Help & Advice

Deadlines

Penalties

Companies House

HMRC

Tax Rates

If you use a company, the profits will be liable to Corporation Tax at 19% (marginal rates will apply from 1 April 2023). Companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.

https://www.gov.uk/government/publications/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023/corporation-tax-charge-and-rates-from-1-april-2022-and-small-profits-rate-and-marginal-relief-from-1-april-2023

Taking money from your company.

For shareholders and directors of limited companies the main ways of taking funds from the company are:

• Dividends
• Tax efficient benefits.​
• Loans to directors.
• Salary

Dividends.

Owners of smaller private companies are usually the shareholders and directors. They can then choose how to withdraw funds. Currently dividends are the most tax efficient method.

For 2022/23 the first £2,000 is tax-free. The rates are then:

• 8.75% if part of the basic rate income tax band.
• 33.75% if part of the higher rate income tax band, and
• 39.3 % on the excess.

Tax efficient benefits.

Consider:

• Employer pensions.
• Employer supplied pensions advice.
• Workplace nurseries.
• Cycle to work schemes
• The provision of an ultra-low emission vehicle emitting 75g CO2/km or less.
• Meals in a staff canteen.
• Hot drinks and water at work.
• A mobile phone.
• Workplace parking.
• Christmas parties up to £150 per head.

Financial benefit awards from an employer. Where employees come up with ideas that can make the employer money. The amount that can be claimed is the greater of 50% of the financial benefit in the first year, or 10% of the financial benefit in the first five years. In both cases this is subject to an over-riding cap of £5,000.

• In-house sports facilities.
• Counselling for redundant staff.
• Use of works buses.
• Equipment and facilities for employees to help with their job.
• A long service awards.
• A trivial benefits exemption of up to £50 per benefit. This cannot be cash or a cash voucher. Limited to £300 for directors and connected persons.

Salary.

For directors with no other income and if there is more than one employee and the Employer’s Allowance is available then a salary equal to the Personal Allowance (£12,570 for 2022/23) will be more tax efficient.

Directors’ overdrawn current or loan accounts

If a director borrows money from their company but they must comply with the 2006 Companies Act. A shareholder approval (by ordinary resolution, subject also to the provisions in the articles) is required for loans in excess of £10,000 (£50,000 if the loan is to meet expenditure on company business). Also, the company should agree loan terms and have supporting documents.

Where there is an overdrawn director’s account there is potentially a S455 charge on the company and a taxable benefit on the director in respect interest-free loan.

S455 CTA 2010 – company tax charge

If a director (or any other participator in a close company) leaves a loan account outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010. This is payable at 32.5% of the outstanding loan balance and becomes due 9 months after the end of the accounting period. When the loan is repaid in full or in part s.455 tax is wholly or partly repayable 9 months after the end of the accounting period in which the repayment is made. The Revenue’s online form to reclaim

Taxable benefit on the director

If the overdraft on a director’s account with the company exceeds £10,000 it is treated as a loan. A taxable benefit will arise on the loan when the employee does not pay interest to the employer at HMRC’s official rate of interest. The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid. The taxable benefit of interest calculated is required to be reported on form P11D. This will also be liable to Class 1A NICs

https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates

Write off an overdrawn director’s loan

When a company writes off a loan made to a director the amount is treated as a dividend and as earnings for NICs purposes. In addition, it is an unallowable expense for Corporation Tax purposes.

Consider declaring a dividend to clear the loan as this will avoid the NICs charges.

Drawings For Directors

Beware directors who continue to draw down more money than their salaries or dividends allow.

The real sting is not so immediately obvious, but it will affect those directors who continue to draw down more money from their company each month than the RTI-reported salary, expenses and available declared dividends provide for. Continuing to do this against good tax planning advice is just going to precipitate a higher tax bill when the year-end accounts are prepared.

The company will face a 32.5% surcharge to Corporation Tax for any loans made to a director in the year if the amount has not been fully repaid within nine months of the tax reporting date. The extra tax paid can be reclaimed back from the HMRC when the director’s loan has been repaid, but as it can take over a year to receive the refund, such surcharges can often be a disaster as far as business cash flow is concerned.

The need to consider the tax implications of a director’s loan often only materialises when the year-end accounts are prepared, and it is discovered there is insufficient distributable profits to cover the withdrawals made. To make matters worse, we often find the company cannot afford to pay the extra tax on an overdrawn director’s loan account, nor can they afford to pass the required bonus as a salary after the event and before the expiry of the nine months’ limit to clear it. The only other remaining option available is the director to repay the overdrawn amount back to the company from private funds.

