Limited Companies

This section contains articles on essential topics for limited companies.

Forming a limited company

Certax can provide expert advice on forming a limited company. Here are some of the issues to consider…

Although you can set up a company using your own resources, it is normally advisable to use a specialist formation agent. You first need to decide on the following:

  • Whether the company is to be a private or public company limited by shares, or a private company limited by guarantee
  • The purpose of the company and its capital requirements
  • Whether the proposed company name is available and acceptable

Incorporation procedures

The Companies Act 2006 sets out exactly what documentation is required for forming a company, and it is very different from that which was previously needed.

An application to form a company is made on Form IN01. This has to be accompanied by a Memorandum of Association (see below), the Articles and the correct registration fee.

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. Companies are no longer required to specify their objects, and the concept of authorised share capital has been abolished.

New Model Articles have been introduced. There are three types, as follows:

  • Private company limited by shares
  • Private company limited by guarantee
  • Public limited company

They are written in plain English and are shorter and simpler than ‘Table A’ (which has been around in various forms for the last 150 years). In practice, companies can be formed using either Model Articles, Model Articles with amended provisions, or bespoke Articles.

Companies incorporating as limited by shares (whether private or public) must complete a statement of capital and initial shareholdings as part of the formation documentation. The statement of capital is a new document. It is a ‘snapshot’ of a limited company’s issued share capital at a given time. It also needs to be provided in various other circumstances, including as part of the application to incorporate and with each annual return.

Directors

A company must have at least one director who is a natural person aged 16 years or over. For each director who is an individual, the following information must be provided:

  • full forename and surname
  • any former name(s) used for business purposes, including maiden name(s) and previous married name(s)
  • full service address including town, county and postcode (for the public record)
  • usual residential address (protected information)
  • country/state of residence
  • date of birth
  • nationality
  • occupation
  • the number of shares, if any, the director is to have in the company
  • security items from the criteria required by Companies House (if the company is formed electronically)

Shareholders

The following information must be provided in relation to each shareholder:

  • full forename(s)
  • surname
  • full address including town, county and postcode
  • the number of shares the shareholder is to have in the company

Directors’ Service Addresses

Directors (and company secretaries where applicable) of both existing and new companies now have the right to set out a service address rather than their usual residential address. The service address may be the company’s registered office.

Individual companies have to maintain two registers of directors – one containing, amongst other things, a service address for each director, and a further register containing the residential address of each director (protected information).

Home addresses are no longer put on public record by the Registrar of companies. Companies House still hold a register of residential addresses, but access will be very strictly limited (e.g. liquidators, the police, HM Revenue & Customs and credit reference agencies). If no action is taken, the residential address will automatically become the service address until the information is provided in the next confirmation statement (this replaced the annual return from 30 June 2016).

If formation agents have been involved, they will normally provide copies of the relevant documents, together with suggested minutes for the directors’ meeting, a form AA01(change of accounting reference date) and forms SH01. They usually also supply the Statutory Book – a combined register, and minute book (in loose leaf or bound form), and some blank share certificates.

Post incorporation matters

First meeting of directors

Once you receive the Certificate of Incorporation, you should hold a first meeting of directors to deal with the following matters:

  • appointment (if appropriate) of a chairperson, managing director, and any additional directors, and approval of any employment contracts
  • appointment (if appropriate) of auditors
  • issue of share certificates and, if appropriate, allotment of further shares
  • approval of banking arrangements, including agreeing authorised signatories in respect of the Company’s bank account and passing the resolutions required by the bank
  • approval of any business contracts
  • disclosure by directors of their interests in any contracts made with the Company
  • adoption of an accounting reference date
  • convening of a general meeting (if required)

First general meeting

A first general meeting of the company is required:

  • to approve any substantial property transaction between the Company and any of its directors
  • to approve any directors’ service contracts to be entered into for terms exceeding five years

Returns

After the first board and general meeting, you should make the following returns to the Registrar of Companies:

  • Form SH01 (Return of allotments of shares)
  • If necessary Form AA01 (change of accounting reference date). Failure to notify a change will result in the Company’s accounting reference date becoming the anniversary of the end of the month of incorporation

Other matters

  • Minutes of the first board and general meeting should be prepared
  • The Company should issue share certificates
  • The Company’s statutory books should be written up
  • Shareholders should pay their share capital into the Company’s bank account
  • Don’t forget to register for PAYE and VAT, if appropriate.

If you are considering forming a limited company, contact the team at Certax for advice and assistance.

Company secretarial duties

Certain information about a company must be publicly available including, for example, the company’s annual accounts, registered office address and details of directors, company secretary (if there is one) and members. Providing and updating this information has historically been the job of the company secretary. At Certax, we can provide comprehensive assistance with company secretarial matters.

Company legislation provides an opportunity for a business organisation to benefit from the protection of limited liability, separating the legal persona of the organisation from the individuals who own it.

In return for this protection a certain amount of information about a company must be publicly available including, for example, the company’s annual accounts, registered office address and details of directors, company secretary (if there is one) and members. Historically, providing and updating this information has been the job of the company secretary.

Do all companies need a company secretary?

There is no longer a requirement for all companies to appoint a company secretary. Private companies (whose name ends in ltd) do not generally need to appoint a company secretary to deal with this paperwork, unless they either wish to do so or their Articles of Association (their governing document) requires them to do so.

