We highlight here the key VAT areas you need to consider when running your business. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations.
The VAT registered businesses act as unpaid tax collectors. They are required to account both accurately and promptly for all the tax revenue collected by them.
The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.
Below we cover some of the areas that you need to consider.
However, it is important for you to seek professional advice appropriate to your circumstances.
APPENDIX: Table of sectors and rates in Flat Rate VAT Scheme
|Trade Sector||Appropriate %|
|Accountancy or book-keeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services that are not listed elsewhere||12|
|Catering services including restaurants and takeaways||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Dealing in waste or scrap||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture that is not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services*||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation||10.5|
|Investigation or security||12|
|Labour-only building or construction services*||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing that is not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionary, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing that is not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Wholesaling agricultural products||8|
|Wholesaling that is not listed elsewhere||8.5|
The only way to establish whether your business will benefit from this scheme is to carry out a calculation and comparison of the normal rules and the flat rate rules.
If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas we can advise as to whether the VAT flat rate scheme would be beneficial for your business and help you to operate the scheme. Please do not hesitate to contact us at Adiva Accountants in Lewisham.
In the flat rate scheme, you must keep a record of your flat rate calculation showing:
- your flat rate turnover
- the flat rate percentage you have used
- the tax calculated as due
You must still keep a VAT account. There will only be one entry for each period, if the only VAT to be accounted for is that calculated under the scheme.
The VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. The turnover will include any exempt supplies, so it will not be beneficial to join the scheme where there are significant exempt supplies.
The percentage rates are determined according to the trade sector of your business and range from 4% up to 14.5%. In the first year of VAT registration, a further 1% reduction applies off the normal rates for businesses. If your business falls into more than one sector, you should use the percentage of the main business activity as measured by turnover. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary. If the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.
Despite that you pay VAT at the flat rate percentage under the scheme, you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate VAT rate.
If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise on whether the VAT Flat Rate scheme would be suitable for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.
Capital assets treatment
Capital goods are excluded from the flat rate scheme. If you purchase capital assets costing more than £2,000 (including VAT), you can claim input VAT on such items on your VAT return in the normal way. You must then account for VAT on a subsequent sale of the asset at the normal rate, instead of the flat rate.
European Community transactions
Income from sales of goods is included in your turnover figure. Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way. Even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above.
The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.
The scheme cannot be used if, within the previous 12 months, you have:
- ceased to operate the flat rate scheme
- been convicted of an offence connected with VAT
- been assessed with a penalty for conduct involving dishonesty
The flat rate scheme cannot be used if you:
- use the second hand margin scheme or auctioneers’ scheme
- use the tour operators’ margin scheme
- are required to operate the capital goods scheme for certain items
The scheme is open to all businesses that have VAT turnover of £150,000 or less (excluding VAT). A business must leave the scheme when income in the last twelve months exceeds £230,000. Unless this is due to a one off transaction and income will fall below £191,500 in the following year. If there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days, then the business must also leave the scheme. The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way. But if you have been registered for VAT for at least a year, it would usually be based on the previous 12 months.
You can join the scheme by applying by post, or online (when you register for VAT). HMRC will inform you that your application has been accepted and of the date of commencement. Only after that you can operate the flat rate scheme.
The scheme will clearly be inappropriate if you regularly receive VAT repayments.
Here we explain how the VAT Flat Rate Scheme operates. The VAT flat rate scheme is designed to reduce the administrative burden of operating VAT for small businesses. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you as to whether the flat rate scheme is appropriate to you.
In this VAT scheme a set percentage is applied to the total turnover of the business as a one-off calculation. This is used instead of having to identify and record the VAT on each sale and purchase you make.
If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise on whether the VAT cash accounting scheme would be suitable for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.
Output tax must be accounted for when payment is received.
They are treated as received on the date the cheque is received or if later the date on the cheque. If the cheque is not honoured an adjustment can be made.
