Monday 30 June 2014

How to close/shut down a limited company?

Do you run a Limited Company? There may be a time when you no longer want to run as a limited company. You might be to getting into other ventures, getting back as a full-time employee, or many other reasons. Whatever reasons, it is important to close your limited company.

The two main ways of ending a company in the UK depend on whether there is sufficient money in the company for it to be able to pay all of its debts. Shortly after it stops trading, these may include:
  • Corporation tax for the final period
  • VAT for the final period
  • Outstanding PAYE and National Insurance on payrolls
  • Final accountancy fees
  • Any remaining amounts owed to trade suppliers
  • Bank loans or overdrafts
  • HP or lease agreements, or any other ongoing commitments
  • Money owed to directors or shareholders.
If the company cannot pay its debts, it will ultimately enter into one of the different types of insolvency proceedings. This usually involves an insolvency practitioner either taking over the company in order to keep it running while its finances can be restructured, or selling off the company assets in an attempt to raise money to pay the creditors. The conduct of the directors may also be investigated. More information is available on the Insolvency Service website.

Assuming that the company is not troubled by any such debt issues, there is a simplified way of closing it down. In a typical case, the steps would be as follows:

The company should carry on no further business, and undertake no further transactions, except those which are necessary to wind it up.

Anyone that the company owes money to should be paid, otherwise they may object to the company being dissolved in this way. The company bank account should not be emptied or closed until all company debts have been paid. Any loans to or from any company directors or shareholders should be repaid.

If any vehicles or equipment have been bought on any form of hire purchase, leasing or finance agreement, then the finance company should be contacted to establish the options for ending the agreement early.

The company will apply to HM Revenue & Customs to have its VAT registration cancelled, using form ‘VAT 7′. A final VAT return will need to be completed, and there may be a VAT payment due.

A final payroll will be run for all of the staff. They will be issued with P45s. At some stage the company will need to make a final P35 return of payroll information to HM Revenue & Customs.

Any of the directors and the company secretary may wish to resign, though at least one director should remain in place to deal with the closure. Remaining as an unpaid director of the company should not affect their own personal taxes in any way.
Close/Shut down a limited company


 A final set of accounts will need to be prepared, and submitted to HMRC. They should be informed that the company has stopped trading and has no further taxable income, so that they do not object to the company being closed down.

It is not usually practical to prepare the final set of accounts immediately after the company has stopped trading, as there may be some final expenses in the following weeks or months that may need to be included.

Any corporation tax should be paid from the company bank account. The company generally has 9 months from the close of business to pay this tax, but the company cannot be closed down until it is paid.

It should be clear by now that it is rarely possible to have the process fully wrapped up within a few weeks of making the decision to close down the company. It is normal to leave the company almost dormant over a period of months, while all the formalities are dealt with.

Any money or equipment left in the company after all these expenses have been met should be paid out to the shareholders in proportion to their shareholdings, unless there are alternative provisions in the articles of association. The company should consider making an application to use the Revenue’s Extra Statutory Concession C16, which treats all such final payments as capital gains instead of dividends, as this may result in less tax being due.

Once 3 months have passed since the business closed, the directors will be able to make an application to Companies House under Section 652a of the Companies Act to have the company struck off. Companies House make a charge of £10 for this, and the 652a application form can be downloaded from their website.

As an alternative to the company being fully closed down, it can remain ‘dormant’ on the register. Leaving the company dormant typically costs less than £100 per year, and it means that it can be used again, for any other purpose, without any delay or set-up cost. It also serves to reserve the company name for future use, and an older company has slightly more financial credibility than one that has just been incorporated. If the company is not going to be used for at least 3 years, then it is usually more cost effective to close it down, and then incorporate another company if one is needed.

APJ Accountancy -  a team of Chartered Certified Accountant regulated and monitored by The Association of Chartered Certified Accountants (ACCA).
www.apjaccountancy.com

Friday 27 June 2014

What should I do if my contract is caught within IR 35?

Accounting Tips for Contractors:


We often get asked about the best way to extract money from a limited company if contract is caught by IR 35.

First and foremost, the only way to be sure whether your contract falls inside or outside IR35 is to have it review by professional accountant firm who are specialised in Contractor Accountancy services.
Note : At APJ Accountancy, we offer this free within our standard package service

And by the way, it works on a contract by contract basis. So, for one contract you may fall under IR35 but for some others you may be outside.