Public limited companies (whose name ends in plc) must still have a company secretary who must have specialist, up to date knowledge of company law.

The company secretary is an officer of the company. This means that they may be criminally liable for company defaults, for example, failing to file a document in the time allowed or to submit the company’s annual return.

If your private company does not want to have a company secretary

If a private company decides not to have a company secretary then it should check its Articles of Association to ensure that its own regulations do not require it to appoint one. The company should inform Companies House of the resignation of any existing company secretary.

Where a private company chooses not to have a company secretary, any item that would normally be sent to the company secretary is treated as being sent to the company. Any duties which would normally be the responsibility of the company secretary will be carried out either by a director or a person authorised by the directors.

The company secretary and Companies House

A company secretary, or in the case of a private company the person responsible for company secretarial duties, will have regular dealings with Companies House as this is where public records about the company are held.

Most communications with Companies House are through Companies House Webfiling or their Software filing facility. Companies House is moving towards 100% online filing.

Company secretarial duties

The duties of the person responsible for company secretarial matters are not defined specifically within company law but may be divided generally into three main areas:

  • maintaining statutory registers (keeping the company’s records up to date)
  • completing and filing statutory forms (keeping the public record up to date)
  • meetings and resolutions (making sure the company abides by both its internal regulations and the law).

Maintaining statutory registers

All companies must maintain up to date registers of key details, these include:

  • a register of members
  • a register of directors
  • a register of charges
  • a register of persons of significant control*.

The details in these registers include, for example, names, addresses, dates of appointment and resignation (for directors) and for members, the number and type of shares held. This is not an exhaustive list.

These registers must be made available for inspection by the general public at the company’s registered office or at a single alternative inspection location (SAIL) which must also be recorded at Companies House.

A company may choose to keep its directors’ residential addresses private and to record a service address for them. If so it will need to keep an additional register showing the directors’ residential addresses which is not open to inspection by the general public.

* A person with significant control is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights or who otherwise exercises control over a company or its management.

Maintaining statutory information at Companies House

Alternatively, private companies may also choose (elect) to keep some of the information normally kept in the statutory registers at its registered office or SAIL on the public register at Companies House. This will include their registers of directors, directors’ usual residential addresses, secretaries, members and persons of significant control. While this election is in force the company does not need to keep its own separate statutory registers updated.

Whilst this election is in force the general public can access company information through Companies House instead of visiting the registered office. This will include some information, such as members’ addresses or directors’ full dates of birth, which is not generally available on the public record for private companies.

Completing and filing statutory forms

The company must ensure that their record at Companies House is always up to date and contains current details of various statutory matters.

Many of the more common types of information can be submitted online by first registering at www.companieshouse.gov.uk. Alternatively Companies House currently has a series of over 200 statutory forms to allow paper filing.

The company secretarial duties would extend to ensuring that, for example:

  • The company’s annual accounts are filed on time at Companies House. For a private limited company, under normal circumstances, this must be within 9 months of the end of the accounting year. A fine will be levied if the accounts are late.
  • Once each year Companies House will send each company a confirmation statement showing a snapshot of the information they hold. The company must ‘check and confirm’ that the information held at a given due date is accurate. The information must be checked, and amended if necessary, within 14 days. If this information is returned late or not returned at all, the company, director(s) and secretary (if appointed) may be prosecuted. This confirmation statement replaces the annual return from June 2016 .
  • All changes to the way the company is organised need to be notified to Companies House, within a specified period of between 14 and 28 days, depending on the change. The annual confirmation statement cannot be used to change this information and a separate form should be used. The most common forms include:
    • changes in directors, secretaries and their particulars
    • a change of accounting reference date
    • a change of registered office
    • allotments of shares.
  • If a company does not complete its confirmation statement the Registrar might assume that the company is no longer carrying on businesses and take steps to strike it from the register.
  • The current version of the company’s Articles of Association is filed whenever a change in the company’s internal rules is made.

Charges

When a company gives security for a loan either the lender or borrower should notify Companies House within 21 days, by filling in the appropriate form and paying the statutory charge. Without timely registration the charge will be void – that is, the loan will still be repayable but the security given will not be valid.  This does not apply to property acquired which is subject to a charge.

Good company secretarial practice ensures that any charges created are registered and that the company’s credit profile is protected by removing the charge from the register as soon as the loan is repaid.

Meetings and resolutions

Company law sets out procedures for conducting certain aspects of company business through formal meetings where resolutions will be passed. When resolutions are passed, the company is bound by them (a resolution is an agreement or a decision taken by the members).

Here the company secretarial role would be to ensure that proper notice of meetings is given to those who are entitled to attend, to minute the proceedings and to ensure that copies of resolutions which affect the way the company is run are sent to Companies House within the relevant time frame.

Notice of company meetings

Members and auditors are entitled to notice of company meetings. For a private limited company a general meeting notice of at least 14 days is needed. Notice can be in writing, by email or by means of a website (if certain conditions are met). However, a private company is no longer required to hold an Annual General Meeting (AGM), unless the company’s Articles of Association make express provisions for holding AGMs.

If an existing company with an existing express provision for an AGM wishes to abolish this requirement, it will need to change its articles by special resolution.

Resolutions

There are two types of resolution that may be passed, ordinary resolutions (passed by a simple majority of the members) or special resolutions (passed by a 75% majority of the members). In general, resolutions will be voted on by any members present at a meeting.

