IMPORTANT NOTE: HMRC IS CURRENTLY REVIEWING THE ENTIRE CORPORATION TAX POSITION OF "SMALL" COMPANIES. IT IS EXPECTED THAT WHOLESALE CHANGES TO LEGISLATION WILL FOLLOW WHEN THE REVIEW IS CONCLUDED.PLEASE READ THE NOTES IN THE BUDGET PAGES FOR NEWS OF ANY MORE DEVELOPMENTS.
We can offer all services to limited companies including accounts preparation, tax calculations and advice on all associated matters. We hope the information below will be of help in answering some of the more frequently asked questions. Contact us for specific recommendations about your own company's affairs.
Each heading listed below has its own section. Scroll down to view relevant section.
Why start a limited company?
Profits and Losses
Depreciation/Capital expense allowances
Rates of tax & administration
Corporation Tax "Self Assessment"
Advance Corporation Tax
Groups of companies/Consortia
Close and "family" companies
IR35 & related Service Companies
Limited Liability Partnerships
Brief notes on each subject are given below but you should be aware this is an area of rapid change.
Why start a limited company?
There are many reasons to consider forming a company but the main commercial objective would be the protection of "limited liability status". This means that, so long as nothing negligent or otherwise illegal has taken place, an individual shareholder will not usually be required to pay out to creditors if the company goes down. In these circumstances the shareholder cannot be asked to contribute more than any amount unpaid for the shares owned. This can be a highly desirable form of protection under which to trade.
The question often arises as to which business medium to use ..... a limited company or something else such as self employment, partnership, LLP or FLP. Each has its own good and bad points. For example, payment of dividends from a limited company avoids paying National Insurance on those sums but there will be other issues to condsider. It is dangerous to make a decisison such as this based on one fact alone.
It is important that professional advice is taken before embarking on a business venture in order to decide which is most appropriate business medium for you.
Profits and losses
A UK resident company is liable to tax on all its profits worldwide. An overseas company trading through an office of any kind (branch, agency etc.) inside the UK is liable to tax on profits of that office.
"Profits" are defined as including all income and taxable capital gains but certain specific types are excluded. For example, "distributions" of profit from other UK resident companies.
It is important to note that, whilst all forms of income may combine into one figure for the purposes of company accounts, differing tax rules will be applied to each separate source. Expenses must therefore be "matched" with the corresponding income - trading income and expenses, property rental income and expenses etc. It follows that sufficient records must be maintained to permit this process.
As with self-employed persons revenue expenses are generally deductible for tax purposes if they are wholly and exclusively for the purposes of the trade. Amounts claimed in the accounts for fines (e.g. parking tickets), loan interest paid, purchase/disposal of capital assets, depreciation, entertaining and some other areas require careful attention as they will be completely disallowed for tax purposes or be subject to special rules.
Profit calculations for tax purposes will follow normal accounting guidelines (with certain specified differences) and income/expenses declared will therefore be on the basis of amounts arising/relating to the year. This is irrespective of when the amounts in question are physically received or paid.
Another item to receive particular consideration is relief given for expenditure on capital assets (see "Depreciation/Capital allowances" below). Any claim under this heading is to be deducted before arriving at the final tax profit/loss figure.
Losses are computed on the same basis as profits but the manner in which tax repayments may be claimed, in respect of those losses, is laid down by statute. The main ways in which losses can be relieved are -
1. carry forward and use to reduce tax on profits of the same trade in later years**
2. set losses against other income and gains of the same accounting period
3. any balance unused can be carried back and set against income and gains of the immediately preceding year. In some cases the ability to carry back losses is extended. This option is not, however, available to investment companies.
4. losses on termination of a trade may be carried back up to three years prior to cessation
5. losses arising to group companies may be surrendered to other group members
**Note... point 1 states losses cannot be used against future profits arising to a trade other than that which gave rise to the loss originally.
Where a change in ownership of the company has taken place special rules may prevent full relief being obtained for losses that arose before the change.
