Four Fundamentals to Running a Limited Company by Shpat Paçarada

Four Fundamentals to Running a Limited Company

There are many reasons to start a new business, including the freedom of being in charge. However, the decision to set up a company and be your own boss is a huge step and it will require determination, the ability to plan ahead, resilience and focus. As a client of Seven Eleven Accountants, we’re right by your side every step of the way. Our dedicated team is here to support you with everything from company formation, VAT returns, tax planning and bookkeeping. All businesses start with great intentions and hope but, in reality, more than half of all businesses will not make it beyond a couple of years. This guide intends to help you appreciate four of the most important elements involved.

Four Fundamentals to Running a Limited Company

Company Set Up Company Registration Register for Taxes Bank Account Business insurance Appoint an Accountant

Taking cash from your Company Salary Dividend Pension

Trading Invoicing Expenses

Taxation Corporation Tax PAYE / NIC VAT Self-Assessment Making Tax Digital

1. COMPANY SET UP So you decided to set up a limited company but before you begin trading there are three things to think about.

Shareholders These are the owners of your limited company. There must be a minimum of one shareholder but there are no rules around the maximum number of shareholders a company can have. Shares can be held by other companies too. Shareholders are entitled to a share of the distributions made from your company’s profit and to a share of the residual assets on winding up your company.

Directors These are the people who are appointed by the shareholders to take care of the day-to-day running of your company. In the case of most private companies, the shareholders and directors will be the same people. There must be a minimum of one director and they must not have been declared bankrupt or been banned from being a company director by a court.

Registered Office This is a legal requirement and it is the address that all statutory mail from Companies House and HMRC will be sent to. The address will appear on Companies House register, meaning the details are available to the public. If your business is based at your residential address you may want to use an external registered office service.

1.1. Register for Taxes There are three main taxes which you will need to ensure that the company is registered for: PAYE, VAT and Corporation Tax. In addition to this, any directors or shareholders where dividend is distributed will need to register for self-assessment. Shortly after incorporation HMRC will send a notice with Corporation Tax number. PAYE and VAT registrations can be completed online via HMRC’s website immediately after.

You may already be registered as a self-assessment tax payer but if not then you will need to complete an SA1 form which can be done online. More of the above mentioned taxes will be outlined later on in this guide.

1.2. Bank Account One of the first things to do after the company has been formed is to open a bank account as this will be needed in order to receive money from trading. There are numerous banks that are all keen to open an account for you and you’re free to choose whichever bank you feel best suits your needs.

1.3. Business Insurance Business insurance is crucial for the well-running of your company: it can provide peace of mind and keep you safe against risk. The only insurance you require by law is Employers Liability insurance (minimum cover of £5 million) but only if you have employees. Other insurance you should consider depending on your circumstances: Public Liability, Professional Indemnity, Income protection Insurance, Product Liability, Office Insurance, Cyber and Data Risk Insurance and Personal Accident Insurance.

1.4. Appoint an accountant It is important to appoint an accountant in the early stages of running a company, the knowledge and advice offered by an experienced accountant can be invaluable in guiding you through the compliance issues involved in running a company. A couple of factors to consider when choosing an accountant are:

SME Specialist An accountant who understands the way that your business works is essential. An accountant that specialises in small businesses and understands how SMEs work is the most important factor.

Online Accounting Cloud computing has revolutionised the way that many businesses manage their accounts as it enables them to access their accounts from anywhere, at any time and can save money

Call 03333 449697 or email hello@711.accountants to see how we can help your business 06

2.TRADING The company is now registered with Companies House and HMRC, you have opened a company bank account, organised your business insurance and appointed an accountant – the company is now ready to begin trading.

2.1. Invoicing In order to receive payment for the services provided to your clients, you will need to issue an invoice to the clients. In case of retail or hospitality you must issue a receipt. An invoice/receipt should contain the following details: • Company name, address and registration number • VAT number • Invoice date • Client name and address (invoices only) • Description of services/products supplied

2.2. Expenses If you incur expenses then these can be claimed from the company if they have been incurred ‘wholly and exclusively’ for the purpose of trade. We will give you the tools to make this process very easy. Some typical expenses incurred by contractors are detailed in this section.

