Taxation of businesses - limited companies

 

The tax system for limited companies

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. 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. The current tax rates for companies can be found here: Corporation tax rates

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.

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 must pay corporation tax on their profits 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 2018, you must file your tax return no later than 31 January 2019 (if filed online) or 31 October 2018 (for paper returns).

Paying directors

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.

You might want to consider paying yourself a low nominal salary (usually up to your tax free personal allowance) and take your remaining income in dividends to avoid paying NICs. If you decide to pay yourself a salary above the personal allowance, consider making use of tax free employment benefits instead of salary to avoid tax and NICs.

Timing the payment of dividends and bonuses from your own company you can save a considerable amount of tax. 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.

Starting and ceasing to trade

You should inform HMRC immediately your company begins actively trading. Heavy penalties can be imposed for failure to notify and for failure to keep records.

Don't forget to claim for pre-trading expenditure. You can claim for expenses incurred in the 7 years prior to commencement of trading in your first year. The expenses are treated as incurred on the first day of trade.

When you dispose of shares in your company, there are various reliefs available to reduce your potential tax liability. We can guide you through the various options available to you when the time arises. See Capital gains tax and Inheritance tax and gifts for further information.

Keeping records

Companies must retain all records required to enable them to deliver a correct tax return. Records must be retained until 6 years from the end of the accounting period and the maximum penalty for each failure to retain records is £3,000 per accounting period.

Company car or mileage allowance?

It is often more tax efficient to pay the purchase cost and running costs of a car privately and claim the tax free business mileage allowance, rather than to put the car through the company as a company car. Although you will not be able to deduct the running costs from the company profits, you personally will not be taxed on the benefit of the car.

Use of home and mobile phones

If you carry out work from home at any time as part of your employment in your company, you can claim £18 per month without the need to keep records, but you must keep records of your expenses if you wish to claim more.

An employee (including a director) can be provided with a mobile phone tax free. However, the exemption only applies if the phone contract is between the mobile phone provider and the company. This is important because if the contract is between the employee and the mobile phone provider and the employer pays the bill on the employee's behalf, the employee will suffer a tax charge on the benefit and it must be reported on a P11D. This rule also applies to many other benefits paid for by a company on behalf of an employee/director.

Pension funding by companies

A payment within the limits into a pension scheme for a director is a tax-deductible item for the company and is not classed as a benefit for the director. This can be a useful way of extracting surplus funds from a company or avoiding higher rate tax on further dividends or salary payments where the funds are not required to live on and surplus cash is building up within the company. However, special rules apply to spread pension contributions if these are excessively high in a particular year.

Other tips

You might want to restrict your income by not paying yourself a dividend in a particular year. This could be useful for claiming tax credits or other tax planning opportunities as your income will actually be less in that year.

You can employ your partner or children (if aged 13 or over) in your business to make use of their personal allowance and therefore save your family and your business tax as a whole. However, they must actually carry out work in the business and be paid a realistic rate for doing so. The National Minimum Wage rules also need to be considered.

Employees (including directors) are eligible to claim flat rate allowances for the costs of protective clothing and associated laundry costs. However, you cannot claim for the cost of ordinary clothing. Employers can also pay for eye tests if employees and directors spend most of their working time using a computer.

There are various VAT schemes available such as the flat rate scheme and cash accounting scheme which might benefit your business. We can help you decide which schemes might be appropriate for your business and your circumstances.

You might want to consider salary sacrifice schemes and paying employees tax free benefits in exchange for part of their salary. Employers and employees can benefit through paying less NICs on the salary payments. An example of this is childcare vouchers schemes.

Income and allowable expenses

Please read the following pages to learn more about how different types of income and expenses are treated for limited companies:

> The treatment of income and expenses - limited companies

> Tips when running a limited company

> IR35 legislation for Personal Service Companies and partnerships

Capital allowances

Please read the following pages to learn more about how capital allowances work and how they can reduce your tax liabilities:

> Capital allowances

 

Disclaimer

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.

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