All loss reliefs must be claimed within specified time limits. These vary depending on the heading under which a claim is made and care must be taken to ensure deadlines are not missed.
Business stock & assets taken for personal use > where business owners have removed stock and/or assets from their businesses for personal use the items are deemed to have been taken from the business at SELLING price. This is a long established principle previously backed up only by case law but which has now been put on the statue books.
Depreciation/Capital allowances > NOTE > capital allowances (tax relief for capital expenditure) continiues to undergo upheaval. Contact us if you need advice about claiming allowances.
Whilst any accountancy depreciation is disallowed for tax the legislation permits claims for a form of "tax depreciation". There are many areas for claiming these allowances - plant/machinery (including ships), industrial buildings, agricultural buildings, scientific research and know-how to mention just a few.
PLANT AND MACHINERY is probably the largest area for claims and covers all functional assets used in the continuance of the trade - factory production machines, computer hardware, motor vehicles etc. Assets merely forming part of the setting in which the trade takes place (wall pictures/potted plants in the reception area of a factory, for example) might not qualify for allowances under this heading.
Tax legislation does not define "plant and machinery" or the difference between "functional" and "non-functional" assets. The matters have been before the courts on numerous occasions with the result that a plethora of rules relating to various items of expenditure has been established.
Many classes of equipment/assets used by small and medium-sized businesses qualify for an immediate 100% deduction on the first £200,000 of eligible expenditure. This allowance is entitled "Annual Investment Allowance" ("AIA").
The maximum Annual Investment Allowance is to be shared between "related" companies in whatever proportion the owners decide. Companies are "related" if they have similar activities and/or shared premises.
Annual "writing down allowances" on further plant and machinery expenditure is reduced to 18%.
Annual "writing down allowances" on long-life assets is increased to 8%.
Any "small" pools of unallowed capital expenditure under £1000 can be written off in full.
Business Premises Renovation allowance is no longer availble.
Expenditure on certain defined fixtures and fittings within commercial buildings are eligible for an annual writing down allowance of just 8%. Qualifying expenditure is set out in a statutory list which includes electrical lighing systems,lifts, escalators, thermal insulation, cold water systems, other water & space heating systems and ventialtion cooling.
Note > always remember that special rules for capital allowances apply to North Sea oil and gas ring fence businesses.
POINTS TO CONSIDER >> in light of the withdrawal of industrial buildings allowances (see below) review capital expenditure to investigate if it could now be better claimed as repairs or under an alternative part of the capital allowance rules such as plant & machinery or mineral extraction.
SPECIAL NOTES -
1. Cars - a 100% deduction is available where the car purchased is a qualifying low emission model
2. A 100% allowance is also due for expenditure on combined heat and power plant, refrigeration equipment, boilers and motors/variable speed drives, lighting and energy saving insulation/thermal screens.
3. Repair v. Replacement > repair expenditure is usually allowed as a deduction for tax purposes but the same generous treatment is not always available for a "replacement". Tax legislation contains rules for deciding what is a "repair" in the case of fittings integral to a building (e.g. air conditioning system). The number to be remembered is 50%. If a repair - or total repairs over a 12 month period - cost more than 50% of the cost of a replacement then it will be treated as a replacement.
Allowances are not compulsory. They may be "disclaimed", wholly or in part, if it is financially prudent to do so. Also motor cars and some second hand assets may have special rules restricting the allowances available.
NOTE THAT the this paragraph is historic as "INDUSTRIAL BUILDINGS allowances", "Hotel Building" and "Agricultural Buildings Allowances" were phased out completely by 2010/11. In the main these relate to costs on building structures used for qualifying purposes, typically, processing/manufacturing industries or the provision of certain services including electricity, water and transport.
Not included are offices, retail shops and other hotels aspects although hotels qualify for specific reliefs not available to other buildings.
Industrial, Hotel Building and Agricultural Buildings Allowances were phased out completely by 2010/11.