They are treated as received/paid on the date of the sales voucher.
Standing order/direct debits
They are treated as received/paid on the day the bank account is credited.
VAT must be accounted for on all receipts/payments even where they are part payments. Part payments are allocated to invoices in date order (earliest first) and any part payment of an invoice allocated to VAT by making a fair and reasonable apportionment.
In the cash accounting scheme the prime record will be a cash book summarising all payments made and received with a separate column for VAT. The payments need to be clearly cross-referenced to the appropriate purchase/sales invoice. Additionally, the normal requirements regarding copies of VAT invoices and evidence of input tax apply.
A business can join the scheme if it expects that taxable turnover in the next 12 months will not exceed £1,350,000. Additionally, it has to fulfil the following:
- is up to date with VAT returns
- has paid over all VAT due or agreed a basis for settling any outstanding amount in instalments
- has not been convicted of any VAT offences in the previous year
All standard and zero-rated supplies count towards the £1,350,000 limit. Exception are the anticipated sales of capital assets previously used within the business. Exempt supplies are not included.
When a business joins the cash accounting scheme, it must take care not to account again for VAT on any amounts already dealt with previously on the basis of invoices issued and received.
A business can start using the scheme without informing HMRC. The scheme does not cover:
- goods bought or sold under lease or hire-purchase agreements
- goods bought or sold under credit sale or conditional sale agreements
- supplies invoiced where full payment is not due within six months
- supplies invoiced in advance of delivering the goods or performing the services
When the annual turnover reaches £1,600,000, the business must leave the scheme immediately. After leaving the scheme, VAT is due on all supplies on which it has not already been accounted for. However, for a further six months after leaving the scheme, the outstanding VAT can be accounted for on a cash basis.
Here we cover the workings of cash accounting for VAT. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you on the annual accounting scheme.
The cash accounting scheme allows a business to account for and pay VAT on the basis of cash received and paid. This is used rather than on the basis of invoices issued and received.
The main advantages of the scheme are as follows:
- Output tax is not due until the business receives payment of its sales invoices. If most of customers pay promptly, the advantage will be limited.
- There is automatic bad debt relief for VAT as if no payment is received, no output tax is due.
- Most small businesses find it easier to work in terms of cash flows in and out of their business, rather than the invoiced amounts.
The potential disadvantages are as follows:
- There is no input tax recovery until the payment of suppliers’ invoices.
- The scheme will not be beneficial for net repayment businesses. If a business has just started up, it usually has substantial initial expenditure on equipment, stocks etc. So, if the input tax exceeds the output tax, you should delay starting to use the scheme. This way, the business recovers the initial input tax on the basis of input invoices as opposed to payments.
If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham can help you to plan your VAT administration and consider whether the annual accounting scheme would be beneficial for your business. Please do not hesitate to contact us at Adiva Accountants in Lewisham for further advice.
Any business can leave the scheme voluntarily at any time by writing to HMRC. However, once its annual taxable turnover exceeds £1,600,000, a business can no longer be in the annual scheme.
- A reduction from four to one in the number of VAT returns needed each year.
- Cash flow can be managed more easily, as the liability to be paid each month is known and certain.
- There is an extra three weeks to complete the VAT return and pay any outstanding VAT.
- It should help to simplify calculations where the business uses a retail scheme or is partially exempt.
It is possible for interim payments to be higher than needed, because they are based on the previous year. However, they can be adjusted if the difference is significant. A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.
If the business expects that the taxable supplies in the next 12 months will not exceed £1,350,000, they can apply to join the scheme. In order to join the businesses must be up to date with their VAT returns and cannot register as a group of companies. Application to join the scheme must be made on form 600(AA) which can be found on the GOV.UK website or via a link in the VAT Notice 732. HMRC will advise the business in writing if the application is accepted.
