If so, then many congratulations! If you set it up as a limited company, there are a number of things you need to consider and adhere to; not least the significant legal duties and responsibilities associated with being a company director.
This article provides a brief overview of what you need to know.
Legal duties and responsibilities of company directors
These include, but are not limited to:
- Being familiar with, and following the articles of association created when the company was formed;
- Keeping certain records such as business expenses and minutes of director and shareholder meetings;
- Being responsible for the financial performance of the company;
- Reporting changes;
- Preparation and filing of the company’s financial accounts and tax returns;
- Paying Corporation Tax on the company’s profits.
Registering with HMRC
Once your company has been formed, unless you have declared it as dormant, your company is liable for Corporation Tax from when you start trading. You must register your company for Corporation Tax with HMRC within three months of starting to trade.
Does your trade fall under any tax schemes?
There are many trades/business types that, for instance, fall within the scope of the HMRC’s Construction Industry Scheme (not just construction companies!) and many business owners don’t even realise it, which can lead to a large tax bill and potential penalties.
It’s important early on to find out whether your business may be subject to it, or any other tax collection scheme. Read our blog here which further explores this topic.
There are strict rules on what business expenses can be tax deductible, and all expenses must meet the important ‘wholly and exclusively’ rule (i.e. the business expense must relate wholly and exclusively to the trade being carried out to be allowable).
Judgement needs to be exercised on whether the expense borne by your business is allowable and how this should be correctly classified.
Taking funds out of the company
Unlike sole-traders, there are restrictions on how directors can take funds out of a limited company. Many self-employed people who set their businesses up as limited companies don’t know this.
Directors can generally only take money out of a limited company in the form of dividends. Dividends can only be issued if the company has made a profit and there is also a process to adhere to. If directors take money out of the company by other means, this is defined as a loan which may be subject to additional tax implications.
If directors wish to take a salary from the company, they can do so by paying themselves like a normal employee via PAYE, in which case the company needs to register with HMRC as an employer and set up a process for payroll.
Tax reliefs and allowances
Tax planning is an important part of an accountant’s job as not all business owners are aware of the tax reliefs and allowances that are available to them, and also how to use them efficiently to reduce their overall tax liability. This is an area where accountants come into their own!
Registering for VAT
Any business, limited company, sole-trader or otherwise, must register for, and charge VAT on sales if the business’ VAT taxable income exceeds a certain threshold in a rolling 12-month period (currently £85,000).
Some businesses may benefit from registering for VAT before their income reaches the required threshold; for example, if a high volume of purchases are made where VAT is paid on them, as the VAT element can be claimed back.
Filing of financial accounts and tax returns
It is a legal requirement that limited companies must file specific documents with Companies House each year, including financial accounts (which consists of four separate financial statements) and a Confirmation Statement. The deadline to file financial accounts is nine months following the end of the accounting period.
It isn’t a legal requirement to employ an accountant; however, these financial statements need to be in a prescribed form and are complicated to put together and compute. These documents must also be materially accurate.
In addition to annual financial accounts, companies must also file annual Corporation Tax returns, and, if VAT registered, quarterly VAT returns. Calculating Corporation Tax can be tricky, as there are certain expenses/costs that are not tax deductible and there is also Capital Allowances to consider, which replaces depreciation in the computation.
Should I change my accounting period?
When a business is set up as a limited company, the accounting period is set automatically according to the month the company was incorporated with Companies House.
There are several reasons why it may be beneficial to either extend or bring forward an accounting period, depending on the circumstances of the business. For example, changing the accounting period to end on 31 March to closely align with the start of the tax year on 6 April.
Diligent Accounting can help…
These are just some of the things that need to be considered when running a limited company and if you haven’t given consideration to any of these points as yet then don’t worry; Diligent Accounting can help navigate you through them.
Please don’t hesitate to contact us if you require any help or advice. We would be delighted to provide a free and informal consultation to discuss your requirements. No obligation. No hard sell. Just a warm, personal and dedicated service, whenever you need us.