Private companies can take most decisions by written resolution. Such a resolution does not require a hard copy and can be passed by email. These resolutions however, need to be passed by a majority of all members of the company, not just by those who return the voting form!

It is important that companies retain copies of all important decisions taken in the management of the company where they are taken at a meeting or by written resolution. Where these decisions change the way a company is run, a copy needs to be filed at Companies House.

Keeping your public record safe

Companies House has recently reported increasing levels of fraudulent filing of information. A favourite ploy is to change the company’s registered office by submitting the appropriate form to Companies House. Once this has been accepted, the fraudsters can change directors or file false accounts without the company having any idea that they have been hijacked! They can then buy goods or obtain credit based on this false information.

Companies House is keen that companies file their information online. This can be a very secure method, particularly if the company signs up for the enhanced security arrangements offered by their PROOF (protected online filing) system, which prevents the paper filing of certain forms.

How we can help

If you would like to discuss any of the issues raised above, or would like further information about the new register of persons of significant control or the implications of keeping your statutory information on the public register, please do contact us. We are able to provide comprehensive assistance with company secretarial matters such as:

  • the maintenance and safekeeping of the company registers
  • the processing and filing of minutes
  • the preparation and filing of resolutions
  • the completion and filing of statutory forms
  • the filing of the annual accounts
  • filing online.

Even though the need to appoint a company secretary for a private company has been abolished, there are a number of statutory procedures that companies must continue to comply with. We, at Certax would be pleased to discuss company secretarial duties with you.

Statutory records

At Certax companies often ask us about their responsibilities regarding statutory records. The following is an overview…

It is essential that you keep your company’s statutory records up-to-date. Do not underestimate the importance of these records – they are definitive proof of the company’s legal existence and its members, and include:

  • Register of members
  • Register of directors
  • Register of directors’ residential addresses
  • Register of mortgages and charges
  • Register of debentures
  • Minutes of board meetings
  • Minutes of general meetings
  • Directors service contracts

Annual returns and accounts

A company’s accounts and annual return must be filed annually with the Registrar of Companies. Non-compliance will render the company liable to dissolution with liabilities subsequent to the dissolution being the responsibility of the directors.

Penalties

The Companies Act 2006 provides for the Registrar of Companies to charge penalties and fines, including:

  • £150-£15,000 penalty for late filing of accounts (the amount depends on the status of the company and the degree of lateness)
  • £5,000 maximum fine for failure to submit accounts
  • £5,000 maximum fine for failure to file the annual return
  • £5,000 maximum fine for failure to notify any changes of officer, etc.

How we can help

As part of our service to client companies, we undertake on receipt of written instructions to keep the company’s statutory records up-to-date and forward the annual confirmation statement and accounts to the company for approval before submitting them to the Registrar of Companies.

If you would like advice about statutory records, Certax can help you.

Audit exemption

Certax can provide advice and assistance to companies on audit regulations, including audit exemption.

Building on the changes introduced in 2012, the UK Government was required to implement the EU Accounting Directive 2013/34/EU into UK law no later than for periods beginning on or after 1 January 2016. The Directive aims to simplify the accounting requirements for small companies and makes a number of other changes to the accounting and reporting requirements for companies. Amongst other things a new standard, FRS 105, deals specifically with micro-entity accounting. Micro-entity requirements are incorporated into the Small Companies and Groups Accounting Regulations.

The relevant Regulations came into force on 6 April 2015, and apply to financial years beginning on or after 1 January 2016. Earlier application for financial years beginning on or after 1 January 2015 is permitted. They do not apply to LLPs and the LLP regulations have not as yet been updated.

One of the main changes in the 2012 rules was to bring the definition of companies not requiring an audit into line with the definition of small companies. The small and medium-sized thresholds for accounting purposes have been increased as follows:

 SmallMedium
 Before: (gross)After: (gross)Before: (gross)After: (gross)
Turnover<£6.5m (<£7.8m)<£10.2m (<£12.2m)<£25.9m (<£31.1m)<£36m (<£43.2m)
Total Assets<£3.26m (<£3.9m)<£5.1m (<£6.1m)<£12.9m (<£15.5m)<£18m (<£21.6m)
No of employees<50<50<250<250

Although the legislative changes enacted on 6 April 2015 will, as things stand, continue to link the audit exemption thresholds with the small company thresholds as shown above, the outcome of the government consultation on audit exemption limits has not yet been announced and it is still possible that the existing limits will be retained, thus severing the link between the audit and accounting thresholds. Responses to the consultation on raising audit thresholds were mixed. Companies which early-adopt revised company law are not permitted to use the raised thresholds for audit exemption purposes for periods beginning before 1 January 2016.

The current year tests were also expanded to include a ‘prior year’ rule. This allowed companies to exceed two or more of the limits in a year and remain small in size so long as they met two of the limits in the previous year and qualified as small in that year.

Not quite all small companies are automatically audit exempt. The Companies Act prohibits various types of company from taking either small company or audit exemptions. These include public companies, authorised insurance companies, banking companies and companies that carry on insurance market activity. There are a few other types of company (trade unions and employers’ associations) which, although they can be small, cannot take audit exemption.

10% or more (by number or value) of a company’s shareholders still have the right to request that an audit is carried out, provided the proper process is followed. A company’s articles of association may prescribe that an audit should be carried out. Other specialist sectors (such as charities) may require an audit under legislation other than the Companies Act.

