company is trading wrongfully. However, if there is no reasonable prospect of moving into profit, and there are doubts about whether the company assets will cover its liabilities or whether it can repay its debts, the company is probably trading wrongfully.

Finally..

You must ensure that all the company’s business stationery carries its name, registered number, country of registration and registered address. These details must also appear on your company website, emails and order forms.

Exercise your directors’ responsibilities carefully and if in doubt, take professional advice. Acting improperly can lead to fines, disqualification from being a director and personal liability for the company’s debts or a criminal conviction.

Don’t forget capital allowances!

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The tax man may be more generous than you think! If you’re a sole trader, partnership or limited company you can claim a tax allowance known as a capital allowance.

When you buy items of equipment and tools for your business, typically items that will be utilised over a period of time, you cannot claim them as a business expense in your accounts. However, you may be able to claim capital allowances. These items are usually regarded as business assets and may include computer equipment, machinery, furniture and even vans and cars. There are various forms of capital allowances and the rates available will vary depending on the specific items of expenditure and dates of purchase.

Your business accounts will typically only cover a 12 month period and assets of the business will be used for a longer period so they need to be treated differently. The tax man allows you claim ‘capital allowances’ for these items which allows you to deduct a proportion of the cost from your taxable profits and reduce your tax bill. Adjustments for personal use of any asset is usually required.

The most useful capital allowance for small businesses is the ‘Annual Investment Allowance’ (AIA) which enables most businesses to claim 100% of the cost of assets against tax, up to an annual limit of expenditure of £200,000. This limit will be reduced to £25,000 from April 2012 so it’s wise to plan ahead carefully when considering new investment. Cars are excluded from the AIA.

Having just saved a new client a significant amount of tax utilising capital allowances not previously claimed, it is important that these allowances are considered and utilised wherever possible. Always consult your accountant for professional advice.

Tax Efficient Profit Extraction

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As a company owner you can choose how to extract the profits from your company, and by making the right choices you can minimise the tax and NI paid by you and the company.

The Taxman would like you to take all the profits in the form of a salary and possibly a bonus, as these carry the highest National Insurance charges and ensure the tax is deducted under PAYE before you get your hands on the net income. It is good practice to pay yourself at least a small salary that is covered by your personal allowance (£11,850 for 2018/19) as this makes the best use of your tax free allowances. However, the maximum salary you can take so that neither you nor the company pay NICs is £8,424 in 2018/19, as the threshold for NICs is lower than the tax free threshold. You will still receive NI contribution credits without actually paying NI.

Most company owners extract any further amount they need in the form of dividends. You can receive £2,000 of dividends tax free in 2018/19. Any dividends over £2,000 will be taxed at the following rates:

  • Dividends falling within the basic tax rate – 7.5% (£34,500)
  • Dividends falling with the higher tax rate – 32.5% (over £46,350 from April 2018)
  • Dividends falling with the additional rate of tax – 38.1% (income over £150,000 meaning restrictions on your personal allowance)

NI is not paid on dividends.

You can also charge a rent for assets you own which the company uses (although this could affect the availability of entrepreneurs’ relief on a sale of that asset). These assets could be real property (land) or intellectual property (e.g. patents). If you lend funds to the company it can pay you a commercial rate of interest on that loan. These profit extraction methods are free of NI charges.

We can discuss other methods of extracting profits, perhaps using your family members. Please contact us for specific advice in your own circumstances.