A limited company is a type of business structure which incorporated into a legally distinct body. If an individual opts to run the business as a limited company, the business willbe legally distinct from the person responsible of running the business; maintain separate finances for both business and personal finances; and own assets. To set up a limited company, an individual needs to register with Companies House – the process of registration is called incorporation. An individual can register his / her limited company online or via post. DNS Accountants can assist with the registration process on behalf of the business. While registering, the following details will be required:
- Complete name and address of the business
- Name and address of company directors and company secretary (if appointed in-house)
- Shareholder details and share capital
As a Limited Company contractor, an individual can claim costs that are incurred entirely for the business and can be claimed as business expenses. Since, these are claimed as business expenses an individual will be eligible to receive tax relief on these costs. Claiming business expenses accurately can decrease the tax bill so it is imperative to take out time to understand what can and cannot be claimed. Contractors can indulge into a discussion with DNS Accountants to provide them with guidance with regards to claimable expenses. We can help contractors understand what is classed as an expense and the process involved in making a claim
If you have a new business in mind and want to join hands with over 500,000 people a year turning their ideas and enthusiasm into a new UK company, the very first step in doing so is to decide its nature i.e. sole trader or limited.
Limited Companies are of two types:
- Public Limited Companies: A Public Limited Company, also known as PLC is a company that is able to offer its shares to the public. They don’t have to offer the shares to the public but they can do that, if they want to.
- Private Limited Companies: A Private Limited Company, also known as PLC is quite similar to public limited company but it can be run with just one member and it cannot offer its shares to the public, even if they want to.For a public limited company to start trading, it must have issued shares of value £50,000.
A Limited Company:
- Is a separate legal entity incorporated with the Companies House under Companies Act 2006.
- Has its own share of finances which is separate from its owner's personal finances.
- Own its assets and can keep the profits generated after all taxes are paid.
Limited Company – What are the advantages?
At present, there are over 3.5 million limited companies incorporated in UK and is preferred over a sole trader or partnership structure. The private limited structure is a proven successful business model where the business owners hold all shares of the company. Forming a private limited company results in protection of personal assets;provide access to more resources, better financial assistance and greater tax cuts.
There are a number of advantages associated with a Limited Company. Some of these are as follows:
- It's quick and easy to start with: The Companies Act 2009, which was effective from 1st October 2009, made it easier to run a limited company and it can be done online now.
- It has a Separate Legal Entity: Limited Companies enjoy permanent succession because they have their own legal entity and thus, even if the shareholders and employees leave the company, it does not affect the company. Since it has its own separate legal entity, then in the event of a death or resignation, the shares are allocated to remaining members. Discontinuation of the private limited company occurs only in case of dissolution or liquidation or by the order of the courts or Registrar of the Companies.
- It has Limited Liability: The biggest advantage of limited company is its limited liability feature. Limited companies are treated as a single entity and thus in case of any debts, company is responsible for it i.e. in case if a company is unable to pay its debts, the shareholders will have to pay as per their share of contribution (nominal value of their shareholding) which can be as small as £1. So, with the private limited structure, you can take more calculated business risk without the fear of losing everything to the uncertain and unexpected situations.
- Greater opportunities for tax planning: One of the main advantages of forming a limited company is that it provides greater opportunities for tax planning and is subject to lower corporation tax. Corporation tax is applicable at the rate of 20% on the profits, irrespective of the amount of profit, which is not the case with the sole traders. Dividends are one of the ways through which directors can make more tax savings.
- Professional Status: There is no doubt that on the sound of "limited", adjectives like "credible" , "permanent" , "reliable" gets automatically attached with the name of the company and hence enhances its credibility. It gives a sense of confidence and incorporating a business as a limited company can open up more business avenues.
- Set up of Dormant Companies: In case you have an idea/name for a business but not yet the time and capital to develop it, you can set up a company with desired name and keep it dormant, i.e. no trading in that particular financial year.
- Better Control Over Your Finances: Setting up a limited company means you are dealing with the clients directly and have control over your business and finances. Whereas, in case you are using the services of an umbrella company, you have to rely on the umbrella company for your earnings.
- Raising Funds: In case of a public limited company, you can raise large sums of money because there is no limit to how many shareholders a public limited company can have.
- Liquidity for Shareholders: Shares of a public limited company are easily transferrable and thus provides liquidity for its shareholders.
