Although often viewed as a safe and tax efficient way to operate a business, setting up a limited company is not as always as straight forward and as advantageous as it may first appear. You might like to read our section called 'Self employed or limited company?' to learn more about the potential advantages and disadvantages of setting up a limited company.
Separate legal entity
A limited company is a totally separate legal entity from its owners. This means that essentially it is the company that is responsible for paying its debts and for paying its own tax, rather than the owners.
When a company is formed, it must be registered at Companies House and shares created which the company can then sell to the directors or other persons that become shareholders in the company. The shareholders are the people who become entitled to a share of the profits generated by the company and depending on the class of share may have a say in how the company is run.
The profits can be distributed to the shareholders by paying dividends of a set amount per shareholding.
A company must have at least one director who is a living individual aged 16 years or over. It must also keep statutory records and have a documented 'Memorandum of Association' and 'Articles of Association'.
The Memorandum of Association is a short document, serving the limited purpose of evidencing the intention of each subscriber to form a company and become a member of that company.
A company's Articles of Association is an internal rulebook. Every company formed under company law will have articles of association, commonly referred to simply as the company's 'articles'.
Statutory accounts must be filed at Companies House along with an annual return updating the company details, now known as a Confirmation Statement. A corporation tax return must also be delivered to HMRC every year. An audit may also be required, although this is not normally necessary for small companies.
You can form a company directly with Companies House or you can use us or an agent to set one up for you. After you have created a company there are a number of things you must do otherwise you may incur financial penalties. Below are just a few of the most important tasks:
- Choose your accounting period end date
- Notify HMRC as soon as your company starts trading and register for corporation tax
- Register directors for self assessment
- Start maintaining your statutory books, minutes of meetings and issue share certificates
- Start keeping records of the company's income and expenses
- Start putting money aside to pay the corporation tax bill on any profits
- Register for VAT if it is advantageous or if the company's taxable supplies will exceed the threshold
- Register as an employer for PAYE if necessary
You might also need to register for the Construction Industry Scheme (CIS) if you operate in this sector.
Companies are taxed within the corporation tax regime which is different to the income tax regime for private individuals. The rules are therefore different for companies and can often be more complex.
Essentially the company will pay corporation tax on all its profits and income generated within the company. This includes any capital gains made when it disposes of capital assets for a profit. There is no annual allowance for capital gains made within a company but there is indexation relief available to potentially reduce the tax liability.
Directors and other shareholders are taxed under the income tax regime and any salary or dividends received from the company will be taxable in their hands. However, dividends paid out of a company carry a tax credit, which means that the taxpayer will not have an additional tax liability on the value of the dividend unless they are a higher rate taxpayer.
Tax returns and paying tax
A limited company must file a corporation tax return normally within twelve months of the end of its accounting period. Most small companies pay corporation tax by the normal due date, which is nine months and one day after the end of your accounting period. For example, if your company's accounting period ends on 31 March, your corporation tax payment is due on or before 1 January the following year.
Directors must also normally complete and file a self assessment tax return no later than 31 January (if filed online) or 31 October (for paper returns), following the end of the tax year in which your income arose. For example, for the tax year ending 5 April 2017, you must file your tax return no later than 31 January 2018 (if filed online) or 31 October 2017 (for paper returns).
If you pay yourself a salary as a director of a company, this must be done through the PAYE system just like other employees. In addition (or instead of) the company can make dividend payments to shareholders out of the profits generated. However, it is important to remember that if no profits are generated, the company cannot pay dividends as this is illegal.
We can help you decide on the best strategy of remuneration and the most tax efficient ways of taking income out of a limited company.
Please see the following links for further guidance about corporation tax rates and your responsibilities when forming a limited company:
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.
Links to external sites - Brown Royd cannot be held responsible for the content of external sites.