Be aware that every contractors need to be evaluated on their own merits and every contract can be different.

If you aren't sure, you can take the 10 minute Contractor IR35 Test to see if you are likely to be working under IR35 from HMRC website yourself. Click this link to know more information that you need to know about IR35 -  http://www.hmrc.gov.uk/ir35/guidance.pdf

What is the best method to pay yourself?


How to Pay Yourself inside and outside IR35?

Going back to your question the best method to pay yourself, in simple terms

  • For Income from all contracts that fall outside scope of IR 35 – you can pay yourself combination of small salary and big dividend to maximise your tax savings.
  • For income related to contracts that fall inside scope of IR 35 – You may need to pay some additional PAYE and National Insurance on the taxable income from these contracts at the end of the financial year.

So your company will continue you pay you as usual throughout the year deducting PAYE and NICs as applicable.

At the end of the tax year you will need to check you have paid the right amount of tax and NI by calculating the deemed employment payment due on the IR35 contract(s) undertaken.

If you don’t know much about deemed payment then a step-by-step guide for and related NICs can be found on the HMRC website.

HMRC also have a IR35 ‘deemed salary’ calculation spreadsheet which can be downloaded. Click link to download the spreadsheet. www.hmrc.gov.uk/ir35/ir35.xlt 

Alternatively, contact us to discuss how we can be of help in calculating your IR35 contract(s) ‘deemed salary’ and NIC liabilities.

Visit www.apjaccountancy.com/contractor-accountant.html for more information.

Are you a contractor working under IR35 ? Let us know how you do the salary payment. Feel free to post your thoughts as comments below and share it with your friends.

Sunday 22 June 2014

What expenses can you claim for in your limited company?

The main rule is “an allowable expense should be wholly, exclusively and necessarily incurred in the performance of your day to day business.” Any direct expense incurred running your business should be claimed, there are some expenses that you might think meet the criteria but are unfortunately not allowable, such as entertainment and professional attire.

However, if you are operating as a limited company you can pay for these expenses through the business, but you won’t be able to claim relief against corporation tax. Be careful that you do not trigger a benefit in kind from the company if you are claiming chargeable items.

We have briefly detailed below common expenses that most business suffer:
Limited Company Expenses

Wages/ Directors Remuneration


It is tax efficient to pay yourself, as a director, a salary to utilise your personal allowance.  You could also consider paying your partner a salary, only if they work in the business and have some personal allowance available.  Current rates can be found on HMRC’s website http://www.hmrc.gov.uk/rates/it.htm.

Naturally staffing costs are an expense to your business, along with the employers national insurance contributions.


Pension Contributions


Pensions are a good tax planning tool, they help you extract funds from your company and are also an allowable expense for corporation tax, only if you have an employer’s contribution scheme.


Telephone, Mobile and Broadband


If you use these for your business then you should claim the expense. Ideally the expense should be paid directly by the company , remember if the expense is paid personally and not wholly for the business, then only the business element should be claimed. If you claim the whole amount you would trigger a benefit in kind if there is personal use.


Hotels and accommodation


If you are travelling around the country/globe visiting clients then the cost of your hotels are an expense to your business. If you are travelling for business and pleasure, the pleasure amount must be incidental to the trip for it to be an allowable expense.

If you are working abroad for a long period of time there are circumstances when you can claim the costs of your partner coming out to visit you.

Depending on the circumstances you can claim a flat rate (without a receipt) of between £5 and £20 per night, depending on where in the world you have travelled to for work, as incidental expenses to cover food etc. However, with the rising costs of food you might be better off claiming the actual costs rather than the flat rate allowance.


Living accommodation


If you (a director), or one of your employees stays away from home during the week, because your client is based too far away to travel each day, then the hotel cost is also allowable. However, if for convenience you stay there for the weekend, you should only claim the expense for when you are there working.

You can also, if it is cheaper, rent a property rather than paying hotel charges. Again, if you are staying there 7 nights, but only working 5 days, then the 2 days should not be claimed as a business expense. Also, if you are renting for more than two years then the area you are staying in is then deemed your home and becomes a non-allowable expense.