- Exit Strategy: Going public can enhance the options for the founders to exit the business at some point in the future, if they wish to do so. Both higher transferability of shares and the increased visibility of the business and its performance may increase the chances of bid interest from potential suitors.
How to Register a Limited Company?
If you have a new business in mind and decided to start with a Limited Company, then you have to register your company with Companies House with the following details:
- Full registered name and address of your company.
- Name and addresses of directors and secretaries, if applicable.
- Detail of shareholders and capitals.
Companies House will check the documents and once verified, it will register/incorporate your company and issue Certificate of Incorporation with details, such as:
- Name and registered number of the company
- Date of its incorporation
- Company type i.e. Private Limited by Shares
- Whether the company’s registered office is in England and Wales, Wales, Scotland or in Northern Ireland.
Apart from Corporation Tax, which is mandatory for Limited Companies, you need to check if you have to pay other taxes like VAT, National Insurance Contributions, Capital Gains Tax or PAYE.
How Do You Define Expense?
A business expense is a cost which is incurred in an organization’s efforts to generate revenue. Expenses may be in the form of cash payments like payment of wages and salaries, depreciation of asset(s) or paying of bad debts. One should summarize all expenses and deduct it from the total income before assessing income tax.
For business expenses, you can pay from your personal funds and claim it by submitting relevant receipts and documents. Claiming money spent by you as an expense will help in saving tax on it. However, anything and everything which you pay on the name of company/business expense need not be a valid business expense and thus cannot be claimed in case it is not a valid expense.
Typical limited company expenses
In principle, a limited company can deduct any type of expenses from turnover provided these aren’t specifically disallowed by HM Revenue and Customs (HMRC). Below mentioned are the main business expenses that can be set off against Corporation Tax (unless otherwise stated):
- A limited number of professional subscriptions, if allowed by HMRC
- Accommodation costs when a contractor is away from usual place of business (this should be less than 24 months to be considered as 'temporary workplace')
- An annual private health check
- An eye test when an individual is working on a computer equipment
- Authorised bank charges
- Business gifts up to £50 per individual are permissible before more complex rules apply
- Business insurance, such a professional indemnity insurance
- Business magazines and books
- Capital allowances (depreciation of assets)
- Christmas party exemption for Directors and employees of £150 per person per year
- Company car expenses
- Company formation and ongoing costs (e.g. Annual Return fee); 'capital cost' cannot be set off against Corporation Tax
- Computer equipment and software
- Costs of advertising and marketing the business
- Employer's national insurance contributions (NICs) payable on salaries paid to company employees
- Executive pension contributions
- Hire purchase agreements
- Home office costs (a flat £4/week without receipts is permitted by HMRC)
- Incidental overnight expenses of £5/night (£10/night if overseas) can be claimed as a flat rate if an individual is working away from home
- The cost of subsistence while away from workplace
- Mobile and Smartphone expenses (if the contract is in the company name)
- Professional fees, such as accountant or solicitor
- Stationery, postage, and printing costs
- Travel and parking costs, mileage allowance if using own vehicle of 45p/mile for the initial 10,000 miles, and 25p/mile thereafter; 20p/mile rate for bicycles
- Telephone and internet expenses (if the contract is in the company name)
- The cost of business calls can be reclaimed on a residential phone bill
- Training course fees as long as the skills are relevant to the business
Valid Business Expenses include:
- Travel Expenses: Contractors can claim their work travelling expense provided these expenses meet the definition of a temporary workplace. A contractor can claim 45p per mile for the initial 10,000 miles and post that 25p per mile in a given tax year. The mileage allowance covers car servicing and taxes; petrol expenses; insurance charges; and other additional running costs associated with the vehicle. In case a contractor uses a motorbike to travel for work, he / she can claim 24p for each ‘business’ mile and 20p per mile if he / she prefers to cycle to work. Alternative, if a contractor is travelling as a passenger to the office in a car, he / she is entitled to claim 5p per mile. Additionally, London congestion charges and car parking charges also form part of allowable expenses 24 month rule example: Dema has worked for an employer for five years, during which she has always been based at their head office in London. In these 5 years, she was sent to Solihull to perform her duties at a secondary office for 18 months. Since, she was there for 18 months; Dema can claim relief on travel expenses between her home and the Solihull office as she never exceeded 18 months
- Accommodation: Expenses incurred in accommodation, meals can be claimed as a valid business expense. Generally there is no fixed limit/allowance for accommodation, but your claim for the same should be of reasonable amount.