Business Travel If you incur expenses travelling to client sites in order to fulfil your contractual obligations, the costs of doing so may be claimed from the company providing that it is to a temporary workplace, where you go to perform a task of limited duration or purpose (known as the 24 month rule) and not simply ordinary commuting. The most frequent claims for travel expenses are for public transport tickets, taxis can be claimed in circumstances where public transport is not available but should not be excessive. If a worker uses their own vehicle for business travel, a mileage allowance can be claimed from the company to cover the cost of fuel, depreciation, insurance and any other running expenses attributable to the business travel. The rates are set out in the table below:

First 10,000 Miles per Tax Year

Miles in Excess of 10,000

Car

45p per mile

25p per mile

Motorbike

24p per mile

Cycle

20p per mile

Subsistence The cost of lunch can be claimed when working at a temporary workplace. This must be in the form of a pre-packed sandwich or a meal at a cafe, the cost would not be allowable if the employee was simply reimbursed for the ingredients to prepare his/her own packed lunch. If you are staying overnight on business away from home at a temporary workplace, you may also claim for accommodation and the provision of breakfast, an evening meal and a ‘flat rate’ un-receipted subsistence allowance of £5 per night (£10 per night if working overseas) to cover small incidental personal expenses such as laundry, newspapers etc.

Business Entertaining If you incur costs entertaining a potential client with the intention of winning a particular business or extending a current contract, the costs incurred in doing so can be claimed from the company. Please note however that expenses of this nature are not deductible for corporation tax. Any costs of entertaining should be commercial, reasonable and the company should expect to generate future revenues as a result of the expenditure taking place. For example, to spend £5,000 on corporate hospitality at a major sporting event for a potential customer if it would only generate a few hundred pounds of income would not be seen as reasonable. Even though entertaining expenses are not deductible for corporation tax, it is still worth claiming these costs from the company because if they are paid from your personal income, this will be after having paid personal tax.

Accountancy Fees As it is a legal requirement for companies to prepare financial statements and tax returns; accountancy fees therefore meet the criteria of being wholly and exclusively a business expense. One thing to note however is that fees incurred in the preparation of self-assessment tax returns would not be a business expense and should therefore be paid personally – at Seven Eleven Accountants, we will prepare a basic return free of charge for our clients subject to meeting the requirements.

Mobile Phone Costs The provision of one mobile telephone per employee is not classed as a benefit in kind and is deductible from the company’s profits for corporation tax purposes. The benefit in kind exemption covers the telephone itself, any line rental and the cost of private calls paid by the employer on the telephone. To qualify for this, the contract must be between the mobile provider and the company (the company name should therefore appear on all phone bills) and payment for the phone must be made directly from the company bank account.

Use of home as office allowance If you use part of your home as an office, either to perform duties involved with your client or to carry out administrative work to run the business, you may claim an allowance for using part of your home as an office. The simplest way to do this is to claim the flat rate allowance of £6 per week. Otherwise you can claim much more if you operate from home as long as the calculations are done according to HMRC guidelines.

Training Costs Costs associated with updating or enhancing an existing skill can usually be treated as a company expense. They will be allowable for corporation tax and will not create any benefit in kind or associated personal tax charge. There should be an expectation for the skills or personal qualities improved through training to be useful in the performance of the employee’s duties. If the purpose of attending training is to acquire a completely new skill, the cost may be able to be treated as capital expenditure which can then be written off against any future revenues generated as a result of having the new skill. The company may be able to claim capital allowances for expenditure of this nature. Other costs associated with training such as travel or accommodation (if the training is being carried out at a temporary location away from the employee’s normal workplace or residence) will also be allowable.

Annual Event An annual event is an allowable expense for the company and is treated as a tax free benefit for any employees providing the following conditions are met: • The total cost must not exceed £150 (inc. VAT) per head, if the cost does exceed this limit then the entire cost will be treated as a benefit in kind; • The event must be open to all staff; • You may invite a partner, but if partners are invited, all staff must be entitled to invite a partner – invited partners will also be given an allowance of £150 per head.

You may have more than one annual event in a year, though you must be able to justify (if questioned by HMRC) that they are genuine annual events i.e. a summer barbecue, a winter ball etc., rather than just a night out for your employees every now and then. If multiple events are held, the total cost of all events added together must not exceed the £150 per head allowance.

Trivial Benefits Your company can provide you with benefits totalling £300 in a single tax year free of tax and national insurance, providing the following criteria is met: • The cost for each individual benefit is less than £50, • The benefit isn’t cash or a cash voucher, • The benefit is not a reward based on performance. The number of trivial benefits that can be provided to you is not limited (as long as the total costs do not exceed £50 per time or £300 for the entire tax year). Some examples of trivial benefits could be; kitchen appliances purchased from a retailer, a voucher for a high street store (as long as the voucher is not redeemable for cash), or simply a bottle of wine.

For more information about what you can claim speak to us on 03333 449697 or email hello@711.accountants 14

3.TAKING CASH FROM YOUR COMPANY Successful tax planning achieves a balance between remuneration (salary and pension contributions) and dividends, which minimises the combined tax liability of the individual and the company. The main methods of extracting money from the company will be outlined in this section. We will also highlight some important tax planning tips that you may find useful.