The new and worrying dimension to the director’s loan question will arise where a director has created the loan by regularly making a series of withdrawals each month from the company’s bank account for private expenditure that cannot be supported by the salary and legitimate dividends declared. The Companies Act now allows companies to vote through a loan to a director and a properly convened meeting that is duly minuted and recorded in the company’s records. That is not the same as a situation where the director just uses the company’s bank account as an extension of his own private bank.

HMRC will want to charge tax and NI on private payments.

The issue here is that the HMRC will be fully justified in viewing these private payments as distributions subject to PAYE/NI. There is nothing new in that treatment, but the profession is waiting to see how the HMRC will apply the penalties to what will be false accounting by the employer under the RTI rules if there are grounds the employer should have realised that the salary and dividends, they were presumably voting through were insufficient to cover the actual withdrawals being made.

The point we hope directors of small companies take on board is they can no longer declare monthly dividends on a wing and a prayer to cover the money they withdraw from the company each month. Every dividend declared must be covered by a signed minute approving the dividend with due regard to making sure the company has the distributable reserves to support it. If companies and directors do not take enough care over how they extract their profits from their company, then RTI may just come back and give them one hell of a headache over the next few years.

Expenses for directors

Travel

There is no relief available on the cost of home-to-work travel unless it is to a temporary workplace, or home is a workplace. Directors perform many different duties so whether a home qualifies as a workplace in relation to an individual director will depend on the facts of each case.

When a director has to travel between different sites or appointments etc the cost of travel and incidental costs (subsistence, accommodation and incidental overnight costs) will also qualify for tax relief

The cost of some triangular travel where the journey is from home via a temporary workplace may be allowable.

Car benefit

Where an employer provides a higher paid employee, or a director with a company car, a taxable benefit arises. The amount of the benefit is determined by the cost, CO2 emissions and power supply. The benefit is reduced when a vehicle is not made available for part of the tax year. Pooled cars can be provided tax-free while the charge on low emission vehicles can be very low.A further benefit arises if fuel is supplied for private use. It is unlikely to be tax efficient to supply private fuel.

Car benefit is calculated as a percentage of the manufacturer’s list price of the car plus accessories, based on the carbon dioxide (CO2) emissions of the car as follows:

• Take the list price of the car.
• Add the price of any accessories.

o    Deduct any capital contributions made by the employee toward the cost of the car or accessories. This is the “interim sum”.

• Multiply the interim sum by theappropriate percentage (this is worked out according to the car’s CO2 emissions with adjustments for fuel type).
• Reduce for periods when the car is unavailable or shared
• Deduct payments made* by the employee for private use of the car.

Note

• If the car is a classic car with a market value of more than £15,000 the rules are changed.
• There are special rules for cars that have very low emissions/run on dual/alternative fuels.
• The appropriate percentage changes each year.
• The employer pays Class 1A NICs too, but this along with all the running costs and capital allowances, are tax deductible.

The Revenue’s company car and fuel benefit calculator can be accessed here.

https://www.gov.uk/expenses-and-benefits-electric-company-cars

Buying or leasing

For a cash purchase the company can claim capital allowances based on CO2 emissions. If HP is used a similar deduction is available and the finance costs can be claimed. For an operating lease the rental payments can be claimed subject to a possible restriction depending on CO2. For some qualifying cars 50% of the VAT can be claimed.

Closing a trading company

Capital distributions on winding up.

From 6 April 2016 there are restrictions on treating the final distribution as capital.

• The shareholder must have held at least a 5% interest in the company before the winding up.

• The company has to be a close company.

• In the following two years, the shareholder must not be involved, directly or indirectly, in a similar trade or activity.

• The distribution must not be part of arrangement to avoid tax.

• Where the capital distributed following the striking off exceeds £25,000 it is all treated as income.

•While a formal liquidation is more expensive, all of the distributions are deemed to be capital and potentially qualifies for ER.

Non-trade income.

A company’s trading status is considered by looking at all its activities and circumstances.

Investment businesses, such as property rental businesses are often unlikely to meet HMRC’s conditions. A company or business is not regarded as trading if it has substantial non-trading activities. HMRC will look at income from non-trading activities, asset held and how they are used, expenses incurred by employees and the company’s history.
Where investment or non-trading activities are more than about 20% of all activities then a company is “not wholly” trading. Ex-trading premises and rental income may also cause problems.

Cash Surplus on balance sheet and effect on trading status

Where a company has built up a large cash surplus HMRC believe this to be a non-trading asset. It is necessary to demonstrate that this is required for working capital. Even if the cash is held passively within a bank account HMRC consider this to be a non-trading activity and will seek to deny ER.