Amongst the many changes being debated is a move towards allowing accountancy depreciation figures instead of the above statutory calculations for capital allowances.
Capital Gains/Losses As indicated above (see "Profits and Losses") net chargeable capital gains form part of overall taxable profits and are therefore charged to tax at the same rate as applies to other profits. If a net capital loss arises this will not be set against other trading profits but, instead, will be carried forward to reduce tax on future capital gains. The ability to use losses may be prohibited if there has been a change in company ownership.
In the main, company gains and losses will be computed using the same rules as for individuals (see "Capital Gains Tax" page of this site) but for two main exceptions:
1. there is no annual exemption
2. capital gains of companies continue to benefit from indexation relief
Rates of tax & administration The corporate financial year is always 1st April to the following 31st March.
Any year under consideration is often referred to by the year it starts. For example, the year 1st April 2017 to 31st March 2018 is the "2017 financial year".
The small company rate at which corporation tax is charged is currently 19% but this is due to be reduced year by year until 2020.
A "small company" for this is one with taxable profits up to £300,000.
The main rate of charge is 30%.
Under the "Pay & File" arrangements tax is normally due nine months after the accounting year even if the accounts are not finalised. The corporate Tax Return must then be filed within twelve months of the accounts. Interest on late payment and other penalties for non-compliance apply throughout the rules.
Companies with larger corporation tax bills are required to their tax pay quarterly.
Corporation tax self assessment adds further complications (see below) and Companies' House also require submission of final accounts within nine months of the accounting period end.
Not only must all these deadlines be carefully remembered but new companies have additional regulations placed upon them.
In general, the importance of the administration procedures cannot be over emphasised.
Corporation Tax "Self Assessment" (CTSA)
As with personal self assessment this is, broadly speaking, a system for collecting the tax and not a tax in itself.
Companies are required to work out their own assessment of tax and will not have the option of requesting the Revenue to carry out the calculation. This is the main difference from the personal tax system.
The need for Revenue generated tax assessments is negated by self assessment but procedures for resolving disagreements etc. are still in place.
Charitable gifts and donations
Under CTSA companies are not required to deduct tax from any such donations. Payment is made gross and full tax relief is claimed through the company accounts and tax computations. There is also a new, similar, relief for gifts of qualifying shares and securities.
All company accounts, Tax Returns, tax calculations and loss repayment claims must be filed with HMRC using the iXBRL computer format. HMRC provide the necessary software for the simplest of companies but, often, iXBRL will mean using comercially available software. By now all reputable accountants and tax advisors working in corporation tax will be familiar with iXBRL and have procedures in place.
Furthermore all companies are required make payments electronically for Returns due after 31st March 2011.
Call us if you need help with iXBRL.
Advance Corporation Tax (ACT)
Following the abolition of ACT in 1999 all dividends are now paid without any credits. No ACT credit is therefore available to offset corporation tax due at the end of the period or to reduce personal tax due.
Any unallowed ACT as at 5th April 1999 "surplus ACT" is not lost but benefits from a new method of relief commonly called "shadow ACT". The calculation of this new relief can be complex and requires specialist knowledge.
Foreign dividends have certain special treatment for tax purposes.
Groups of companies/Consortia
There are several definitions of a "subsidiary company" (e.g. 51%, 75%, 80% shareholdings) with each definition being applicable to different areas of taxation. Legislation does not, however, recognise a group as one entity for overall tax purposes.
Groups are treated as if they are "connected persons" and transactions between each other will be viewed in the light of special rules depending on the nature of the transaction involved. Some examples of this are as follows:
Transaction Minimum shareholding
Surrender of losses 75%
Transfer of assets 75%
(for capital gains tax purposes)
Payment of intra-group monies:
Surrender of intra-group taxes:
Shadow ACT 51%
As with all areas of taxation there are several anti-avoidance provisions covering such matters as:
manipulation of rollover relief
change of company ownership within the group (arrangements to avoid tax liabilities and capital gains reduction prior to sale of company, buying/selling companies replete with established gains/losses, other traded tax schemes)
issue of certain share capital to secure perceived tax advantages
and many other situations.
