- Formation of a company incurs legal and administrative costs, which may include new accounting records and possibly systems, new PAYE system, new business tax reference, new VAT registration, new stationery etc.
- Customers, suppliers and service providers must be informed of a change to limited company status.
- The tax position arising on the incorporation of an existing business needs careful analysis. It may be possible to defer capitals gains tax on the transfer of goodwill etc, but the timing and effect of cessation on income tax must be closely planned.
- Annual accounts must comply with the requirements of the 2006 Companies Act. In most cases, a statutory audit is not required for companies with an annual turnover of £6.5 million or less. The statutory audit involves work over and above that which is normally carried out for a sole trader or partnership.
- A company's accounts must be filed on public view with the Registrar of Companies. An Annual Return must also be submitted to the Registrar of Companies together with a filing fee of £30 (£15 if filed online).
- The company will be taxed on its profits of each accounting period, as opposed to the income tax 'current year' basis for sole traders and partnerships. A company must file a corporation tax return.
- Funds withdrawn from a company normally give rise to tax liabilities, whereas owners of unincorporated businesses can generally introduce and withdraw cash without tax implications.
- Remuneration for directors is subject to both employee's and employer's National insurance liabilities - currently up to 23.8% (increasing to 25.8% from 6 April 2011). For example on a remuneration of £30,000 there is a NI liability of £5,779. Both the company and its directors are liable to NIC on many benefits in kind, and a form P11D must be prepared for each director, whatever the level of earnings. This can lead to extra work in filing a tax claim for reimbursed expenses etc for which individual tax relief is available.
- Tax on directors' remuneration paid monthly is payable on the 19th of the following month (22nd for electronic payment) through the PAYE system, and corporation tax is payable nine months after the end of a company's accounting period. For a sole trader or partnership, tax is generally paid by instalments on 31 January and 31 July on the current year basis. The 'credit period' depends upon the choice of accounting date, and you should contact us for further advice on this.
- The 'IR35' legislation relating to personal service companies could be relevant, especially for IT contractors and other service providers who work for only one customer.
- Companies pay tax on capital gains at their corporation tax rate (21% for profits up to £300,000). In a company, a capital gain is reflected in the value of its shares and if these are sold a "double charge" to capital gains tax can arise. This may be avoided if assets that are likely to increase in value are owned either outside the company or within a self-administered pension scheme, or if a company is sold complete with its assets
- An individual has greater flexibility in dealing with trading losses.
- A company director is more at risk of criminal or civil penalty proceedings, e.g. for late filing of accounts or for breaching the insolvency rules.
