Some businesses will want to operate as a limited company. Indeed independent computer consultants and some other trades and professions
are almost obliged to do so. From April 2002 many small businesses have been attracted by some tax advantages to incorporate. But tax
legislation changes, and from April 2004 companies have to pay at least 19% tax on profits paid out as dividends. The March 2004 Budget
reversed the previous tax position whereby there was no tax to pay on the first £10,000 of profits, whether these were retained in the
company or paid out as dividends. After April 2004, companies are still not taxed on their first £10,000 of profits provided that these
are retained in the company. Small companies pay low percentages of tax above that figure.
But, that is not the full story, and intending businesses should consider the following:
A company is a separate legal entity from you, and its money is not your money. While the figures for tax in the company may be lower,
you need to look at the total tax cost for you and the company.
Money you take out of the company will usually be paid as either salary or dividends which involves a lot of necessary administration and
an understanding of company law.
If you have a personal service company, which may obtain work through an agency, you may come within what is known as IR35. This tax
provision defeats any advantages of trading as a company. This is a complex area where the law can change quite quickly. If you think IR35
may apply to you, it would be best to take advice.
If you and your spouse or partner hold shares in the company between you, the Inland Revenue may attack the arrangement through what is
known as the 'settlements legislation'. This means that, if your wife or spouse doesn't take a full part in earning the income of the
business, then the profits will be deemed to be earned by you alone.
There is substantial company regulation and administration. A company is ruled by the Companies Acts. You cannot just draw personal cheques
on your company's bank account without making proper arrangements. The money is not yours.
The records to be kept are more stringent than for a private business. Annual accounts must be prepared in an agreed format, and some
companies have to have an annual audit. A tax return has to be completed for the company and tax paid on its profits. The services of an
accountant are almost certainly needed.
PAYE has to be operated for directors' salaries and fees, and directors will also be taxed on private use of company cars, and possibly
other benefits, on what is known as 'benefits in kind'. A form P11D has to be sent to the Inland Revenue in this connection.
Extracting cash from a company is difficult, and one has to go through the correct procedures. This applies to both annual profits and
winding up a company on liquidation. The whole subject needs to be examined very carefully, and expert professional advice obtained.
From 13 October 2004, companies must tell the Inland Revenue within three months of first starting to trade, or receiving any taxable income.
This also applies where a company has been dormant and starts to trade again. Penalties will apply if notification is late. One the system
is well established, it is intended that notification will usually be on form CT41G.