Trading company – definition

This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’
Non-trading activities may include investment in property, share portfolios, bonds etc.
Excess cash deposits may point to a non-trading activity. Where cash is being accumulated for future use in the trade then the company will be classed as trading.
HMRC use the phrase ‘substantial extent’ by which they mean more than 20%. They apply the 20% test to:
Turnover – does investment income exceed 20% of total turnover?
Balance sheet – are more than 20% of the assets of the company held as investments?
Expenses – do more than 20% of the expenses relate to non-trading expenses?
Directors’ time – do the directors spent more than 20% of the time managing non trading activities.
Cash held on deposit may not involve much ‘activity’ in managing it and this can also indicate trading.
Where the cash surplus arises from the sale of a trade or business assets prior to liquidation then ER can still be claimed but the distributions must be made within 3 years of the sale of the assets. .

Company losses.

If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.

You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back, if you do not it will be carried forward to another accounting period.

https://www.gov.uk/guidance/corporation-tax-calculating-and-claiming-a-loss

Share structure 

Share capital is the total nominal value of the shares in the company, such that a company with 100 ordinary £1 shares will have a nominal share capital of £100. This is not the same as what the shares are worth, which will depend on the value of the company. The company can issue different types of shares. Normally, a small company will issue ordinary shares and may choose to have different classes of ordinary shares (such as A ordinary shares, B ordinary shares, etc.). This structure, known as an alphabet share structure, is a popular structure, as it allows for different dividends to be declared in respect of different classes of shares, which can be very useful from a tax planning perspective. The company can also choose to give different rights to different classes of shares too. For example, the parents may have full voting rights, whereas children may be given shares with an entitlement to dividends only. However, where shares have restricted rights, this may compromise the availability of business asset disposal relief if the company is sold.

Practical tip Consider what share structure will work best for your family company, what rights you want individual family members to have and what flexibilities you wish to retain. Setting up an alphabet share structure at the outset preserves flexibility. However, when assigning rights and shareholdings, be mindful of the qualifying conditions for business asset disposal relief. The company could also issue preference shares, which have a fixed right to dividends and no voting rights, although these are less common in a simple family company. As well as deciding on the type of shares, the family needs to decide how many shares to issue and to whom. The authorised share capital places a limit on the number of shares that can be issued. The company does not need to issue all the shares that can potentially be issued – the shares that are issued form the issued share capital. The company can decide how many shares to issue, as long as this is within the authorised share capital. In a simple family company where there are only two shareholders, such as a husband and wife or civil partners, the company could simply issue one share each. This approach could be adopted whether they simply have one class of ordinary share or adopt an alphabet share structure. Alternatively, the company could issue 100 shares of each class, as this provides for an element of flexibility in holdings of a particular type of share, and this approach is often adopted by small companies. It should be noted that the shareholders must pay for their shares and, in doing so, introduce capital into the company. The amount of capital that the family wish to introduce will have a bearing on the number, class, and nominal value of the shares that are issued

Selling assets to the new company 

Assets are items or property of an enduring nature that are not consumed within a year and usually cost over £100. They include computer equipment, furniture, tools, vehicles, etc.   

Sell personal assets to the new company at market value. At the outset, the company will probably not have the funds available to pay the sole trader for the assets. However, assuming that the sole trader becomes a director of the company, this can be overcome by creating a debt from the company to the sole trader (in the form of a balance on the director’s account), which can be cleared when the company has the funds to do so. For capital gains tax purposes, the assets will be treated as being disposed of by the sole trader at market value, and this may give rise to a capital gains tax liability. Where the assets are transferred to the new company in exchange for shares, incorporation relief may be available.

Super-deduction   

For expenditure incurred in a limited window, companies are able to benefit from a super-deduction. The super-deduction is available for new qualifying plant and machinery that would otherwise benefit from a writing down allowance at the main rate of 18%. However, cars do not qualify for the superdeduction. Further, the super-deduction is only available for investment in new assets; investment in second-hand assets does not qualify. The super-deduction is given as a first-year allowance at the rate of 130%. This means that where the super-deduction is claimed, the company is able to deduct a first-year capital allowance of £130 for every £100 of qualifying expenditure in calculating the taxable profits for the accounting period in which the expenditure was incurred. This will save corporation tax of £24.70 for every £100 invested in new qualifying assets (19% x £100 x 130%). To qualify for the super-deduction, the company must incur the expenditure on qualifying new plant and machinery between 1 April 2021 and 31 March 2023. A balancing charge may arise on the disposal of an asset that has benefited from the super-deduction. The calculation of the balancing charge will depend on when the disposal takes place.

Payroll

Penalties

What you pay depends on how many employees you have.

The Contract Employment Status Tool (CEST).

HMRC have now produced a “Contract employment status tool” which gives their view on whether an engagement falls within IR35.

