Useful Summary Guides

Limited Companies

Summary Guide to start up & running your business.

If you are looking at running your business as a limited company or already have a limited company, this guide should be useful for best practise and summary advice on running your financials for your business.

Personal Liability

By setting up a limited company, you gain protection against personal liability for the debts of your company, although if serious problems, it may difficult to avoid further personal action if funds are not available due to personal withdrawals.

Presenting a professional and clear financial business

It is important to present a strong financial picture if you’re growing your business. Banks, investors and creditors will look carefully at your accounts, personal withdrawals can distort the picture.

Banking

A Limited Company MUST have it’s own bank account to run the business, it is a distinct own legal entity from the Shareholders and this is a legal requirement. 

Personal Expenditure

You should keep personal and business transactions separate, keeping and maintaining accurate financial records for your accountant and tax calculations.

Your business is a separate entity from yourself and you should not simply withdraw cash as and when you want, the income generated does not belong to you, unless taken as salary, dividends, directors loan and expenses.

If the business bank account is used to fund personal items, this makes your accounts more complex for your accountant and may be more costly to prepare your accounts at year end, this includes, direct debits, cash withdrawals, using the company credit or debit cards.

Using the business bank or personal expenditure makes it hard to gauge cash flow for your business and can make your business cash deficit if not managed correctly.

Providing you pay back the money to the business as soon as possible, there is nothing illegal about the withdrawal, but there are risks involved in mixing business and personal transactions.

Any amounts remaining unpaid at the end of the financial year must be reported to HMRC and will be liable to tax and National Insurance.

We suggest to minimise cash withdrawals unless you have no alternative. Banks & accountants are required to report suspicious activity to reduce fraud and money laundering.

Withdrawing money from your limited company

A Limited Company must be run as a business, Directors should not use the business for personal expenditure, it is not illegal but is not best business practice. Technically you can withdraw money from your business account and use it any way you see fit, provide you keep detailed accounting records and repay the funds as soon as possible.

Best business practise it to either; take a salary, take dividend payments, directors loan or reimbursement for business expenses that you have paid through your personal account. 

Taking a salary

This is the simplest way to take money out of you company, a regular salary. You will need to deduct any tax, National Insurance and Employer’s National Insurance contributions due and make payments to HMRC monthly or quarterly.

You must register as an employer prior to taking a salary, HMRC will send you some two PAYE codes for you to report and pay contributions due each month.

The salary and Employers National Insurance contributions reduce your company profits and therefore reduce the business’ corporation tax liability.

Taking Dividends

Dividends are a personal tax-efficient method of receiving money from your business. Funds to pay dividends are available from any remaining profit after payment of corporation tax.

You may wish to leave some profit in your business for investment or other business purposes, but you can take the remainder as an alternative to salary or withdrawals.

Dividends are usually paid at the end of your financial year, so they do not provide short-term funds.

Your accountant would be able to advise the best practise for withdrawing dividends.

Dividends do not reduce your company profits and therefore have no impact on the business’ corporation tax liability.

Dividends must only be paid when a company has sufficient distributable profits  to support them, otherwise they are deemed illegal.

Directors Loan

You can arrange a director’s loan from your business to put funds into your personal account, similar to making funds to your business if it needs funds.

You should aim to repay the loan to the business before the end of the financial year. If you do not you will be liable to a tax charge, S455 on the outstanding balance.

An ‘overdrawn’ directors’ loan account at the end of the financial year end, and not repaid within 9 months and one day after the company’s accounting reference date, will incur interest and corporation tax on the amount unpaid. 

In some instances the directors loan will also need reporting on your self assessment return if not repaid in the allotted time after your company year end.

A director’s loan can be a useful low-cost or interest-free source of funds to meet short term personal requirements.

You should speak to your accountant for advice before taking money for you business, to ensure you are meeting all tax requirements and using funds efficiently and legally.

Business Expenses paid by your personal bank

You should normally cover business expenditure from your business bank account. But sometimes there may be on-off costs from your personal bank account, providing the expenditure is wholly for business purposes, you can receive reimbursement for the costs, on proof of receipt.

 

Construction Industry Scheme (CIS)

Registered Contractor

As a contractor, your obligation is to deduct money from a sub-contractor’s payments and pass it to HM Revenue and Customs (HMRC).

Rules you must follow

  1. Register as a contractor.
  2. Check if you should employ the person instead of subcontracting the work. You may get a fine if they should be an employee instead.
  3. Check with HMRC that your subcontractors are registered with CIS – this needs to be done by verifying each subcontractor prior to their first payment.
  4. When you pay subcontractors, make deductions from their pay and pay to HMRC.
  5. File monthly returns and keep full CIS records – penalties may apply if you do not.
  6. Let HMRC know any changes to your business.

Register as a Contractor

Contractors must register for the scheme prior to paying any subcontractors, you must also be registered for PAYE, these can be done at the same time.

If you are already registered for PAYE, you can call the CIS helpline, 0300 200 3210,  to register you as a contractor quick and easily by giving your UTR and PAYE reference. 

Employee or subcontractor?

This is a detailed area, more information can be found from HMRC or speak with Nicola to determine if you have any queries. https://www.gov.uk/employment-status/selfemployed-contractor

CIS Verification

You must ensure your subcontractors are registered for Construction Industry Scheme (CIS) with HMRC. Once verified HMRC will advise on the rate of deduction.

You will need your subcontractors

  • UTR
  • National Insurance number if they’re a sole trader
  • Company name, company UTR and registration number if a limited company
  • Nominated partner details, trading name and partnership UTR if they’re a partnership

Deadline – verification must take pace prior to first payment to subcontractor

Making Deductions

The Construction Industry Scheme (CIS) deduction rates are:

  • 20% for registered subcontractors
  • 30% for unregistered subcontractors
  • 0% if the subcontractor has ‘gross payment’ status - for example they do not have deductions made

You must pay these deductions to HMRC - they count as advance payments towards the subcontractor’s tax and National Insurance bill.

To make a CIS deduction from a subcontractor’s payment, start with the total (gross) amount of the subcontractor’s invoice.

Take away the amount the subcontractor has paid for:

  • VAT
  • equipment which is now unusable (‘consumable stores’)
  • fuel used, except for travelling
  • equipment hired for this job (‘plant hire’)
  • manufacturing or prefabricating materials
  • materials (only if they paid for them directly)

Finally, deduct the CIS percentage rate (as given to you by HMRC) from the amount left. You’ll be left with the net amount you need to pay the subcontractor.

For instance £1,000 @ 20% deduction rate

£1,000 x 20% = £200 tax to be deducted and paid to HMRC and the Subcontractor receives £800.

 

File Monthly Returns

This can be done via commercial software or CIS online service; you must declare on your return that the subcontractors are not employees.

If a subcontractor has Gross Status, you must still submit on your return.

If you have made no payments, you are still required to submit a nil return.

Deadline: returns must be filed by 19th of every month following the last tax period, 6th to 5th.

For instance a return made on 19th of June will be for the period 6th May to 5th June.

The period dates are for actual payments made to subcontractors, not invoices received.

 

Record keeping

You must keep records for 3 years of:

  • Gross amount paid to each subcontractor, excluding VAT
  • And deductions made from subcontractor payments

If you made deductions, you must keep records of cost of materials invoice you for, excluding VAT.

You may be fined up to £3,000 if you cannot show your CIS records when asked by HMRC.

 

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