The VAT payments
Businesses that have been VAT registered for 12 months or more will pay their VAT in nine monthly instalments. Each instalment will be equal to 10% of the previous year’s liability. These instalments are payable at the end of months 4-12 of the current annual accounting period.
Alternatively, the businesses may choose to pay their VAT in three quarterly instalments of 25% of the previous year’s liability. These are payable at the end of months 4, 7 and 10 of the current annual accounting period.
The balance of VAT liability for the year is then due together with the VAT return two months after the end of the annual accounting period.
Even if your business has been VAT registered for less than 12 months, you may still join the scheme. But each instalment will be based on an estimate of the VAT liability. HMRC will advise on the amount of the instalments to be paid. The annual accounting period will usually begin at the start of the quarter in which the application is made. However, it may begin at the start of the next quarter, if the application is made late in a quarter.
If business has increased or decreased significantly, you will be able to apply to HMRC to change the level of the instalments payable.
The annual accounting scheme is designed to help small businesses by allowing them to submit only one VAT return a year. This is instead of the normal four returns. The scheme aim is to help with budgeting, cash flow and reduce the paperwork. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you on the annual accounting scheme.
Over the years, HMRC have introduced a number of VAT schemes designed to reduce the administrative burden on small businesses. One of these schemes is the annual accounting scheme. During the year, the business pays instalments based on an estimated liability for the year with a balancing payment due with the return.
It is important that you comply with all the VAT regulations. We can help you in a number of ways including the following:
- tailoring your accounting systems to produce the VAT information accurately and quickly
- ensuring that your business is VAT efficient and that adequate funds are available to meet your VAT liabilities on time
- providing assistance with the completion and submission of VAT returns
- negotiating with HMRC if disagreements arise and in reaching settlements
- advising as to which available VAT scheme may be appropriate for your business
If you are starting, or have started a business in Lewisham, Bromley, Kent and London areas and you would like to discuss any of the points mentioned in this VAT summary please contact us at Adiva Accountants in Lewisham.
Cash accounting scheme
If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive, rather than on the basis of invoice dates.
Annual accounting scheme
If the annual taxable supplies do not exceed £1,350,000, the business may apply to join the annual accounting scheme. In this scheme, they will make monthly or quarterly payments of VAT, but will only have to complete one VAT return at the end of the year.
Flat Rate scheme
In this scheme, smaller businesses are allowed to pay VAT as a percentage of their total business income. Therefore, no specific claims to recover input tax need to be made, but for the fixed assets over the amount of £2,000. The scheme’s aim is to simplify the way small businesses account for VAT. But for some businesses, it can also result in a reduction in the amount of VAT that is payable under this scheme.
As it is impractical for most retailers to maintain all the records required, there are special schemes for retailers.
If the value of your taxable supplies exceeds a set annual figure (£83,000 from 1 April 2016), you are required to register for VAT.
Even if you are making taxable supplies below the registration limit, it is possible to apply for voluntary registration. This is beneficial if your business was principally making zero rated supplies. As this would allow you to reclaim input VAT, which could result in a repayment of VAT.
Even if you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start-up expenses can be recovered and a refund will be due.
A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered. For the purpose of VAT registration, a person includes:
- companies, clubs and associations
In cases that an individual carry on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.
Once you become VAT registered you must submit online a quarterly return to HMRC. This VAT return shows amounts of output tax, deductible input tax together with sales and purchases figures. The VAT returns must be submitted within one month and 1 week of the end of the period it covers.
Electronic payment of VAT liability is also compulsory for all businesses.
It is beneficial for businesses who make zero rated supplies and who receive repayments of VAT to submit monthly returns.
It is important that up to date records are kept by a VAT registered business. These records include details of all supplies, purchases and expenses. Additionally, a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. The above records should be kept for six years.
The maintenance of the records and calculation of the VAT liability is the responsibility of the registered person. However, HMRC will need to be able to check that the correct amount of VAT is being paid over. So, from time to time a VAT officer may come and inspect the business records. During the control visit the VAT officer will check to ensure that VAT is applied correctly. And that the VAT returns and other VAT records are properly written up.
