Frequently asked questions
The following information is given only as a basic guide, and should not be seen as definitive as we cannot cater for every possibility and combination of circumstances. Your decisions should be supported by professional advice.
If you cannot find what you are looking for here, please look at the services and links pages for more information. Also go to the links page for websites which will hold the forms mentioned in the answers below.
THINKING OF STARTING UP A BUSINESS?
It is the ambition of many people to run their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start up in business to be more independent and obtain the full financial reward for their efforts.
Whatever the reason, there is a lot to learn and be aware of. There's the possibility of success and the possibility of failure, so do your homework and everything you can to make sure you join the many successes - start off with the right advice and be prepared.
SHOULD I REGISTER AS SELF-EMPLOYED OR SET UP A COMPANY?
This is a commercial decision based on risk. You can undertake business in the UK as either:
- an unincorporated entity - a self-employed sole trader or a partnership - or
- an incorporated body
A company is a separate legal entity and can sue and be sued. It is distinct from its owners. As an unincorporated entity there is no distinction between the entity and the owner and therefore if sued the owners personal assets are at risk.
The administrative burden of operating a company is greater than that of an unincorporated business.
WHEN DO I HAVE TO NOTIFY THE INLAND REVENUE THAT I HAVE STARTED MY OWN SELF-EMPLOYED BUSINESS?
You must notify the Inland Revenue within 3 months of commencement to trade. This should be done using Form CWF1. There are penalties if the Revenue are not notified within this period. You should also start paying Class 2 national insurance contributions, the form for which is attached to the CWF1.
WHAT BOOKS AND RECORDS SHOULD I KEEP?
This depends on the expected size of the business. Smaller businesses can often get by just on keeping a manual cash book or a number of spreadsheets, whereas other businesses need a more sophisticated bookkeeping set up using a computer package such as Sage or TAS Books. We can assist in ascertaining which sort of system is most appropriate to your business. In any event, details of all bank transactions together with all sales and purchase invoices should be kept.
Payroll records also need to be maintained if you employ anyone.
WHEN DOES MY TAX RETURN HAVE TO BE FILED BY IF I AM SELF-EMPLOYED?
If you wish the Inland Revenue to calculate the tax for you, 31st October after the year of assessment. Otherwise 31st January after the year of assessment for online ready-calculated submissions.
WHEN DOES MY TAX BECOME PAYABLE?
Income tax under self-assessment is payable on 31 January following the year of assessment. Payments on account are made, based on 50% of the previous years tax liability, on 31 January in the year of assessment and on the following 31 July.
WHAT IS A COMPANY ?
An incorporated business is normally referred to as a company. Although there are limited liability partnerships and unlimited companies the vast majority of companies are limited by shares. This means the liability of shareholders is limited to the amount unpaid (if any) on their shares.
A limited company can be a private or public company. A public company must include 'public' or 'plc' in its name and can offer shares to the public.
The responsibilities and penalties are more onerous if you are a director of a public company.
A company has a 'memorandum ' and ' articles ' which constitute its rules and will contain specific regulations regarding the duties and responsibilities of the directors.
HOW DO I SET UP A COMPANY AND HOW MUCH WILL IT COST?
A company can be purchased 'off the shelf' for approximately £100 using a company services agent or via an accountant or solicitor.
WHAT STEPS DO I NEED TO TAKE IN ORDER TO EMPLOY SOMEONE?
You should ring the New employer help line, 0845 60 70 143, and register your business for PAYE. Once set up you will be supplied with an employer starter pack which will help you maintain a payroll either on a monthly or weekly basis.
DO I HAVE TO BE VAT REGISTERED?
You only have to register for VAT if your taxable supplies exceed £67,000 or if you expect them to exceed £67,000 in the next 12 months (figures correct for year commencing 1 April 2008). Should your turnover fall below the limits stated above you can still register for VAT voluntarily. These conditions apply to the self-employed as well as companies.
HOW MANY DIRECTORS CAN A COMPANY HAVE?
A company can have as many directors as it sees fit.
WHAT DOES BEING A COMPANY DIRECTOR MEAN?
When you are appointed a director of a company you become an officer with extensive legal responsibilities. You are normally appointed by the Board and the appointment is confirmed by the shareholders.
In brief the directors are responsible for the overall running of the company and for safeguarding the assets of the company.
A company has a 'memorandum ' and ' articles ' which constitute its rules and will contain specific regulations regarding the duties and responsibilities of the directors.
The responsibilities and penalties are more onerous if you are a director of a public company.
You can usually resign as a director at any time, but can only be removed by the shareholders but the rules of the company may vary these procedures.
WHAT RESPONSIBILITIES DOES A DIRECTOR HAVE?
There are two separate types of responsibility:
Common Law - here decided legal cases have established that your position as director is similar to that of a trustee and an agent
Statutory - here company law imposes a large number of duties upon you.
Common Law Duties
Fiduciary duty - as a director you should:
- Act in good faith
- Act in the best interests of the company
- Avoid conflict between personal and company interests
- Not make any personal gain from opportunities which arise by virtue of your position
- The law recognises that your position as director is similar to that of a trustee; ie the shareholders have 'entrusted' the company assets to you and you must act in their best interests.