Small groups

The 2012 rules introduced changes for group companies. Previously, if a group’s aggregated turnover or balance sheet totals exceeded the limits, all member companies had to have an audit regardless of whether they individually qualified as small.

Now, if a group qualifies as small, by meeting two of the following (with a similar prior year rule as for individual companies):

  • Annual turnover not more than £6.5 million net (£7.8 million gross) – these financial thresholds will rise to £10.2 million and £12.2 million respectively for financial years beginning on or after 1 January 2016.
  • Balance sheet total (total assets) not more than £3.26 million net (£3.9 million gross) – these financial thresholds will rise to £5.1 million and £6.1 million respectively for financial years beginning on or after 1 January 2016.
  • Not more than 50 employees

Any subsidiary qualifying as small in its own right may opt for audit exemption.

Gross figures are calculated by the simple addition of the amounts appearing in each company’s accounts. Net figures are those after consolidation adjustments, such as the elimination of intra-group sales and balances. A group may qualify on the basis of either the net or gross figures.

Other groups

In addition to the changes for small companies and groups, subsidiaries of any size, which would previously have required an audit, can be exempt from audit as long as they meet qualifying conditions. These conditions include the requirement for the parent company to produce and file audited group accounts, and for the subsidiary to file a statement of guarantee for each relevant financial year. This statement commits the parent company as follows:

  • The parent undertaking guarantees all outstanding liabilities to which the subsidiary company is subject at the end of the financial year to which the guarantee relates, until they are satisfied in full, and
  • The guarantee is enforceable against the parent undertaking by any person to whom the subsidiary company is liable in respect of those liabilities

Subsidiaries in this category and which are dormant throughout a financial year can opt not to prepare or file accounts, subject to the provision of a similar guarantee.

If you would like further information on any aspect of audit regulations, including audit exemption, contact Certax.

I am text block. Click edit button to change this text. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.

An introduction to corporation tax

At Certax we can advise on all aspects of corporation tax and corporation tax planning. Here is an introduction, but contact us for more advice.

Up until 31 March 2015 there were two rates of corporation tax. From 1 April 2015 the main rate and the small profits rate have been unified and are set at 20%. The rate will reduce to 19% from 1 April 2017 and to 17% from 1 April 2020.

Self assessment

A company has to estimate its own corporation tax liability and pay this by the due date, which is nine months and one day after the end of its accounting period.

A company tax return has to be filed with HM Revenue & Customs within twelve months of the company’s year end.

Interest is charged on late payment of corporation tax, and there are also penalties for late filing of a company tax return.

Tax saving tips

Expenses
Expenditure incurred before the company year end might reduce the current year’s tax liability instead of next year’s. Bringing forward expenditure by even a few weeks on, for example, building repairs, advertising, sales and marketing campaigns, and any other item deductible from profits can accelerate the tax relief by twelve months.
Plant and equipment
Depreciation is not allowed for tax purposes, but capital allowances are available. The maximum amount of the annual investment allowance (AIA), attracting 100% relief, was reduced from £500,000 to a new permanent level of £200,000 with effect from 1 January 2016.
Qualifying expenditure in plant and machinery (not cars) up to the AIA maximum amount attracts 100% relief. Annual expenditure over these amounts enters either the 8% pool or the 18% pool, attracting a writing down allowance at the appropriate rate.
Any business that invests in energy-saving or environmentally beneficial equipment is entitled to claim a 100% first year allowance. Cars with CO2 emissions of up to 75 g/km also qualify for a 100% first year allowance. Cars with CO2 emissions over 130 g/km will enter the 8% pool. All other cars will enter the 18% pool.
There is a 100% capital allowance for the purchase of new, unused (not second-hand) vans, which cannot produce CO2 engine emissions under any circumstances when driven (eg “electric vans”).
Where commercially and financially appropriate, capital expenditure should be brought forward to make the earliest use of the available allowances.
Hire purchase and lease purchase
Hire purchase and lease purchase may provide a useful method of financing the purchase of an asset. Plant and equipment acquired on hire purchase should qualify for capital allowances on the full purchase price, even if the company has paid only the deposit.
Provisions
Specific provisions against bad debts or stock are allowable for tax purposes, but general provisions are not.
Bonuses to directors and staff
A proper provision may be made in the annual accounts for specific bonuses paid up to nine months after the year end. Take care to ensure that these are charged to PAYE and NI as appropriate.
Pension contributions
Contributions to registered pension schemes are normally allowable for tax in the year of payment. Tax relief may need to be spread where contributions in the current period are more than 2.1 times those of the previous period. The excess is the amount of the contribution that exceeds 1.1 times the contributions paid in the previous period. Where the amount of this excess is £500,000 or more the tax relief will be spread over 2 to 4 years.

Capital gains

Capital gains are taxed at the effective rate of corporation tax. Gains are calculated after deducting from the sale proceeds the market value at March 1982 (or cost of acquisition, if later), costs incurred in improving the asset, an indexation allowance (to account for inflation), and certain disposal costs.