3.1. Salary The level of salary that the company pays to you is an important consideration when it comes to tax planning. Directors are exempt from the National Minimum/Living Wage legislation where there is no written contract of employment in place – this gives you the freedom to set your salary at the most tax efficient level. The most tax efficient salary (in most cases) is one set at the earnings threshold for employers NI (£9100 for 2022/23). At this level there will be no income tax or NI to pay. However, it will be high enough to protect contributory benefit entitlement. The salary will also be treated as a deductible expense for Corporation Tax purposes.

Salary Comparison This table shows the different levels of take-home pay achieved based on three situations: all profit taken as a salary; our recommended salary topped up with dividends; and no salary with all profit taken as dividends. Also the case of being not incorporated (sole trader).

High Salary

Low Salary

No Salary

Sole Trader

Turnover

£75,000

Salary

£66,379

£9,100

£0

Employers NI

£8,621

£0

Prof. bef. Tax

£0

Corporation Tax

£0

£12,521

£14,250

£0

Dividend

£0

£49,909

£60,750

£0

£13,984

£7.244

£6,661

£17,432

£5,876

£0

£5,108

Take Home Pay

£46,519

£55,235

£54,089

£52,460

Total Tax in %

37.97%

26.35%

27.88%

30.05%

Income Tax Employees NI

3.2. Pensions Payments made into an employee’s pension plan by a company are deductible for corporation tax. To qualify, the pension contributions must be ‘wholly and exclusively’ for the purpose of trade rather than for the benefit of the employee/director; whilst the 17

guidance on this is a little ambiguous, we advise that if the overall salary and pension does not cause the company to generate a tax loss then the contributions should qualify for tax relief. We would advise you to consult with a pension advisor prior to making any pension arrangements.

3.3. Dividend

A dividend is a distribution of a company’s profits (after having paid Corporation Tax) paid out to the shareholders, the owners of a limited company. The decision to pay a dividend and the amount to distribute are the responsibility of the company’s directors – they must be able to demonstrate at the time of the declaration that the company has sufficient retained earnings to pay the dividend.

Divident Tax Rate £2,000 Divident Allowance Basic Rate

0% 7.5%

Higher Rate

32.5%

Additional Rate

38.1%

Another extremely effective tax planning method is to gift shares in the company to a spouse or civil partner (with whom you are living) if their income falls into a lower marginal tax rate than yours. By doing this, you will be able to make use of their unused tax allowances and maximise the amount of money that can be extracted from the company at the lower rate of tax. These gifted shares become the property of your spouse or civil partner and any dividends paid on the shares must be paid to them. 18

4.TAXATION

As the director of a limited company, you are responsible for ensuring that the company submits returns and pays all taxes by their respective due date. You will also be required to submit a tax return to HMRC containing all of your personal income, and pay over any tax arising on that income. This section of the guide will outline the various tax obligations that you will have as a director. 19

4.1. Corporation Tax Corporation Tax is charged on the profits made by a company for a specific period. Corporation Tax is currently charged at 19%. Shortly after a company is formed, HMRC will issue a notice “Corporation Tax – information for new companies (CT41G)” out to the registered office of the company, this is an instruction to register the company with HMRC for Corporation Tax. A company must submit a CT600 (company tax return) form electronically (via iXBRL) to HMRC; this must reach HMRC within 12 months of the period end for the CT600. The company must pay its Corporation Tax liability within 9 months and 1 day from the T600 period end. 4.2. PAYE/NIC If you intend to pay a salary, the company will be required to set up a PAYE (Pay As You Earn) scheme with HMRC and file returns to them each month. When an employee is paid, you will be required to deduct income tax and NI from their salary and pay it over to HMRC; a declaration of this will need to be made to HMRC under the RTI rules each time you pay an employee. If you provide any taxable benefits or make certain expense reimbursements to any individual within the business, these will need to be reported to HMRC each year on a P11d form.

4.3. VAT VAT is a tax levied on the sale of goods or services by UK businesses; it is added to the value of the sales/fees invoiced out to your clients, currently at 20%. It is compulsory for a business to register for VAT if the annual turnover will exceed £85,000 (2022/23). Further, you may be eligible to join the Flat Rate VAT Scheme which may simplify the VAT process of your business. If your company is VAT registered, you will be required to charge VAT on each of your invoices, submit quarterly VAT returns electronically by the relevant due date, pay any VAT owing by the due date and to keep a VAT account within the company’s accounting records.