However, even in the absence of any errors being discovered, you should not assume that your business has been given a clean bill of health.
Offences and penalties
HMRC have wide powers to penalise businesses who ignore or do not apply the VAT regulations properly. Penalties can be applied in respect of the following:
- late returns/payments
- late registration
- errors in returns
If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations. Please do not hesitate to contact us at Adiva Accountants in Lewisham.
A transaction is within the scope of VAT if:
- there is a supply of goods or services
- made in the UK
- by a taxable person
- in the course or furtherance of business
Input VAT and Output VAT
Businesses that are VAT registered charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly, VAT is charged on most goods and services purchased by the business. This is known as input VAT.
The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them. However, the input VAT suffered on the goods and services purchased by the business can be deducted from the amount of output VAT owed. Please note that certain categories of input tax cannot be reclaimed. Such as third party UK business entertainment and for most business cars.
Taxable supplies are mainly either standard rated (20%) or zero rated (0%). The standard rate was 17.5% prior to 4 January 2011. Additionally, there is a reduced rate of 5% which applies to a small number of certain specific taxable supplies. The supplies that are not taxable are known as exempt supplies.
There is an important distinction between exempt and zero rated supplies.
- If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.
- If your business is making zero rated supplies you should register for VAT. As your supplies are taxable (but at 0%) and recovery of input tax is allowed.
If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can help you comply with the VAT regulations. Please do not hesitate to contact us at Adiva Accountants in Lewisham.
In order to maximise tax saving opportunities for companies, appropriate course of action should be planned in advance. So, it is crucial that professional advice is sought before the year end and as early as possible. If your company is in Canary Wharf, Bromley, Kent and London areas we would welcome the chance to tailor a plan to your specific circumstances. Please do not hesitate to contact us at Adiva Accountants in Canary Wharf for further advice.
From 1 April 2015, the main rate of corporation tax is 20% and will continue the same for the Financial Year beginning on 1 April 2016. The main rate of corporation tax will then be reduced as follows:
- 19% for the Financial Years beginning on 1 April 2017, 1 April 2018 and 1 April 2019
- 17% for the Financial Year beginning on 1 April 2020.
Under the self assessment regime most companies must pay their tax liabilities nine months and one day after the year end.
If your company’s profits for an accounting period are at an annual rate of more than £1.5 million, you must normally pay your Corporation Tax for that period electronically, in quarterly instalments. If your company has a 12-month accounting period, you’ll have to pay in 4 equal instalments due:
- 6 months and 13 days after the first day of the accounting period
- 3 months after the first instalment
- 3 months after the second instalment (14 days after the last day of the accounting period)
- 3 months and 14 days after the last day of the accounting period
Corporation tax returns must be submitted within twelve months of the year end and are required to be submitted electronically. In cases of delay or inaccuracies interest and penalties will be charged.
Companies are chargeable to corporation tax on their capital gains less allowable capital losses.
An indexation allowance is given, in order to counteract the effects of inflation inherent in the calculation of a capital gain. However, the allowance is not allowed to increase or create a capital loss.
You should consider the timing of any chargeable disposals to ensure where possible advantage is taken of minimising the tax. Depending on circumstances this could be achieved by accelerating or delaying sales. You should also consider the availability of losses or the feasibility of rollover relief.
New assets purchase
If the sale proceeds are reinvested in a replacement asset, it may be possible to avoid a capital gain being charged to tax.
Only certain trading tangible assets qualify for relief. And the replacement asset must be acquired in the four-year period beginning one year before the disposal.
The government has proposed changes in 2016 Budget to make corporation tax losses more flexible. When losses arising on or after 1 April 2017 are carried forward, they will be available to be used against profits from different types of income in the company and other group companies. However, where a company’s or group’s profits are above £5 million, there will be a restriction on the use of carry forward losses. Any profits over £5 million arising on or after 1 April 2017 cannot be reduced by more than 50% by brought forward losses.