- Clothing: Cost of your everyday wear is not a part of a valid business expense. However, if you are required to wear a particular type of uniform or protective clothing then it can be classed under valid business expense.
- Training: Training required to complete the work effectively are usually exempt. In case of overseas training, HMRC will only consider overseas training permissible if a contractor is able to prove that it is completely necessary to undertake the said training in order to carry out the duties. Costs for overseas training will not normally be allowed unless a contractor can clearly demonstrate the following:
- Prove that the trip is official and not personal by providing a schedule which gives details of the events involved
- Convince that the nature of the training is completely fundamental to the duties performed by a contractor and that they could not be performed without undertaking the training
- Pre-Trading Expenses: There are certain expenses which you have to do prior to setting up the company like meeting clients, phone bills or equipment costs. In case these expenses are made within 7 years of your first day of business and have a reasonable cost, you can claim them as your business expense.
- Home-Office Costs: In case you spend most of your time at your home office, you can claim a percentage of electricity bill, broadband charges, telephone bill, metered costs of gas and water. However, if you are using your home-office only for paperwork and accounting, you are allowed to claim only £4 per week with regard to utility bills.
- Pension Contribution: For the year 2017/18, you can claim tax relief on your annual pension contribution up to £40,000, or up to 100% of your earnings, whichever is lower.
i.e. if you have earned £25,000 in one tax year but have placed £40,000 extra in your pension kitty, you can claim tax relief only on £25,000.
- Childcare: As an employee or director of your limited company, you can claim a percentage of your childcare expenses. In order to claim the expenses easily, you can tie up with an approved child care provider and link the payment to your limited company bank account.
- Computer Equipment and Software: Costs/expenses incurred in purchase or maintenance of computer equipments, hardware and software can be classed as a valid business expense provided value of each item is equal to or is less than £1,000. In case it is above £1,000, it will be treated as capital expense and you cannot claim it.
- Accountancy Fees: In case you have made any payment to your accountant as a part of your business, you can claim it through your limited company. It does not include any type of payment for your personal tax.
- Annual Work Event: In case you are hosting an annual event on behalf of your limited company, you can claim the expenses through it provided these conditions are met: i) Event was hosted in that tax year ii) It was open to all the employees in the company iii) maximum cost per head does not exceed £150, including VAT.
- Eye Tests: If you are required to work in front of laptop/monitor or any kind of display screen for at least an hour on a daily basis, you can have your regular eye tests paid by your limited company. However, the test results should mention that the prescription is for display screen work only.
- Stationery and Printing Costs: Stationery and printing costs such as postage, stationery supplies, printing and printer ink etc can be classed as a valid business expense and can be claimed through your limited company.
- Professional Memberships: In case you are a part of a professional or trade association and it is of an advantage to your business, you can claim this cost against corporation tax.
- Health Insurance: Medical and Health insurance can be classed as a valid business expense and can be claimed through your limited company, however the policy needs to be a specific Permanent Health Insurance (PIH) Policy. This policy needs to be in the name of your company and payments are done through the company bank account.
Working as a director or an employee to your company gives you an added advantage of claiming valid business expenses through it, which you may not be able to do through an umbrella company. However, you need to claim your business expenses to save tax on your earnings because tax is incurred only on the profits so your business expenses should be deducted from your total earnings for you to understand your finances better. For example, if you have earned total £5,000 in a month and have incurred £1,000 in business expenses then you have to pay tax on £4,000.
However, you need to consult your accountant for a more detailed picture and for accounting other factors like VAT, PAYE, and Dividends etc.
DNS Accountants summaries, in brief,the expenses that can be claimed through a Limited Company
- 24 Month Rule for travel
- Charity, Entertainment and Sponsorship
- Childcare costs
- Company Assets
- Home Office
- Pension Contributions
- Training Costs
- Travel Expenses
In order to claim the expenses, it is extremely important that a contractor keep hold of all receipts of expenses incurred in order to make a claim. This is imperative, as HM Revenue and Customs can decide to investigate a contractor; hence, having evidence of all the expenses incurred while hold handy. Contractors can contact DNS Accountants for any assistance.