Limited company directors, with HMRC, it’s business -- and personal
Running a limited company is not an easy task. Not only are directors in charge of leading all the daily aspects of the business, but they also need to be on top of their game when it comes to filing with HMRC, ranging from their statutory accounts to a personal tax return, writes Mart ‘Tram’ Abramov, co-founder of TaxScouts.
Dealing with the Revenue, however, makes this even more difficult. As the rules tend to change quite a lot from one year to the next, it’s common to get confused and there are some aspects of the HMRC process that need to be considered beforehand.
This is especially true if you’re reading this as a first-time entrepreneur, consultant or contractor who’s become the director of a newly-established limited company and don’t know where to start.
How to pay yourself
First things first, and money matters! A recurring concern for those who have structured their businesses as a limited company -- and are now a director -- is how they will get paid. One of the good things about running your own incorporated business is that you may be entitled to pay less personal tax than if you were registered as a sole trader.
Limited company profits are subject to UK Corporation Tax, currently set at 19 per cent. Corporate tax is paid through the company, but as a director of a limited company, if you decide to take a small salary and complement your income in the form of dividends, then you will need to complete a self-assessment tax return. Company dividends are not subject to National Insurance Contributions (NICs), so this way you will be paying a smaller amount of it, resulting in a bigger payout of earnings. There is a threshold on dividends -- once you take more than £2,000, you’ll need to file a personal tax return.
When it comes to expenses, there is little difference between a limited company director’s expenses and a freelancer’s expenses. However, it’s worth bearing in mind that expenses related to the limited company will be submitted through your company’s corporate tax return, while personal business expenses -- such as mileage -- are claimed through your personal tax return.
Pay attention to IR35
Directors of Personal Service Companies (PSCs) need to also pay something else -- close attention to IR35. This is a complicated piece of tax legislation that needs extra attention right now because, from April 2020, HMRC is changing it for PSC contractors who supply large and mid-sized private sector organisations. IR35 has always been a consideration since its introduction in 2000, but it’s now probably higher up the HMRC-related list of things to prep for if you’re a newcomer to contracting. In short, you used to be able to decide your IR35 status whereas from April, you’ll lose this decision-making power and clients will get it instead.
According to HMRC, this key change is expected to affect 170,000 individuals working through their own company, and as many as 60,000 organisations that use workers employed by a Personal Service Company (PSC). Therefore, make sure you review your contracts to see if and how the changes will affect you.
Ultimately, if you’re a contractor set up as a limited company but, in all intents and purposes, act as an employee of just one employer, you could fall foul of IR35 and be in for a nasty surprise. That surprise could hit you any day now (engagers are putting their April 2020 policies in place as you read this); or it could hit from a tax standpoint at the year-end, or even many years down the line, if HMRC doesn’t keep to what it said this week about retrospective assessments.
Can I just flee and relocate my company abroad?!
Some contractor-types might not like the sound of all these rules and requirements. But even if your limited company is not registered in the UK, you may still need to pay tax to HMRC, because an e-residency or offshore business won’t save you from UK corporation tax!
Similarly, if your company is located outside the UK but is trading in the country through a “permanent establishment,” there’s also no guarantee of escape, as the company will also be liable to corporation tax, and possibly employment tax for employees and directors based there.
Don’t forget yourself!
And then there is your own tax situation, personally. You can use this HMRC tool to check if you need to submit a self-assessment tax return. Consider, not all directors need to file an assessment. If you receive a letter from HMRC telling you to file a return, make sure you do.
To file a return you have to register directly with HMRC, but beware of the deadlines as setting up an account can take as long as 14 days! Oh, and don’t forget to put January 31st in your calendar as it is the deadline to file and pay your personal self-assessment tax return. Missing deadlines can result in hefty, increasing fines, so if you are late, make sure you catch up as soon as possible to reduce the amount you might owe.
It’s business, AND personal
The eagle-eyed will notice that the old adage of “It’s business not personal” doesn’t really apply here, on both tax and expenses. If you’re a limited company director, yes, you have your business and its obligations to HMRC (and to others including Companies House), but yes, you also have your own self-assessment to deal with as an individual. Confusion can creep in between the two if it’s all new to you, so get your accountant on the case and be sure whether they will assist you with both aspects -- or just one. A bit like the HMRC processes outlined here, don’t wade into these mixed waters of business and personal taxation unprepared.