Contractors’ Questions: How to treat £10,000 in a limited company I set up?
Contractor’s Question: I started a company to house some part-time income from app development, totalling just over £10,000 in 2018. I don't want to take this money out just yet and I don’t think there will be anymore turnover for the company until April 2019. What are my filing obligations? Register with Companies House? But don’t register for self-assessment, as despite being a director I’m not taking the money out of the company?
Also, I generated the turnover by working from my mortgaged home, where I obviously incur gas and electricity costs, so what proportion of the turnover can I use to deduct to pay corporation tax?
Expert’s Answer: For simplicity’s sake, if you use your home for business activity, HMRC allows a flat rate of £4 per week that you can expense from the company to yourself. Alternatively (and slightly more complex), you can calculate the proportion of your household costs that relate to business use by taking your total electricity, gas, landline calls and internet usage and then work out the amount of this that can be proportioned to the room within your house that the business activity takes place, and again for the amount of time the room was used for business use.
Unfortunately, no element of your mortgage can be claimed (the same would be applicable for any mortgage interest or council tax, and the rules also apply to rent). As this can be a lot of hassle to work out the figure, and often it is a figure that is actually less than the flat rate, most directors will opt to use HMRC’s flat rate of £4 per week!
Next, you are correct to say that you need to file earnings with Companies House. But as well as your annual accounts, Companies House will expect a Confirmation Statement each year, and HMRC will expect your annual accounts and company tax return (CT600), which calculates how much corporation tax your company owes.
Regarding registering for self-assessment, HMRC states that you’ll need to submit a tax return if you are a company director. So technically, even if you’ll have no tax to pay (because you are not extracting the money from the company), this should still be declared to HMRC.
Lastly, some additional advice. Bear in mind the dividend allowance, which is £2,000 (2018/19 & 2019/20 thresholds). Although receiving a dividend would form part of your earnings to declare to HMRC within your tax return, if you receive no dividends elsewhere, this would be tax-free. Therefore, it would be an attractive way to withdraw some of the funds within your company. To declare this, you would simply need to complete a dividend tax voucher and dividend minutes document. Best of luck!
The expert was James Foster, commercial manager at contractor accountancy firm SJD Accountancy.