Setting up a company.
If you use a company, the profits will be liable to Corporation Tax at 20% (decreasing to 17%). Where you are already higher rate (HR) anything you draw from the company (salary/dividends) will be charged to HR. Amounts drawn as dividends are not chargeable to NIC but will incur a new dividend charge of approximately 7.5% after the first £5,000.
If there are sufficient profits you then have the option of taking out further dividends and paying higher rate tax or carrying these forward and perhaps taking them out as a capital dividend when the company ceases. The advantage of carrying profits forward that would otherwise put you into higher rates is that capital dividends will be chargeable at 18% after your annual exemption (£11,100 for 2016/17). This is reduced to 10% where the distribution qualifies for Entrepreneurs’ Relief. New rules require the company to be liquidated, which may involve expensive professional charges, however the position may have changed by the time you decide to end the company.
The easiest way to form a company is to do it on line and the site I use can be accessed here. The “No Frills” package will allow you to set up the directors, company sec, and registered office and share capital at the same time. If you have any problems give them a ring. I am quite happy to set up the company for you if you wish. Opt for a large number of authorised shares, say 100, as this will allow you more flexibility should you need to issue further shares in future. You then need to consider how the shares are to be split. If your partner/spouse has spare personal allowances/basic rate band it will make sense to pay him/her a salary ( this must be paid on a commercial basis) and allocate some shares to him/her. This will allow you to equalise income between should you generate sufficient profits to fall within the higher rate tax bracket.
Our charges depend on the amount of work involved as clients’ require our varying degrees of help with bookkeeping, payroll, VAT, company secretarial, personal Tax Returns, statutory accounts and Corporate Returns. For an average one-man business, I usually quote £1,000 plus VAT pa for the final accounts and Returns, to cover myself in case there are complications, but the actual charge is usually nearer £750 plus VAT. Bookkeeping payroll and VAT are charged on a time basis at £25 plus VAT per hour.
You will need to open a company business bank account and possibly a tax reserve account. Most bank offer free banking for one or two years. You may also have to arrange business insurance. Ensure contracts (internet, mobile) are transferred into the company name. Consider whether you can take advantage of the favourable tax treatment of:
- Electric cars & vans
- IT equipment, including tablets, laptops, ipods
- Mobile phones
- Subsidised travel
- Small loans
- Staff parties (£150 per year)
- Trivial Benefits (£300 per year)
- Pensions advice (£150 per year)
- Lunch and refreshments (works canteen rule).
Striking off a company.
- Where the company has been dormant we can avoid the formal liquidation process which will be expensive. Instead we can apply for an informal dissolution which we can do provided the following conditions are met:
- It has not traded within the last 3 months.
- It has not changed the it’s name within the last 3 months.
- It is not subject to any legal proceedings, current or proposed.
- It has not made a disposal for value of property or rights.
- All debts have been paid.
- All Returns have been submitted and agreed.
- It has closed its bank accounts.
When all of the above criteria are met a Striking Off application (DSO1) can be completed.
Ensure all assets are transferred out of the company prior to applying for the company to be struck or these assets may be lost. Assets include:
- Debtors (customers, HMRC or other third parties owing money to the company. Reduce these to nil or be prepared to write them off)
- Bank balances (close all company bank accounts).
- Property (transfer out of company’s name).
- Equipment (transfer out of company’s name).
- Domain names (transfer out of company’s name).
The form DS01 Striking-off application (PDF 762KB) must be:
- Signed by the majority of directors
- Submitted with a £10 fee to Companies House, Crown Way, Cardiff CF14 3UZ
- A copy must also be sent to interested parties within 1 week of the application e.g. HM Revenue & Customs, creditors, employees, members etc.
Where there are creditors, members etc., you should let them know of the proposed dissolution before applying, as they may object to the company being struck off. it is also prudent to notify others who may have an interest as they might later object to the application (HMRC, local authorities, training and enterprise councils other government agencies etc).
Losses arising after 1 April 2017 can now be used more flexibly. They can now be set off against total profits for the current and future years for that company and other group companies. Previously loss relief carried forward was restricted to profits from the same trade. Companies can choose how to use pre-April 2017 trading losses before later losses. Where a trade ceases with unused carried-forward losses these can be set without restriction against profits arising in the final 36 months of the trade.
Published 13 September 2017.
Updated 2 August 2018.