Mileage Claim


It is normally more tax effective to claim mileage rather than buying a car through the company, mainly due to fuel rate charges and benefit in kind issues. You can claim 45p per mile for the first 10,000 miles and 25p thereafter. Remember you need to keep a mileage log showing all of your business miles.

The 2 year rule also applies here, if you travel to the same clients address, more than circa 60% of your time, then after 2 years HMRC deem this as commuting and is a disallowable expense.


Motorbikes and cycle bikes


As with a car you can also claim mileage for a motor bike, which is 24p per mile and 20p per mile for a cycle bike. Don’t forget to log your miles, even cycling to the bank for business is allowable.


Other travel expenses


Train, bus and taxis are all allowable expenses if you use these to visit clients, or for other business trips such as seeing your accountant or bank manager. Car hire and parking changes can be also claimed.
If an employee receives a parking ticket whilst working, then this fine can be paid by the company and claimed as a tax deductible expense. Note that parking tickets are only an allowable expense for employees, not a sole trader.


Subsistence


Although we all have to eat, there are a few circumstances where you can claim your daily meal as an expense in the UK.  If you are staying away from your home overnight then a reasonable evening meal is allowable also you can claim if your business journey is outside your normal pattern of work such as leaving before 7am. Alternatively, you can claim a flat rate of £5 per night depending on your circumstances and reasons for working away.


Accountancy fees


Of course our fees are a tax deductible expense, but only the business element. If your personal tax return is included then a benefit in kind is triggered unless an adjustment is made in your director’s loan account when the annual accounts are prepared.


Entertainment


NOT ALLOWABLE, but remember that if you are entertaining clients you can claim the expense back but the company cannot claim the tax relief. This is a useful tax planning tool if you personally are a higher rate tax payer.

Don’t forget that the company is allowed to spend £150 per employee, per year, for a festive party. If the cost is more than £150 then the whole amount becomes disallowable. If the party is going to cost more than £150, it is recommended that the directors pay the difference personally so that the £150 is still available as an expense.


Training and development


The rule here is that you can claim for maintaining/enhancing your skills required in the business but not the acquisition of new skills. For example an IT contractor going on a computer course is allowable, but learning to become an aeroplane pilot would not be allowable.


Advertising


If you are advertising and marketing your business these expenses are allowable. Examples would include yellow pages and Google ad words. Don’t forget to claim any costs involved in social media and networking.


Companies House fees


Paying your annual filing fee is an allowable expense.  Some accountants include this fee in their fixed priced
accountancy packages.


Bank Charges and loan interest


If you are charged bank fees, then these can be claimed, along with the interest charged on borrowings in the company name, including loans and overdraft facilities. Factoring charges are allowable and any bank management fees or arrangement fees can be claimed.


Professional Subscriptions


If you are a member of a professional body, which relates to the trade, your annual subscription is allowable, along with any continuing professional development to maintain the membership.


Reference books and Journals


If you need reference books or journals to support your trade or part of your training, then you should pay for and claim these in the company.


Eyesight tests


This is a tax deductible expense for limited companies.  You can claim for the eye test and normally the lenses, but not the frames.


Office stationery and postage


All your paper clips, pens and paper can be claimed, not forgetting the huge cost of postage. Luckily emails are free! Couriers can be claimed, along with other sundry office costs such as cleaning, loo roll and tea and coffee supplies.


Computer Equipment


As computers rarely last more than 2 years, any PC’s, laptops and ipads used for business can be claimed. Currently you can use your annual investment allowance to claim the whole expense in the year of purchase.

Computer software, depending on its life span, can be either claimed as an expense or capitalised and included in the annual investment allowance claim. However, as software is normally upgraded yearly these items can normally be expensed.


Use of home as an office


If you maintain an office/storage facility at home, then HMRC allows you to claim £3 per week without any proof of expenses. Alternatively you can calculate a percentage and time in use, this proportion of the total household expenses can be claimed. For example if you use a spare room and you have a 3 bedroom house plus a lounge and kitchen, you can claim 20% of your household bills to include, mortgage interest, buildings insurance, gas, electricity, council tax and any other expense incurred in running your home. However when claiming use of home as an office, if this proportion of the home is permanently used as an office then it is not eligible for principle private residence relief and subject to capital gains tax if you sell your property and make a gain.