4.4. Making Tax Digital Tax is changing. The government’s ambitious initiative, known as Making Tax Digital, is set to revolutionise the way we deal with finances and shake up the industry. This plan is a part of HMRC's ambitious plans to become one of the world's most digitally advanced tax administrations. Under this system, information will be filed electronically using the government’s approved software and paper records will no longer be accepted. The digitalisation is set to include the Self-Assessment Tax Return, VAT Returns, Income Tax and Corporation Tax. These changes are being rolled out incrementally, with VAT being the first affected as of April 2019. As a client of Seven Eleven Accountants, there is absolutely no need to worry about Making Tax Digital, as we are geared towards making fully compliant submissions to HMRC.

4.5. Self-Assessment Self-assessment tax returns are completed by individuals for a number of different reasons; the main reasons are as follows: • You are a company director; • You have income from a self-employed trade; • You have un-taxed income; • Your income is in excess of £100,000; • You have capital gains tax to pay; • HMRC have sent you a tax return (for whatever reason); • Income of £10,000 or more from savings and investments.

Payments on Account If the amount owing from self-assessment comes to £1,000 or more, then you will usually need to make payments on account for the following year. The payments on account are made in two instalments, the first on 31st January and the second on 31st July. Any payments made on account will then be offset against the total tax liability for the following year.

Income Tax Personal Allowance Basic Personal Allowance

£12,570

Rates Basic rate of 20% on income up to Higher rate of 40% on income between Aditional Raate of %45% on income above

£37,500 £37,501 £150,000 £150,000

National Insurance Employees National Insurance First £ 9,880

£9,881-£50,270

13.25%

£50,271 onwards

3.25%

Employers National Insurance First £9,100 £9,101 onwards

0% 15.05%

ABOUT US Seven Eleven Accountants offer a helping hand as your accounting and growth partner, with a team of professional and personable accountants to guide you through your business life. With 20 years of experience working with businesses and owning a business we have an extensive understanding of running a successful company. We’re well-equipped to deliver the best service possible and we pride ourselves on our ability to make the lives of our clients as easy as possible. You can be sure that your finances will be dealt with by an expert, dedicated accountant. Everything we do is fully compliant with the legislation of the day. Our team provide you with peace of mind when it comes to financial and tax related matters. Together we will build strong foundations for your business, enabling you to grow to the successes you need to grow and thrive.

Money Back Guaranty We have belief in the quality of our service. We are transparent and we keep things very simple. There is no binding contracts. No small print designed to catch you out. You can terminate our working agreement at any time. And to make this a real no-brainer, we do something a bit unusual. We don’t ask anybody to pay until the third month. If you like our style, then we will carry on building and planning. If you are unhappy, then we can part company with no hard feelings. Our service is impeccable. Our knowledge is deep and our methods are proactive. All our prices are fixed in advance. We hide nothing and we keep the relationship simple and equal.

AND FINALLY A while back I was reading about an expert on subject of time management. One day this expert was speaking to a group of business students and he used an illustration I'm sure those students will never forget. After I share it with you, you'll never forget it either. As this man stood in front of the group he said, "Okay, time for a quiz." Then he pulled out a large jar, wide-mouthed mason jar and set it on the table in front of him. Then he produced about a dozen fist-sized rocks and carefully placed them, one at a time, into the jar. When the jar was filled to the top and no more rocks would fit inside, he asked, "Is this jar full?" Everyone in the class said, "Yes". Then he said, "Really?" He reached under the table and pulled out a bucket of gravel. Then he dumped some gravel in and shook the jar causing pieces of gravel to work

themselves down into the spaces between the big rocks. Then he smiled and asked the group once more, "Is the jar full?" By this time the class was onto him. "Probably not," one of them answered. "Good!" he replied. And he reached under the table and brought out a bucket of sand. He started dumping the sand in and it went into all the spaces left between the rocks and the gravel. Once more he asked the question, "Is this jar full?" “No!” the class shouted. Once again he said, "Good!" Then he grabbed a couple of beers and began to pour them in until the jar was filled to the brim. Then he looked up at the class and asked, "What is the point of this illustration?" One eager beaver raised his hand and said, "The point is, no matter how full your schedule is, if you try really hard, you can always fit some more things into it!" "No," the speaker replied, "that's not the point. The truth this illustration teaches us is: If you don't put the big rocks in first, you'll never get them in at all and there’s always room in the schedule for a couple of beers!" What are the big rocks in your business? Put those in your jar first.

Notes

Seven Eleven Accountants Ltd 14 Containerville 1 Emma Street London E2 9FP 03333 449697 hello@711.accountants www.711.accountants

Four Fundamentals to Running a Limited Company

Seven Eleven Accountants Ltd 14 Containerville, 1 Emma Street, London E2 9FP 03333 449697 - hello@711.accountants www.711.accountants