The extraction of the profits
Directors/shareholders of companies may wish to consider extracting profits in the form of dividends, rather than as increased salaries or bonus payments. This is beneficial as it can lead to substantial savings in national insurance contributions. Please note that company profits extracted as a dividend remain chargeable to corporation tax at a minimum of 20%.
The timing of the dividend’s payment is not critical from the company’s point of view. But from the individual shareholder’s perspective, timing can be an important issue. The tax liability can be delayed by one year, if the shareholder is a higher/additional rate taxpayer, and a dividend payment is delayed until after the tax year ending on 5 April. There are a number of important factors to consider before the deferral of tax liabilities. So, please contact us at Adiva Accountants in Canary Wharf for detailed advice.
Loans to directors and shareholders
The company might have to pay a tax liability if it makes a loan to a shareholder. If the loan is still outstanding after nine months of the end of the accounting period, the company is required to make a payment equal to 25% (32.5% for loans made on or after 6 April 2016) of the loan to HMRC. The money is not repaid to the company until nine months after the end of the accounting period in which the loan is repaid by the shareholder. If the loan is provided at an interest rate lower than the market rate, this may also give rise to a tax liability for the director on the loan benefit.
At Adiva Accountants in Canary Wharf, we can provide tax advice for your company in Canary Wharf, Bromley, Kent and London areas. For further advice on proposed changes, dividends and loans, please do not hesitate to contact us at Adiva Accountants in Canary Wharf.
The Advancing of expenditure
If the expenditure is incurred before the company’s accounts year end, it can reduce the current year’s tax liability.
There are many situations where significant expenditure is planned for early in the next accounting year. If you bring forward this expenditure by just a few weeks to fall within the current year, the related tax relief is received 12 months early.
Below are some examples of the type of expenditure to consider bringing forward:
- building repairs and redecorating
- advertising and marketing campaigns
- redundancy and closure costs
Please note that payments into company pension schemes are only allowable for tax purposes when the payments are made. And not when they are charged in the company’s accounts.
You should consider the timing of capital expenditure on which capital allowances are available to obtain the maximum reliefs.
Companies are able to claim an annual investment allowance which provides 100% relief on expenditure on plant and machinery, excluding cars. The amount of AIA available for a particular accounting period varies depending on the accounting period.
|Periods from||Annual limit|
|1 April 2014||£500,000|
|1 January 2016||£200,000|
There are special rules where accounting periods straddle one of the above dates.
Groups of companies have to share the same allowance. The expenditure on qualifying plant and machinery which is in excess of the AIA is eligible for writing down allowance (WDA) of 18%. Where the capital expenditure is incurred on integral features the WDA is 8%. Additionally, there are 100% allowances on designated energy saving technologies. Other limited allowances are also available for investments in certain types of building.
There are three main options for companies to consider in utilising the trading losses:
- they can be set against any other income (e.g. bank interest) or capital gains arising in the current year
- they can be carried forward and set against trading profits arising in future years
- they can be carried back for up to one year and set against total profits.
At Adiva Accountants in Canary Wharf, we can provide tax planning advice for your company in Canary Wharf, Bromley, Kent and London areas. For further advice on tax savings for companies, please do not hesitate to contact us at Adiva Accountants in Canary Wharf.
It is crucial to consider tax saving opportunities before the year end of the company. Also, before the tax year end of the shareholders or directors of the company. At Adiva Accountants in Canary Wharf, we can provide pre-yearend tax planning advice for your company in Canary Wharf, Bromley, Kent and London areas.
The tax legislation and commercial factors affecting your company are continually changing. So, it is advisable to carry out each year a review of your company’s tax position.
This review and tax planning is important to be carried out before the company’s yearend. This is because the current year’s results can normally be predicted with some accuracy. And importantly if needed there is time to carry out any appropriate action.