Reducing capital gains

Rollover relief
Claim rollover relief if your company buys new chargeable business assets within one year before or three years after selling a business asset. This effectively postpones any tax liability until the new asset is sold. Special rules apply if the new asset is a wasting asset.
Negligible value claim
Claim relief on assets that have become worthless. A loss can be claimed even though the asset has not been sold, and this can then be offset against chargeable gains.
Crystallising capital losses
Assets that have fallen in value since March 1982 (or date of acquisition if later) could be sold, thereby crystallising capital losses to set against other chargeable gains. This is easily achieved if the asset is a quoted share or security.
Deferring capital gains
Capital gains are realised when an unconditional contract for the sale of an asset has been made. In the case of conditional contracts, the sale is regarded as taking place when the condition is satisfied. You can therefore use a conditional contract, or grant an option, to delay the gain until after the year end.

If you are concerned about your corporation tax liabilities or would like to discuss corporation tax planning, contact Certax today.

Corporation tax self assessment

There are a number of procedures for filing your company’s tax return and paying the tax due. We set out the basic elements here but at Certax, we can prepare the necessary returns and advise on the tax payments due for your company.

Key features

The key features are:

  • a company is required to pay the tax due in advance of filing a tax return
  • a ‘process now, check later’ enquiry regime when the tax return is submitted
  • the inclusion in the tax return, and in a single self assessment, of the liabilities of close companies on loans and advances to shareholders and others, and of liabilities under Controlled Foreign Companies legislation
  • the requirement for companies to self assess by reference to transfer pricing legislation.

Practical effect of CTSA for companies

Notice to file

Every year, HMRC issues a notice to file to companies. In most cases, the return must be submitted to HMRC within 12 months of the end of the accounting period.

Filing your company tax return online

Companies must file their corporate return online. Their accounts and computations must also be filed in the correct format – inline eXtensible Business Reporting Language (iXBRL).

Unincorporated organisations and charities that don’t need to prepare accounts under the Companies Act can choose to send their accounts in iXBRL or PDF format. However any computations must be sent in iXBRL format.

Penalties

Penalties apply for late submission of the return of £100 if it is up to three months late and £200 if the return is over three months late. Additional tax geared penalties apply when the return is either six or twelve months late. These penalties are 10% of the outstanding tax due on those dates.

Submission of the return

The return required by a Notice to file contains the company’s self assessment, which is final subject to:

  • taxpayer amendment
  • HMRC correction, or
  • HMRC enquiry.

The company has a right to amend a return (for example changing a claim to capital allowances). The company has 12 months from the statutory filing date to amend the return.

HMRC have nine months from the date the return is filed to correct any ‘obvious’ errors in the return (for example an incorrect calculation). This process should be a fairly rare occurrence. In particular the correction of errors does not involve any judgement as to the accuracy of the figures in the return. This is dealt with under the enquiry regime.

Enquiries

Under CTSA, HMRC check returns and has an explicit right to enquire into the completeness and accuracy of any tax return. This right covers all enquiries, from straightforward requests for further information on individual items through to full reviews of a company’s business including examination of the company’s records.

The main features of the rules for enquiries under CTSA are:

  • HMRC generally have a fixed period, of 12 months from the date the return is filed, in which to commence an enquiry
  • where the company is a member of a group (other than a small group), HMRC can raise an enquiry up to 12 months from the due filing date
  • if no enquiry is started within this time limit, the company’s return becomes final – subject to the possibility of a Revenue ‘discovery’
  • HMRC will give the company formal notice when an enquiry commences
  • HMRC are also required to give formal notice of the completion of an enquiry, and to state their conclusions
  • a company may ask the Commissioners to direct HMRC to close an enquiry if there are no reasonable grounds for continuing it.

Discovery assessments

HMRC have the power to make an assessment (a ‘discovery assessment’) if information comes to light after the end of the enquiry period indicating that the self assessment was inadequate as a result of fraudulent or negligent conduct, or of incomplete disclosure.

Summary of self assessment process

Example

A company prepares accounts for the 12 months ended 31 May 2016 and submits the return by 31 December 2016. Key dates under CTSA are:

01.03.17
Payment of corporation tax
31.05.17
Deadline for filing the return
31.12.17
End of period for HMRC to open enquiry (being 12 months from the date the return was actually filed)

On 31 December 2017 the company tax position is finalised subject to HMRC’s right to make a discovery assessment in some circumstances.

Payment of tax

There is a single, fixed due date for payment of corporation tax, nine months and one day after the end of the accounting period (subject to the Quarterly Instalment Payment regime for large companies).

If the payment is late or is not correct, there will be late payment interest on tax paid late and repayment interest on overpayments of tax. These interest payments are tax deductible/taxable.

Credit interest

If a company pays tax before the due date, it receives credit interest on amounts paid early. Any interest received is chargeable to corporation tax.

Loans to shareholders

If a close company makes a loan to a participator (for example most shareholders in unquoted companies), the company must make a payment to HMRC if the loan is not repaid within nine months of the end of the accounting period. The amount of the tax is 32.5% of the loan for loans made or benefits conferred on or after 6 April 2016. The tax charge is 25% of the loan for loans made prior to 6 April 2016.

This increased rate mirrors the dividend upper rate. The government has noted that this will prevent individuals gaining a tax advantage by taking loans or making other arrangements to extract value from their company rather than remuneration or dividends.

Additional rules for loans to shareholders

Further rules prevent the avoidance of the charge by repaying the loan before the nine month date and then effectively withdrawing the same money shortly afterwards.

