There is a lot to know about setting up and running a limited company in the UK. As an experienced accountancy firm specialising in helping contractors with limited companies, we know how confusing things can be. To help you avoid having to contact a professional unnecessarily, we have put together a list of common FAQs. If you cannot find the answers to your questions here, please contact ICP right away.
It is legally possible to use your limited company to purchase an interest in other companies. Whether or not this advisable depends on the circumstances your company finds itself in. Keep in mind that both your company and you, as the director, are limited in the amount of capital gains that can be earned before taxes are applied. Earning too much money by investing in other companies could subject your limited company to additional taxation.
Perhaps the one advantage of using a limited company to invest in others is the fact the dividends are not subject to corporation tax. The downside is that if dividends exceed 20% of your company's annual turnover, all of your company's income would be subject to taxation at 21%. There would be no allowance applied.
Directors of multiple limited companies can use one company to provide a loan to another under certain circumstances. For example, the company making the loan must have enough cash to meet its financial obligations. There is no tax advantage to doing this; that is to say, corporation tax is not reduced as a result of making a loan. Furthermore, the loan may constitute an association between the two companies for tax purposes, which could increase the liabilities of both. Should you use your company to make a loan to another company you are the director of, the loan must be reported with your annual accounts.
Contractors can hire minor children as part-time workers under certain conditions. Any such children are classified as child employees and, as such, certain requirements apply to their employment. We will not list all of the requirements here, but we will say that a work permit must be obtained for the child through the education department of your local council. There are also restrictions regarding working hours and, although there is no minimum wage in place for employees under the age of 16, child employees must be paid a 'reasonable' amount.
Shares in your limited company can be freely transferred to your spouse or civil partner. You cannot transfer shares to any other relatives or friends.
You may have heard that it is possible to reduce tax liability by appointing an adult child as a shareholder, paying that child by way of dividends. However, it is not true. The Settlements Legislation has seen to that. The only legal transfer of shares among family members is transfers between spouses and civil partners.
The practice of reducing one's tax liability by shifting all, or a portion of, earnings to a lower rate taxpayer is known as income shifting. It is illegal under the Settlements Legislation. The legislation applies to both standard income and dividends. If caught under the Settlements Legislation, the individual who transferred assets will be liable for the full taxable amount as though he/she still had an interest in what was transferred. Again, the only exception is transferring income to a spouse or civil partner.
Incidentally, the Arctic Systems case of 2007 settled the issue of the spousal exemption once and for all. The House of Lords determined that spouses and civil partners could freely transfer assets to one another as gifts, and, then those gifts to not constitute a legal right income.
Although the Settlements Legislation and Arctic Systems case both recognise the spousal exemption for transfer of shares, multiple transfers are frowned upon by the HMRC. Furthermore, they can be hard to justify as gifts. It is generally agreed that spouses and civil partners should limit their transfers to just one.
A dividend payment made immediately after a share transfer can be construed by HMRC as a right income. Any such determination would result in the appropriate amount of taxation on the dividend payment.
A company with high reserves may present an underlying expectation of high dividend payments to shareholders. Therefore, transferring shares with high reserves raises a red flag with HMRC. They may view such transfers as yet another tax avoidance scheme, which, upon successful investigation, could result in additional taxation and penalties. This fact should be strongly considered before any transfer to the spouse or civil partner is made while the company has high reserves.
A shareholder can issue a dividend waiver for the purposes of keeping the money within the company for other purposes. However, a commercial justification for doing so must be present. If it is done simply to avoid tax, it will not stand up under HMRC scrutiny.
Companies with multiple shareholders can issue shares of different classes, with rights assigned to each class differently. This enables the company to pay out dividends disproportionately; i.e., higher classes of shares would receive higher dividends. This is all covered under the Settlements Legislation to prevent tax avoidance through different classes of shares.
The Arctic Systems case is important to share classes in that it established that ordinary voting shares did not constitute a whole or substantial right to income under some circumstances. The litmus test here is one of examining the criteria for a gift exemption against a right to income.
The government put regulations in place in 2004 to protect workers employed by limited companies, umbrella companies, and employment agencies. Such workers can opt out of those rules if they choose to. Likewise, limited companies, umbrellas, and agencies cannot require adherence to the rules as a condition for supplying work. To opt out, the worker must inform the limited company, umbrella, or agency prior to the commencement of a contract. The opt-out can be withdrawn at the conclusion of that contract.
If a worker does choose to opt out, the company will not have to comply with some of the procedural requirements of the Agency Regulations. Some contractors use this opt out as protection against IR35, but it's not a wise thing to do.
In the case of a limited company in which the owner and director are one in the same, the director can take money from the company using a director’s loan. In order to do this and satisfy HMRC, the company would set up a director’s account to facilitate all such transactions. Director’s loans are subject to personal taxes; they may also change the tax position of the company. Director’s loans cannot be used as a tax avoidance vehicle.
This area of accounting is rather complex. We would urge you to work with an accountant before setting up a director’s account or making a director’s loan.
There are certain financial charges under section 455 that apply to director’s loans. Taking a loan, repaying it before the charges are applicable, then immediately taking on new loan the day after is known as 'bed and breakfasting'. While there is nothing technically illegal about it, this is a grey area we would not recommend company directors test.
There are times when a limited company needs to reduce its workforce. Terminating employees contracts is known as redundancy. Redundancy is allowed only for legitimate purposes; that is to say, companies cannot use redundancy as an excuse to replace unwanted workers.
Some companies offer redundancy payments to compensate former workers who lost their jobs through no fault of their own. The amount of redundancy payments depends on the terminated employee's age, length of service and earnings at the time of redundancy. Redundancy payments can be entirely tax-exempt, partially tax-exempt, or taxable.
Directors who are not major shareholders (owners) can be made redundant just like any other employee. However, the same is not true for major shareholders and single owners. They cannot be made redundant because they can legally block their own termination.
When a customer prepares an invoice on behalf of a vendor and submits it with payment, the vendor is required to use this invoice as the working document. The VAT Regulation does not allow for the creation of a secondary invoice. Such self-billing agreements are fairly common in the UK.
Dividends are not technically tax-free under the law. Practically speaking, they are tax-free for the average basic rate taxpayer. The combination of income tax and the national tax credit cancels out taxes owed on dividends, effectively making them tax-free. This does not apply to dividends earned by those in the second and third tax bands.
Yes, company directors do have to file self-assessment tax returns, as does anyone else who is self-employed. ICP customers receive one free self-assessment tax return filing per year as part of their service package. If you are not on ICP customer, you file a tax return just as you would if you were a salaried company worker.
Female employees may receive statutory maternity pay (SMP) as a result of pregnancy if they have met certain requirements. This payment is compulsory as long as all criteria are met, including the employee working for the same company throughout her pregnancy.
Statutory paternity pay (SPP) is a compulsory payment made to partners and/or biological fathers to take time off to care for a mother and her newborn baby. As with SMP, SPP is subject to a strict set of criteria.
The salaries of company directors are subject to National Insurance payments under some circumstances. Limited companies must pay Employers NIC as well. However, contractors don't necessarily have to pay National Insurance in a given year to have that year still qualify – as long as income exceeds the lowest earning limit for NI.
When it comes time to close your limited company, you will have two options for taxes. First, you can strike off the company after declaring dividends and making distributions. Shareholders pay taxes on their individual dividends just as they did while the company was still in operation. The second option is to go through a formal liquidation by way of a third-party insolvency practitioner. Capital gains tax will be assessed to any and all shareholders after exercising the annual exemption. It is best to consult with an experienced accountant to determine which option is more tax efficient.