Office furniture and any machinery


Your office chair, desk and cupboards can be expensed in the same way as computer equipment, the same is true of any machinery used in the production of goods.


Legal and professional fees


If you require the help of a solicitor and if their service is related to the trade of the business then the expense is allowable. If it relates to capital items, then the costs need to be capitalised along with the capital expenditure. If you are paying for legal work to raise capital or drawing up shareholder agreements, then these costs are also disallowable.

Professional fees such as business coaches/consultants etc are also allowable.


Repairs and renewals


General maintenance of your property is allowable, such as light bulbs, fixing broken equipment etc. However improvements/renovations should be capitalised and added to the base cost of the property.


Leasing of equipment


Lease or buy is sometimes a difficult decision, leasing is an allowable expense for corporation tax and is very useful for cash flow. If you have used your annual investment allowance for the year it will take you some years to benefit from the capital investment of new equipment, thereby leasing an asset gives you tax relief sooner.


Clothing


Business clothing is not allowable, as there is the possibility of dual purpose, without boring you with case law about a lawyer not being able to claim their black robes, the only clothing that is allowable is protective clothing, such as steel toe cap boots and high visibility jackets.


Insurances


All of you insurance products are allowable expenses, such as professional indemnity and public liability insurance. You can also claim key man insurance and certain types of life insurances. The general rule is if the pay out of a claim is taxable then then premium will be tax deductible.


Business gifts


Food and drink are not allowable, however a gift of under £50, with your corporate branding on, can be claimed. A nice corporate umbrella or pen will be fine.


Company Formation fees


The initial cost of forming a company can be paid by the business, or reimbursed to the director, but this expense is not allowable for corporation tax.


Franchise Fees


If you are purchasing a franchise fee over a period of time, then you need to check whether the initial fee can be claimed in the first year or amortised over its useful life, i.e. the franchise period.


Goodwill


Purchased goodwill can be amortised over its useful life and is normally a tax deductible expense, however there are situations where this is not possible, normally when there is a related party individual. You can also claim the goodwill created on incorporating your sole trader business or partnership into a limited company. Please contact us for more details on how this would work. This is only possible for trades started after April 2004.

This list is intended only as a guide for individuals running a limited company. The list of expenses is not exhaustive as each company will different circumstances, so we recommend you seek professional advise to compliment this. If you have any questions on whether you can claim a specific expense, please contact one of our accountants

If you have more questions on Small Business Accounting, Contract Tax planning or more, feel free to contact us

Saturday 21 September 2013

Contractor tax: Limited Company and Personal Taxes Explained


If you are contracting via own Limited Company the amount of tax you will pay as a contractor will arise in two different ways.

1)     Which you pay through your company and

2)     That which you pay personally.

The total amount of tax which you will pay will be determined by the IR35 status of your contract.

If your contract falls within IR 35 you will inevitably suffer higher tax. This can be significantly detrimental and so you should try to remain outside this if you can.

Let us explain each of the two categories of tax in more detail.

1)    Taxes Paid Through Your Limited company

There are 3 different kinds of tax which you will pay through Limited company

The first one is Corporation Tax  

This is effectively paid on net profit of your company affairs.

All limited companies are subject to Corporation Tax at rates varying between 0% and 30%.

Most contracting companies will pay at the small company’s rate of 20%.

If your contract is not caught by IR35, then you will most likely take the traditional route of low salary combined with high dividends.

Since dividends can only be paid from company profits, you will need to pay corporation tax at 20% of your net company profit. Corporation Tax is payable 9 months after your year end.

 

Second is the employer's National Insurance Contributions

This is a company cost based on the amount of your gross salary charged at the rate of 13.8%.

If your contract is caught by IR35, then your salary will be substantially higher as result and consequently the amount of Employer’s National Insurance will be based on the IR35 salary.

If your contract is not caught by IR35, then best advice would be to take a very low salary, potentially avoiding Employer’s National Insurance contributions altogether. No National Insurance contributions are chargeable on company dividends. Employer's National Insurance is paid monthly.



Third one is VAT (Value Added Tax)

If your company is registered for VAT (which the vast majority of contracting companies are), then you will need to charge VAT on your invoices to agencies/clients at the standard rate of 20%.