A ‘30 day rule’ applies if at least £5,000 is repaid to the company and within 30 days new loans or advances of at least £5,000 are made to the shareholder. The old loan is effectively treated as if it has not been repaid. A further rule stops the tax charge being avoided by waiting 31 days before the company advances further funds to the shareholder. This is a complex area so please do get in touch if this is an issue for you and your company.

This tax is included within the CTSA system and the company must report loans outstanding to participators in the tax return.

How we can help

Do not hesitate to contact us at Certax if you require any further information about Corporation Tax Self Assessment.

 

 

Companies – getting the timing right

By timing payments or receipts carefully around the year end, companies can save money. Certax can advise you….

The timing of certain payments and receipts of income is crucial for tax purposes. By moving a date of payment or receipt by just a few days either side of the company’s year end, you can reduce the tax bill and defer payment until the next tax year.

Do

  • Ensure that charges on income (for example, annuities and royalties) are paid before the year end
  • Ensure that any provisions made are against specific costs, not a general estimate
  • Ensure that any pension contributions are paid before the year end
  • Consider whether any additional remuneration/bonuses should be voted to directors in respect of the current accounting period (these can be paid up to nine months after the year end)
  • Ensure that you value stock and work in progress taking into account any reduction arising as a result of obsolescence
  • Consider the effect of bringing forward any capital expenditure into the current accounting period

Don’t

  • Sell assets such as property or shares that will give rise to a large chargeable gain, until after the company’s year end
  • Forget the effect this will have on your accounts as if you reduce your profits, the bank manager may wonder if that lending was such a good idea after all!
  • Sell assets on which capital allowances have been claimed until after the year end

If you are would like help with timing payments and receipts to reduce the tax bill and save money, contact Certax. 

 

How much dividend can I take?

Certax can advise company directors on paying dividends and how much dividend can be taken.

There is sometimes a general presumption that dividends may be paid out of any cash that happens to be in the bank account at the time. But it’s nothing like so simple as that.

The basic principles are to be found in the Companies Act 2006. In general, a private company can distribute the whole of its accumulated realised profits less its accumulated realised losses. In practice, unrealised losses have to be considered as well. Apart from statutory matters, account must also be taken of any provision of a company’s Memorandum or Articles restricting dividends.

It is a fundamental rule of law that dividends may not be paid out of capital. So, for example, a dividend based on accounts which show available profits would be ultra vires if made after subsequent losses have eliminated those profits. Directors who make an unlawful or imprudent dividend may be held personally liable to account for it to the company.

The Companies Act makes shareholders liable to repay a distribution if, at the time of the distribution, they knew, or had reasonable grounds for believing, it to be illegal.

The message here is that before declaring a dividend, the directors must be as certain as they can be that there are sufficient distributable reserves available, taking into account any corporation tax on profits earned, and losses incurred, since the last annual accounts were prepared

This may necessitate the production of reliable management accounts prepared using the same accounting policies as the annual accounts in order to give a true and fair view of profits, losses, assets and liabilities, share capital and reserves.

We can help in this area and should be pleased to discuss it with you.

If you are a company director and would like advice on paying dividends, contact Certax.

IR35 personal service companies

We summarise what situations are caught by the special rules that apply to some personal service companies and the implications of the rules. At Certax, we can help check whether the regime may apply to your company and advise you what steps to take to help to avoid coming within the regime.

The ‘IR35’ rules are designed to prevent the avoidance of tax and national insurance contributions (NICs) through the use of personal service companies and partnerships.

The rules do not stop individuals selling their services through either their own personal companies or a partnership. However, they do seek to remove any possible tax advantages from doing so.

Summary of approach

Removal of tax advantages

The tax advantages mainly arise by extracting the net taxable profits of the company by way of dividend. This avoids any national insurance contributions (NICs) which would generally have been due if that profit had been extracted by way of remuneration or bonus.

The intention of the rules is to tax most of the income of the company as if it were salary of the person doing the work.

To whom does it apply?

The rules apply if, had the individual sold his/her services directly rather than through a company (or partnership), he/she would have been classed (by HMRC) as employed rather than self-employed.

For example, an individual operating through a personal service company but with only one customer for whom he/she effectively works full-time is likely to be caught by the rules. On the other hand, an individual providing similar services to many customers is far less likely to be affected.

Planning consequences

The main points to consider if you are caught by the legislation are:

  • the broad effect of the legislation will be to charge the income of the company to NICs and income tax, at personal tax rates rather than corporate tax rates
  • there may be little difference to your net income whether you operate as a company or as an individual
  • to the extent you have a choice in the matter, do you want to continue to operate through a company?
  • if the client requires you to continue as a limited company, can you negotiate with the client for increased fees?
  • if you continue as a limited company you need to look at the future company income and expenses to ensure that you will not suffer more taxation than you need to.

The last point is considered in more detail below.

Employment v self-employment

One of the major issues under the rules is to establish whether particular relationships or contracts are caught. This is because the dividing line between employment and self-employment has always been a fine one.

All of the factors will be considered, but overall it is the intention and reality of the relationship that matters.

The table below sets out the factors which are relevant to the decision.