HMRC have stated that they will stand by the result you get from this tool provided:

• the information you have given is accurate and,
• the results are not achieved through contrived arrangements, designed to get a particular outcome from the service.
If the information is checked and found to be inaccurate or contrived, they will be treated as deliberate non-compliance, and may attract penalties.

The Employment Status Indicator (ESI).

This is another step in the right direction taken by the HMRC to help taxpayers. According to the HMRC web site, completing the ESI tool will provide an indication of your employment status. Click here to try out the ESI tool.

The answer can be relied upon as evidence to support your position, provided your answers to the ESI questions accurately reflect the terms and conditions (not just the written contract) under which you provide your service and the ESI has been completed by your engager. If you just complete the ESI tool the result is only indicative.

https://www.gov.uk/guidance/check-employment-status-for-tax

Benefit in Kind

The provision of benefits-in-kind can form part of a tax-efficient profit extraction strategy. Providing benefits to employees who are not family members can be useful to generate goodwill, and where an exemption is available can be particularly tax efficient. However, the provision of benefits-in-kind imposes a number of compliance obligations on the family company. Where the benefit is taxable, unless the benefit is living accommodation or an employment-related loan, the employer can opt to deal with the tax on the benefit through the payroll (‘payrolling’). However, this is only an option if the employer signs up to payroll the benefit before the start of the tax year, as HMRC does not accept requests to payroll in the year. Once a benefit has been registered for payrolling, it remains registered unless cancelled by the employer. Again, this must be done before the start of the tax year for which the cancellation is to have effect. Employees must be given details of their payrolled benefits for a tax year no later than 31 May following the end of the tax year.   

If taxable benefits are provided to employees and these are not payrolled (or included within a PAYE Settlement Agreement), the employer must report the taxable benefits provided to each employee to HMRC on form P11D by 6 July following the end of the tax year for which the benefits were provided (so, by 6 July 2022 for taxable benefits provided in the 2021/22 tax year). The employee must be given details of the benefits returned on their P11D or a copy of their P11D by the same date. A Class 1A National Insurance liability arises in respect of most taxable benefits provided to employees, which are not dealt with by means of a PAYE Settlement Agreement. The Class 1A liability is an employer-only liability payable at the Class 1A rate of 13.8%. Employers who have provided taxable benefits to employees must file a P11D(b) by 6 July after the end of the tax year. This is the employer’s declaration that all required P11Ds have been filed and also the statutory Class 1A National Insurance return. A P11D(b) is required even if there are no P11Ds to submit because all taxable benefits have been payrolled.  

The general rule is that benefits are valued based on the cost to the employer. There are also specific rules for certain types of expenses.

https://www.gov.uk/guidance/payrolling-tax-employees-benefits-and-expenses-through-your-payroll

Cars –The benefit  on company cars is dependent CO2 emissions and the list price. Where private fuel is paid for there is a fuel benefit. If the employee’s own car is used for employment purposes (not commuting) then they can be reimbursed at the Revenue’s suggested rates.

Where the reimbursement is greater than these rates a benefit will arise. If less then the employee can claim the difference as an expense.

https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances

Trivial Benefits – Where benefits meet the definition of ‘trivial’ they can be excluded from the P11D, however, there is an annual cap of £300 on this exemption for directors their family and their household.

To be trivial the benefit must cost less than £50 to provide, it cannot be cash or a cash voucher, this does not include store gift cards.

https://www.gov.uk/expenses-and-benefits-trivial-benefits

Staff Parties– There is an exemption for staff events that do not exceed a total of £150 per year.

https://www.gov.uk/expenses-benefits-social-functions-parties

Construction Industry Scheme (CIS)            

Under CIS contractors deduct money from a subcontractor’s pay and pass it to HMRC. A contractor must complete a monthly CIS certificates (even when it is a nil return). Failure to submit the certificate by the monthly deadline can result in a £100 fine.              

Contractor –A contractor is a business or other concern that pays subcontractors for construction work. 

Contractors may be construction companies and building firms, but may also be government departments, local authorities and many other businesses that are normally known in the industry as ‘clients’.     

Some businesses or other concerns are counted as contractors if their average annual expenditure on construction operations over a period of 3 years is £1 million or more.  

Private householders aren’t counted as contractors so aren’t covered by the scheme.             

When you’re about to take on and pay your first subcontractor, regardless of whether that subcontractor is likely to be paid gross or under deduction.

Subcontractor – A subcontractor is a business that carries out construction work for a contractor.           

Subcontractors can apply to be paid gross – with no tax deductions taken from their payments. To do this, subcontractors will need to show us that they meet certain qualifying conditions.        

A subcontractor must complete a tax return including the CIS which has been deducted from them that tax year to reclaim it.