Invoicing

A Company may invoice clients. The following details should be included in an invoice:

  • Company Name
  • Company address/telephone number/email address
  • Company Registration number
  • Company VAT Registration number (if VAT registered)
  • Invoice number – this should have a unique invoice number – using a prefix letter indicating the client
  • Invoice date
  • Charge period
  • Total value of time charged
  • Disbursements
  • Total net value of invoice for VAT (time plus expenses)
  • VAT charged at standard rate
  • Total invoice value (inclusive of VAT)
  • Terms of payment due date by which invoice should be paid (normally 30 days).

Self-Billing – If your Company sources its assignments through an agency, it may operate a “self-billing system.” This system generates an invoice on behalf of the Company. Because your Company invoices for your services it supplies, there is no need for you to issue one.

Please contact us if you require any advice or clarification with regard to invoicing.

Insurance

Generally there are three types of insurance that a director of a Company needs to consider. These are as follows:

Professional Indemnity Insurance (PI)

Professional Insurance may be required if your Company gives professional advice to third parties. This insurance will cover any actions brought against the Company for claims of negligence arising from advice given by your Company. It is common place for professional specialists such as accountants, lawyers and architects to hold such insurance.

The level of cover required will depend on what your client might insist upon, however usual requirements tend to range from £250,000 – £5 million.

Public Liability Insurance

This insurance is also known as Products Liability Insurance or Third Party Liability Insurance. There is no legal obligation to hold such insurance but it is usual to see a requirement for this insurance in the agency/client terms and conditions.

The insurance provides cover against claims from third parties that may sue if they have suffered because of your actions. For instance spilling coffee over a third party’s laptop, software written by you that does not work or an individual trips over cables you have laid as you have not securely cornered off the area.

It is usual to see the majority of agencies/clients requiring £5 million of cover.

Employers Liability Insurance

By law every employer must have Employers Liability Insurance which gives protection against any actions brought by an employee for illness or injury which has occurred as a result of the employment. However this is no longer necessary if you are the only employee and you own at least 50% of the shares.

In many Personal Service Companies the only employee is also the owner and in theory, an individual cannot take legal action against oneself. However companies with more than one employee will still have a legal obligation to implement such cover.

Despite the removal of the legal requirement it is usual for an agency or client to require cover to be in place. In most cases the amount of cover required is £5 million and often the end client will request proof of such a policy being in place before allowing an individual on site.

Corporation Tax

Details of your Company have to be registered with Companies House. As a private limited company directors have to:

  • Complete an annual return to Companies House and
  • submitting a signed set of accounts to Companies House each year

Once your Company is registered with Companies House you must tell HMRC that your Company may be liable to Corporation Tax (CT). CT is tax due on taxable profits of limited companies and certain other organisations. Taxable profits are generally calculated by deducting all business expenses, such as salaries, Employer’s National Insurance Contributions, travel expenses etc from the turnover

For CT purposes the tax year is the financial or fiscal year running from 1 April to 31 March (as opposed to the tax year for individuals that runs from 6 April to 5 April each year). A Company Tax Return (form CT600) must be filed by you as the director for each Corporation Tax accounting period.  When filing the CT600 you must also submit a set of accounts to HMRC.

Corporation Tax due is normally due nine months and one day after the end of the accounting period. See Important Dates for more details.

Interest and penalties will be charged for late filing and late payments.

Companies and organisations have to submit CT Returns online and pay all CT and related payments electronically. Related payments include interest charged on overdue CT and penalties for not filing Company Tax Returns on time.

VAT

VAT is a tax charged on most business transactions in the UK. The current rate of VAT is 20%.

VAT-registered businesses must add VAT to the cost charged when they provide goods and services to customers. You must register for VAT if your Company’s annual turnover for the previous 12 months either exceeds a specific limit called the VAT threshold (£85,000: 6 April 2019 to 5 April 2020) or you think your turnover will go over this limit. If you consider your turnover will exceed the VAT threshold we recommend that you register for VAT as soon as possible.

VAT is added to the value of your fees. By way of example an invoice to one of your clients in the sum of £5,000 would be £6,000 (£5,000 x 20% = £1,000).