Close and "family" companies
This description is applied to any company under the control of its directors or five, or fewer, persons. "Persons" includes all associates/relations and each word is specifically defined. These types of company are popular with small enterprises but it is easy to fall foul of the very tight regulations covering dividends/distributions, company loans and the rate of corporation tax itself.
This type of company is bound by identical rules as any other company but great care must be taken in order to avoid the many pitfalls applicable to it. The situation is worsened by the introduction of Corporation Tax Self Assessment (see above) which brings with it extra complications.
IR35, the "umbrella" company, "Managed Services" & The "Personal Service Company" (PSC)
These are names often associated with the "one man" company. There are many differing commercial objectives to using such a company - e.g. avoiding PAYE issues in some specific activities (computers, film/TV work, newspaper industry, music business etc.), difficulties in obtaining public liability insurance and inability to contract / tender for certain types of work as a sole trader. Not only are PSCs and umbrella management companies often subject to the rules on close companies (above) but they are subject to further restrictions. HMRC feels these types of companies are used, all too often, to avoid certain PAYE rules and for no other purpose. As a result, much new legislation has been introduced to restrict these perceived advantages. Professional organisations have made representations to government pointing out the downside of the changes but it is still thought the new rules are very harsh.
Where a PSC has not paid out all its income as salary then the money is, nevertheless, likely to be classified as salary. As a result income tax and NI are charged on both the company AND the individual.
All such companies will be affected by the changes even if they are not flouting existing rules. It is thought that, should these continue in the adverse financial climate, many companies may cease trading and jobs will be lost.
Since these rules came into operation many legal arguments have taken place and cases have made their way through the courts. The Stutchbury case, although failing to dislodge the so called IR35 regulations, was important in that the presiding judge identified imprecise areas of the legislation where the Inland Revenue was instructed to clarify.
The case involving John Bessell and his company Dragonfly Consulting was crucial in this area. The taxpayer lost his case and the Professional Contractors Croup said that this would "undermine much of the successful defence against IR35"
In the "Arctic Systems" case (Jones v. Garnett) a family company was taken to court under Trusts legislation. At the initial stages Mr & Mrs Jones lost their case but,following a dramatic reversal of fortunes, the House of Lords (now the Supreme Court) found in their favour against the Revenue.
Not surprisingly a ministerial statement was issued almost immediately after the decision giving the government's inital views. The statement gave clear indication of more complex tax legislation is to be proposed relating to settlements, family companies, taxation of dividends and related issues. However, for the time being, proposals made by HMRC, to impose tax consequences on what they describe as "income shifting", have been "shelved". Great care must be taken where a small close company proposes to issue dividends etc. to shareholders and employees. Consult with us if this concerns you.
The government has acknowledged that these rules are largely ineffective. They have not succceded in collecting as much Revenue for the Exchequer as was originally predicted. Following a "review" of the rules the government has decided it will not abolish them, as was orignally hoped, but that HMRC must issue clearer "guidance" on the matter.
We will keep a careful watch on this particular thorny issue on behalf of all our clients. Any tinkering with the rules may result in "fying pan into fire".
Even though the government has announced that the proposed regulations are "shelved" our advice is to monitor any rule changes and lobby Members of Parliament as you feel appropriate.
Limited Liability Partnerships
This is a business vehicle combining aspects of limited liability with partnerships. The legislation was introduced in 2001. In our view it is a method of business which should be considered but is most likely to be of benefit in only a small minority of cases. Care is also recommended as there are many complexities inherent in the process which may not suit all clients.
Furthermore, HMRC have introduced new requirements on LLP firms which, in their view, comabat the use of an LLP in a "disguised emploment" scenario. This makes the use of an LLP even more distasteful to many people.