HMRC will consider the following to decide whether a contract is caught under the rules:

Mutuality of obligation
– the customer will offer work and the worker accept it as an ongoing understanding?
Control
– the customer has control over tasks undertaken/hours worked etc?
Equipment
– the customer provides all of the necessary equipment?
Substitution
– the individual can do the job himself or send a substitute?
Financial risk
– the company (or partnership) bears financial risk?
Basis of payment
– the company (or partnership) is paid a fixed sum for a particular job?
Benefits
– the individual is entitled to sick pay, holiday pay, expenses etc?
Intention
– the customer and the worker have agreed there is no intention of an employment relationship?
Personal factors
– the individual works for a number of different customers and the company (or partnership) obtains new work in a business-like way?

Exceptions to the rules

If a company has employees who have 5% or less of the shares in their employer company, the rules will not be applied to the income that those employees generate for the company.

Note however that in establishing whether the 5% test is met, any shares held by ‘associates’ must be included.

How the rules operate

The company operates PAYE & NICs on actual payments of salary to the individual during the year in the normal way.

If, at the end of the tax year – ie 5 April, the individual’s salary from the company, including benefits in kind, amounts to less than the company’s income from all of the contracts to which the rules apply, then the difference (net of allowable expenses) is deemed to have been paid to the individual as salary on 5 April and PAYE/NICs are due.

Allowable expenses:

  • normal employment expenses (eg travel)
  • certain capital allowances
  • employer pension contributions
  • employers’ NICs – both actually paid and due on any deemed salary
  • 5% of the gross income to cover all other expenses.

Where salary is deemed in this way:

  • appropriate deductions are allowed in arriving at corporation tax profits and
  • no further tax/NICs are due if the individual subsequently withdraws the money from the company in a HMRC-approved manner (see below).

Points to consider from the working of the rules

Income and expenses

The income included in the computation of the deemed payment on 5 April includes the actual receipts for the tax year.

The expenses are those incurred by the company between these two dates.

In order to perform the calculations, you need to have accurate information for the company’s income and expenses for this period. You may need to keep separate records of the company expenses which will qualify as ‘employee expenses’.

Timing of corporation tax deduction for deemed payment

A deduction is given for the deemed payment against profits chargeable to corporation tax as if an expense was incurred on 5 April. This means that relief is given sooner where the accounting date is 5 April.

Pension contributions

Payments made by your company into a personal pension plan will reduce the deemed payment. This can be attractive as the employer’s NICs will be saved in addition to PAYE and employee’s NICs.

Other points to consider

Extracting funds from the company

For income earned from contracts which are likely to be caught by the rules, the choices available to extract funds for living expenses include:

  • paying a salary
  • borrowing from the company and repaying the loan out of salary as 5 April approaches
  • paying interim dividends.

The advantage of paying a salary is that the tax payments are spread throughout the year and not left as a large lump sum to pay on 19 April (22 for cleared electronic payment). The disadvantage is fairly obvious!

Borrowing from the company on a temporary basis may mean that no tax is paid when the loan is taken out, but it will result in tax and NICs on the notional interest on the loan. There may also be a need to make a payment to HMRC equal to 25% (32.5% for loans made on or after 6 April 2016) of the loan under the ‘loans to participators’ rules.

The payment of dividends may be the most attractive route. If a deemed payment is treated as made in a tax year, but the company has already paid the same amount to you or another shareholder during the year as a dividend, you will be allowed to make a claim for the tax on the dividend to be relieved to avoid double taxation.

The company must submit a claim identifying the dividends which are to be relieved.

Example of payment of dividend

Mr Arthur owns 100% of the share capital of Arthur Ltd. All the income of the company is caught by the IR35 rules. Accounts are prepared to 5 April 2016. An interim dividend of £20,000 is paid on 30 September 2015. The deemed payment on 5 April 2016 is £80,000.

There is no immediate tax cost of the dividends being paid out either to the company or to the shareholder.

The company will pay tax and NICs on the deemed payment of £80,000 in the normal way ie on 19 April 2016.

The company can make a claim for the £20,000 dividend not to be treated as a dividend for tax purposes in Mr Arthur’s hands.

Getting ready for 5 April

There is a tight deadline for the calculation of the deemed payment and paying HMRC. The key dates are:

  • the deemed payment is treated as if an actual payment had been made by the company on 5 April
  • tax and NICs have to be paid to HMRC by 19 April
  • final RTI submissions showing details of the deemed payment has to be submitted to HMRC by 19 April.
  • Where a provisional payment of tax and National Insurance contributions has been made because it has not been possible to accurately calculate the deemed payment and deductions by 19 April, then any adjustments should be reported via an Earlier Year Update (EYU) submitted electronically to HMRC before the following 31 January. However, interest on overdue tax is chargeable from 19 April if tax and NICs are underpaid on the basis of provisional figures

It is therefore in your interests to have accurate information on the company’s income and expenses on a tax year basis and, in particular, separate records of the amount of the company expenses which will qualify as ‘employee expenses’.

Partnerships

Where individuals sell their services through a partnership, the rules are applied to any income arising which would have been taxed as employment income if the partnership had not existed.

In other words, where a partnership receives payment under an ‘employment contract’:

  • income of the partnership from all such contracts in the year (net of allowable expenses as described above) are deemed to have been paid to the individuals on 5 April as salary from a deemed employment with PAYE/ NICs due accordingly and
  • any amount taxed in this way as if it were employment income is not then taxed as part of the partnership profits.

Partnerships excluded from the rules

Many partnerships are not caught by the rules even if one or more of the partners performs work for a client which may have the qualities of an employment contract.