Below we cover some of the areas where advance planning may produce tax savings. For further advice, please do not hesitate to contact us at Adiva Accountants in Canary Wharf.
There are a number of good reasons for considering the use of a company or to incorporate your business. However, there are many factors to consider before doing so. The changes to the tax law may change this advice for some individuals. We would welcome the opportunity to talk to you about incorporation and your own specific circumstances in Bromley, Kent and London areas. Please do not hesitate to contact us at Adiva Accountant in Bromley for further advice.
Below we highlight potential disadvantages of trading as a company.
Companies have higher annual compliance requirements in terms of administration and accounting. So, the costs are usually higher for a company than for a sole trader or a partnership. Companies Act dictates the format in which the annual accounts need to be prepared. And in certain circumstances, the accounts need to be audited by a registered auditor. Details of the directors/shareholders are filed on the public register held by the Registrar of Companies.
The annual accounts have to be made available on public record. However, these can be modified to minimise the information disclosed.
As a company, if you pay directors or staff, you will need to complete PAYE records for salary payments. And you have to submit details of salary payments on a timely basis under PAYE Real Time Information. Also, you will need to keep records of expenses reimbursed to you by the company. Therefore, P11D forms may have to be completed.
A system needs to be set up for you to correctly pay dividends, if you will require regular payments from your company.
Business owner transactions
The owner of an unincorporated business may introduce funds to and withdraw funds from the business without tax implications. For the owner/director of the company there may be tax implications on these transactions.
A company director may be at risk of criminal or civil penalty proceedings. These can be for late filing of accounts or for breaking the insolvency rules.
Below are some other non-tax advantages of incorporation.
Normally operating as a company provides limited liability. If a shareholder’s shares are fully paid, he cannot normally be required to invest any more in the company, or be liable to company’s debts. However, banks would often require personal guarantees from the company directors for borrowings. The director is not usually liable to company creditors.
A company is separate from its owners (the shareholders) and will enjoy legal continuity as it is a legal entity in its own right. The company can own property, sue and be sued.
Transfer of ownership
It is easier to transfer the ownership of the business, in comparison to a business which is not trading as a limited company.
The corporate status is often deemed to add to the credibility or commercial respectability of the business.
Companies can usually borrow more against the assets of the business. This is possible as normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company.
The company could establish an approved pension scheme. This may provide greater benefits than the self-employed schemes.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley to discuss all the advantages of operating as a company.
When you incorporate your existing business, it will involve transferring at least some of your assets (e.g. goodwill) from your sole trade or partnership into your new company. You need to be careful as the transfer of goodwill may create a significant capital gain. If the business is transferred in exchange for shares in the company, it is possible to defer the gain until any later sale of the company.
Changes to relief for goodwill
Generally, individuals were prevented from claiming Entrepreneurs’ Relief (ER), where goodwill was sold to the company for cash or debt on or after 3 December 2014. So, capital gains tax arises on the gain made. The exception is that a claim to ER is allowed for partners in a firm who do not hold or acquire any stake in the successor company.
New legislation to be introduced in Finance Bill 2016 will revise the restriction on the claim for ER on goodwill on incorporation. Where the individual claiming relief holds less than 5% of the shares and the voting power of the acquiring company, ER can be claimed in respect of goodwill.
Also, if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner. Then relief will also be due where an individual hold 5% or more of the shares or voting power.
These changes will be backdated to disposals on or after 3 December 2014.
Stamp Duty Land Tax (SDLT)
You need to consider SDLT charges when assets are transferred to a company. Goodwill and debtors do not give rise to a SDLT charge, but land and buildings may do so.
When ceasing a business in an unincorporated form, you need to consider various issues including ‘overlap relief’.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the goodwill relief, overlap relief and other reliefs available.
Corporation tax rate
Profits of the company are taxed at 20%.