This money is collected by the company on behalf of HMRC and must be accounted to them on a quarterly basis. You will be able to make claims for input VAT (on your company purchases) by deduction when you make the payment to HMRC. Most contractors register for the VAT Flat Rate Scheme which is a means of obtaining a VAT rebate without the need to account for the input VAT on all purchases. It often means an overall VAT saving to the business which is even higher in the first year when HMRC allow a 1% greater saving. VAT does not affect the profits of a company except where there is a VAT ‘profit’ from the flat rate scheme.

 

2)    Taxes Paid Personally

There are 3 different kinds of tax which you will pay personally to HMRC

First one is the Income Tax

If you are working in an IR35 caught contract, then you will pay tax on deemed salary.

Our post on what should I do if my contract is caught within IR 35 explains further.


If you are not caught by IR35, then only a very small amount of your Income Tax liability will be deducted through PAYE (on the low salary). On IR35 exempt contracts, you will receive dividends, on which there will be tax credits covering your basic rate tax liability. If your taxable income is less than the higher rate threshold, then you will not have any further income tax liability.

Income Tax is paid monthly under PAYE or twice a year in January and July if there is additional Income Tax to pay under self-assessment.



Second is the employee's National Insurance Contribution

If your contract is caught by IR35, then you will suffer Employee’s National Insurance contributions on your salary. These are currently 12% up to £797 per week and 2% thereafter on all earning above this limit.

If your contract is not caught by IR35, then you will pay very little, if any, Employee’s National Insurance contributions, since the bulk of your income will be taken by dividends, which do not attract National Insurance contributions of any kind.

Employee's National Insurance Contributions are paid monthly.



And finally the Capital Gains Tax

You may be subject to Capital Gains Tax when you close your company and make a capital distribution to yourself as shareholder. This can be advantageous and is worth asking your accountant about in advance of the business ceasing to trade. In addition, Entrepreneurs Relief can reduce the amount of any final tax liability on cessation of trade.

I hope this helps. All the best

APJ Accountancy

Tax Tips For Contractors – What should I do if my contract is caught within IR 35?


We often get asked about the best way to extract money from a limited company if contract is caught by IR 35.

First and foremost the only way to be sure whether your contract falls inside or outside IR35 is to have it review by professional accountant firm who are specialised in Contractor Accountancy services. (Note - @ APJ Accountancy we offer this free within our standard package service)

And by the way, It works on a contract by contract basis. So for one contract you may fall under IR35 but for some other’s you may be outside.

Be aware that every contract needs to be evaluated on its own merits and every contract can be different.

If you aren’t sure you can take the 10 minute Contractor IR35 Test to see if you are likely to be working under IR35 from HMRC website yourself.

Going back to the question about what is the best method to pay your self. In simple terms

For Income from all contracts that fall outside scope of IR 35 – you can pay yourself combination of small salary and big dividend to maximise your tax savings.

For income related to contracts that fall inside scope of IR 35 –

You may need to pay some additional PAYE and National Insurance on the taxable income from these contracts at the end of the financial year.

So your company will continue you pay you as usual throughout the year deducting PAYE and NICs as applicable.

At the end of the tax year you will need to check that you have paid the right amount of tax and NI by calculating the deemed employment payment due on the IR35 contract(s) undertaken.

If you don’t know much about deemed payment then a step-by-step guide for how to calculate ‘deemed salary’ and related NICs can be found on the HMRC website.

HMRC also have a IR35 ‘deemed salary’ calculation spreadsheet which can be downloaded.

Paste www.hmrc.gov.uk/ir35/ir35.xlt into your browser to download the spreadsheet.

Alternatively, contact us to discuss how we can be of help in calculating your IR35 contract(s) ‘deemed salary’ and NIC liabilities.


Finally if you are wondering if I need to pay myself the deemed salary? Or Can I only take dividends, do they count? Then answer is:

You don’t need to actually pay yourself the salary, although it is a deductible expense for Corporation Tax purposes so it works out well when you have combination of contracts falling inside and some falling outside IR 35.

If you had paid yourself the salary during the year of the IR35 contract then the ‘deemed salary’ would have been less. You can’t retrospectively pay yourself the salary without incurring more tax.

You can, however, pay dividends and offset the ‘deemed salary’ against these. This claim will reduce the amount of reportable dividends for tax purposes.

I hope this helps. All the best

APJ Accountancy
www.apjaccountancy.com