Skill and care
The courts have established that you must exercise due skill and care when acting as a director. Although this is a subjective matter you cannot accept appointment as a director and then do nothing.
Breach of duty
Failure to fulfil these duties can result in an action by the company against you for damages. As many private companies are owned by their directors such actions are rare in these circumstances.
Indemnity insurance is available if you consider it necessary.
Statutory Duties
Accounting
Directors of a company are required by law to produce accounts. The law specifically covers the following matters:
- Accounting records - proper records must be maintained as defined by the companies act.
- Accounts - you are required to prepare accounts for each year to a date which is registered at companies house. The accounts must give a true and fair view and must comply with the form and content prescribed in the companies act. A copy of the accounts must be provided to each shareholder.
- Filing - the accounts must be filed at companies house within a specific period after the year end. Failure to meet this deadline will result in automatic penalties on the company. Very large companies must file their full accounts but others can file an abbreviated version.
- Audit - many companies are required to have an audit. This confirms that the accounts give a true and fair view. Smaller companies are exempt from the audit requirement.
The above requirements are complex and professional advice will be required to ensure compliance. Please talk to us for further information or the current size criteria.
Administration
Company law establishes a number of administrative requirements which you must comply with. These include:
- Maintaining statutory registers of shareholders, directors etc.
- Keeping minute books
- Holding meetings
- Conducting business by passing resolutions in the correct manner
In addition the law reinforces the fiduciary position of a director by including specific legislation relating to transactions between a company and its directors. These rules cover:
- Prohibiting loans to directors
- Restricting other credit to directors
- Disclosing details of loans and other transactions in which a director has an interest in the accounts
These rules are complex and in many cases extend to persons connected with a director.
WHAT LIABILITIES DOES A DIRECTOR HAVE?
The Companies Act contains a large number of penalties which can be levied against directors if they fail to comply with their statutory duties. These vary from a modest fine to imprisonment.
Financial difficulties
If your company should get into financial difficulties there are a number of ways in which you could face liability as a director.
Fraudulent trading
This is committed when a company intentionally defrauds its creditors. However few actions are successful because dishonest intent must be proved.
Wrongful trading
When a company is in insolvent liquidation the courts can require a contribution from any directors found guilty of wrongful trading. To avoid liability directors must show that from the moment insolvency became inevitable they took all possible steps to minimise the loss to the creditors.
The law relating to companies in difficulty should not be underestimated. Expert insolvency advice should be sought sooner rather than later.
You will now be aware that the position of director must not be accepted lightly. The law is designed to penalise those who act irresponsibly or incompetently but a director who acts honestly and conscientiously should have nothing to fear.
We can provide the professional advice you need to ensure you are in the latter category.
WHAT ARE THE RESPONSIBILITIES OF THE SHAREHOLDERS?
None, in terms of the running of the company. The liability of the shareholder is limited to the amount unpaid on their shares.
When do I have to notify the Inland Revenue that I have started my own company?
You must notify the Inland Revenue within 3 months of commencement to trade. This should be done using Form CT41G. There are penalties if the Revenue are not notified within this period.
WILL I PAY MORE TAX IN A LIMITED COMPANY?
It depends. As an unincorporated business the profits, before any drawings, are added to any other income of the proprietor and tax is paid at rates ranging from 20% to 40% plus national insurance depending on the level of profits.
A company is liable to its own corporation tax, which is calculated on profits after deduction of directors remuneration. The tax is payable at rates ranging from 20% to 30% depending on the level of profits.(Rates correct for 2004/2005 tax year).
HOW CAN I TAKE MONEY OUT OF A LIMITED COMPANY?
Generally there are two ways, remuneration or dividends. Remuneration is deductible for corporation tax purposes and is subject to PAYE, including employer national insurance of 12.8%.. Alternatively, if you are a shareholder, you can take dividends. These are not deductible for corporation tax purposes and are taxed on the individual. If you are a basic rate taxpayer the tax is deemed to have been paid. If you are a higher ratepayer income tax is payable at a rate of 32.5% less a 10% tax credit on the distribution.
WHEN IS THE COMPANY'S CORPORATION TAX PAYABLE?
If you are not a large company for tax purposes, nine months after the year end date. Large companies are required to make payments on account during the year of assessment
CAN ANYONE SEE MY ACCOUNTS?
Yes, as an incorporated body your accounts must be filed at Companies House, on public record. For small companies abbreviated accounts can be filed which only show the balance sheet and certain notes, not the profit and loss account
DO I NEED TO HAVE AN AUDIT AND IF SO, WHAT DOES AN AUDIT ENTAIL?
For year ends on or after 31 March 2004 limited companies are not required to have an audit if their annual turnover is under the prevailing threshold and they are not an ineligible company such as a Plc, special registered body or employers association. If shareholders with 10% or more of the voting rights request it, then an audit is required. Also in some instances the company's banker or some other institution or body may require the company to have an audit.
An audit comprises examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements in order for the auditor to satisfy himself that the accounts show a true and fair view.