The rate of employees’ NIC is 12%. That is applied to all the earnings between the lower and upper earnings limits (Between £8,060 and £43,000 for 2016/17). In addition, a 2% charge applies to all earnings over the NIC upper earnings limit (£43,000 for 2016/17). For 2016/17 the rate of NIC for the self-employed is 9% for profits between £8,060 and £43,000, and 2% on profits above £43,000.
It is possible to avoid all the NI contributions by incorporating your business. You will be able to take a small salary up to the threshold at which NI is payable, and then taking the rest of post-tax profits as dividends.
It is possible for the company to make pension contributions on behalf of directors/employees (subject to limits) to a registered fund. This is irrespective of the salary level, but provided it is justifiable under the wholly and exclusively rule. These contributions are allowable expense for companies, but they are deemed to be a private expense for sole traders or partners.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the tax, national insurance and pension implications of trading as a company.
In our opinion, there is still beneficial for a director/shareholder to take a dividend rather than an increase in salary. Under the new rules the amount of the tax saved will be less than before, but is still beneficial.
Company vs Partnership
The table below gives an indication of the 2016/17 tax savings that may be achievable for husband and wife who incorporate their business compare to being in a partnership.
|Tax and NI payable:||£||£||£|
The amount of the potential savings depends on the relevant circumstances of the couple’s tax position. So, they may be more or less than the above figures. The above examples are computed on the basis that the couple:
- share their profits equally
- have no other sources of income
- both partners/directors take a salary of £8,060 from the company with the rest (after tax) paid out as a dividend.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax savings of trading as a company.
You may think that since the dividends tax changes to trade as a sole trader, or a partnership may now be a better option than to trade as a limited company. However, in our view, there is still a benefit in tax terms for most circumstances to continue to trade as a limited company. From April 2016, the tax saved by incorporation compared to being unincorporated is lower than before. However, there is still an annual tax saving.
A company can be used for:
- a profitable trade or
- buy-to-let properties
From 6 April 2016:
- The 10% dividend tax credit has been abolished with the result that the cash dividend received is the gross amount potentially subject to tax.
- New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
- A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.
The table below shows a comparison between the pre and post 6 April 2016 dividend tax rates.
|Dividend falls into||Basic rate band||Higher rate band||Additional rate band|
|Effective rate before 6 April 2016||0%||25%||30.6%|
|Rate from 6 April 2016||7.5%||32.5%||38.1%|
As always there are winners and losers from these changes to taxation of dividends.
A higher rate taxpayer who has dividend income of £5,000 or less, will be better off under the new rules. Under the prior rules, they had a tax liability of up to £1,250 (25% of £5,000). However, under the new rules they will have no tax liability at all.
The sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable, will be worst off. Under the prior rules, they would have no tax liability on the salary (as the salary is below the personal allowance), and no tax on the dividends. Under the new rules, only £5,000 of the dividend will not be taxable. If the shareholder fully utilises his basic rate band in 2016/17 in the most tax efficient way, still would have a tax liability. The minimum tax liability for 2016/17 would be £2,025, compare to Nil in 2015/16.
If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax implications of the changes in dividends taxation.
Usually if you run your business as a company, you may save a considerable amount of tax. However, in certain circumstances this may not be the case, and a sole trade or partnership structure may be better. If your business is in Bromley, Kent and London areas we, at Adiva Accountant in Bromley, can show you the potential tax savings from trading as a company.
The decision to run your business as a company, a sole trader or partnership is an important one. Here we cover the relevant tax issues and describe the possible tax benefits from operating as a company.
The recent changes to the taxation of dividends
From April 2016, there have been significant changes to the taxation of the dividends. The dividends are now taxed at a higher rate, which has reduced the tax savings compare to prior years. Our calculations show that incorporation in 2016/17 and beyond should still result in lower tax bills than remaining unincorporated. If your business is in Bromley, Kent and London areas, please contact us at Adiva Accountant in Bromley about the possible tax savings from operating as a company.