The rules will only apply to partnerships where:

  • an individual, (either alone or with one or more relatives), is entitled to 60% or more of the profits or
  • all or most of the partnership’s income comes from ‘employment contracts’ with a single customer or
  • any of the partners’ profit share is based on the amount of income from ‘employment contracts’.

Penalties

Where a personal service company or partnership fails to deduct and account for PAYE/NICs due under the rules, the normal penalty provisions apply.

If the company or partnership fails to pay, it will be possible for the tax and NICs due to be collected from the individual as happens in certain circumstances under existing PAYE and NIC legislation.

Intermediaries – travel and subsistence

From 6 April 2016, changes to the rules are introduced to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as a recruitment agency or a personal service company.

No relief will be allowed for home to work travel and subsistence where a worker:

  • personally provides services to another person
  • is employed through an employment intermediary
  • is under (the right of) the supervision, direction or control of any person, in the manner in which they undertake their work.

Employment intermediary will be defined as a person, other than the worker or the client, who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour.

Where a personal service company is also within the scope of the IR35 legislation this measure will only apply to those contracts where a deemed employment payment is made, or would be made if all the individual’s remuneration was not being taken as employment income. In these circumstances the supervision, direction or control test will not be used.

Managed Service Companies (MSCs)

MSCs had attempted to avoid the IR35 rules. The types of MSCs vary but are often referred to as ‘composite companies’ or ‘managed PSCs’. HMRC had encountered increasing difficulty in applying the IR35 rules to MSCs because of the large number of workers involved and the labour-intensive nature of the work. Even when the IR35 rules had been successfully applied, an MSC often escaped payment of outstanding tax and NIC as they have no assets and could be wound up.

The government has introduced legislation which applies to MSCs. The rules:

  • ensure that those working in MSCs pay PAYE and NIC at the same level as other employees
  • alter the travel and subsistence rules for workers of MSCs to ensure they are consistent with those for other employees
  • allow the recovery of outstanding PAYE and NIC from ‘specified persons’, primarily the MSC directors, if the amounts cannot be recovered from the company.

MSCs are required to account for PAYE on all payments received by individuals.

Off-payroll working in the public sector

Changes are being made to the IR35 rules in relation to engagements in the public sector. These changes will:

  • move the decision of whether to apply the IR35 rules from the individual worker’s own service company to the public sector body, agency or third party paying them
  • the public sector engager or agency will be treated as an employer for the purposes of tax and Class 1 NICs (including employer NICs) and the amount paid to the worker’s intermediary will be deemed to be a payment of employment income to that worker
  • the 5% allowance used by the worker’s intermediary for certain business expenses will be removed for those contracts with the public sector.

HMRC will provide a new digital tool to help identify whether engagements fall within the new rules, which will apply to contracts entered into, or payments made, on or after 6 April 2017.

How we can help

We can advise as to the best course of action in your own particular circumstances.

If IR35 Personal Service Companies does apply to you we can help with the necessary record keeping and calculations so please do contact us at Certax.

Persons with significant control

Certax can help businesses to produce a ‘persons with significant control’ (PSC) register. Here, we outline the new requirements for businesses…

Recent changes to company law have imposed new obligations on UK companies, as well as those holding interests in UK companies.

From 6 April 2016, all UK companies that are not already subject to similar requirements must produce a register of ‘persons with significant control’ – or PSC register – containing details of the ultimate beneficial owners of the company.

This information must be filed with Companies House, where it will be held in a public register, with the stated aim of improving the level of transparency of UK companies. The information must be provided to Companies House from 30 June 2016.

What is significant control?

The definition of a person with significant control is any person to whom one or more of the following points applies:

  • the individual either directly or indirectly holds more than 25% of the shares in a company
  • the individual either directly or indirectly holds more than 25% of the voting rights in a company
  • the individual has the right to appoint or remove a majority of a company’s board of directors
  • the individual exercises, or has the right to exercise, significant influence or control over the company
  • the individual exercises, or has the right to exercise, significant influence or control over the activities of a trust or firm which is not a legal entity, and which itself meets one of the above conditions.

Companies with simple ownership structures should find the new requirements relatively straightforward, although for those with more complex arrangements, or where the issue of ownership is unclear, the situation may be more challenging.

Identifying PSCs

Under the new rules, companies are required to take reasonable steps to identify whether a person or legal entity has significant control and to include relevant details relating to them in the PSC register. This means that companies will need to look beyond the individuals who immediately own their shares, to identify those individuals or entities which ultimately have significant control of the company.

Additionally, if an individual knows, or ought reasonably to know that they should be registered as a significant controller, a proactive disclosure obligation will apply to that individual, requiring them to notify the company of their interest.

Failure to comply with the new rules could potentially result in financial penalties and a criminal conviction.

New filing obligations

The changes to company law also include amendments to the filing requirements of companies with Companies House. Under the new ‘check and confirm’ process, which replaces the annual return, companies will supply a confirmation statement affirming whether the information remains up-to-date. Where applicable, companies will be obliged to notify Companies House of any changes at least every 12 months. These obligations remain separate to the existing duty to notify the Registrar of Companies of changes in information, on an ongoing basis. Regulations are also expected to bring LLPs into the PSC regime alongside companies.

This article is for general information only and you are always advised to consult an expert for further advice.

We can help companies to generate their own PSC register – please contact us today.