Flat Rate Scheme (FRS)

The Flat Rate Scheme (FRS) is a scheme designed to help small businesses reduce the amount of time they have to spend accounting for VAT. If you use the FRS you do not have to calculate VAT on every transaction as you pay a flat rate percentage of your turnover as VAT. This benefits you as it is simpler and easier record keeping and gives you certainty and peace of mind as to what your VAT liability will be.

A Company may only register for the FRS if it is VAT registered and its expected turnover in the next year excluding VAT is less than £150,000.

Under the FRS the Company pays HMRC a fixed percentage of gross turnover  which varies according to industry sector (e.g. 10.5% for Financial Services) but still charges 20% on goods and services. The difference between VAT collected and the amount payable to HMRC is treated as income of the Company.

However, under the FRS you cannot always reclaim VAT on your purchases. So if you purchase a substantial number of goods and services from VAT-registered businesses or you make a lot of zero-rated or exempt sales you may pay more VAT.

As part of our service we offer VAT registration to all new clients. We will also advise you whether or not you should join the FRS.

As a director of your Company you have several VAT responsibilities, including:

  • Completion of a VAT Return every quarter and
  • paying any VAT due at the same time as submitting the VAT Return in which case you will have at least four weeks after the Return period to make the payment.

Procedure: From Permanent Employment to Limited Company and Back Again

When you leave permanent employment and your Company commences trading you should be aware of the implications this will have in respect of earnings and how you will be taxed under PAYE and your liability to National Insurance Contributions.

On leaving employment your former employer should give you a form P45 as you are entitled to this by law. Your form P45 shows your gross pay to date and the tax you have paid. Assuming that you are on a cumulative code you will have received a proportion of your personal allowances (also known as free pay) due for the period from 6 April to the date you left employment. When your Company commences trading and you have decided what level of salary and start to pay yourself this will impact on your PAYE position.

If you have chosen to pay a salary above the Lower Earnings Limit (LEL) (see Tax Rates and Allowances for current and forthcoming year rates) you will be required to set up a PAYE Scheme with HM Revenue & Customs. We can assist you with the registration which is free of charge to all new clients.

HMRC will provide a PAYE reference number to your Company. As a director of the Company you have a number of PAYE responsibilities including:

  • Maintaining PAYE records, reporting under Real Time Information (RTI) and preparing relevant forms throughout the tax year;
  • dealing with the deduction of PAYE and NIC from salaries and paying these deductions to HMRC;
  • reporting benefits & expenses for directors and employees (Forms P11D and P11D(b)  by 6 July after the end of the tax year.

Interest and Penalties may be charged for late filing and late payments.

Tax deducted under PAYE

Under the operation of PAYE the salary you pay yourself as director will be added to the previous pay. The tax due is calculated on this total figure each pay period (weekly or monthly) with credit given for the tax paid in the year to date. You receive the balance of your personal allowances due each week or month for the remainder of the year. The way in which PAYE should work is that by the end of the tax year (5 April) you have paid the correct amount of tax. Any over or under payment of tax arising in the tax year should automatically be adjusted to ensure that you pay the correct tax on your total gross salary for the year.

If you pay yourself less than LEL it is not necessary to set up a PAYE scheme and therefore PAYE will not be operated. It is not possible therefore for an automatic adjustment to be made to the amount of tax due in the remaining months to 5 April. In order to correct the position and claim the full allowances by means of a refund it will be necessary to submit a Self Assessment Tax Return.

National Insurance Contributions (NIC)

Any salary/bonus paid by the company over and above the Earnings Threshold attracts a liability to NIC. Employee’s NIC is deducted from the salary/bonus paid to the director/employee. Employer’s NIC is payable by the Company on the salary/bonus.

The way in which NIC is calculated for directors is different to the calculations for employees. The calculation for directors is based on an annual earnings period rather than the normal pay periods (weekly or monthly) used for employees. There are two methods for actually calculating NIC for directors. The first is the standard method under which the total salary/bonus from the directorship are added together, NIC is calculated on this total amount with credit given for NIC paid to date for that year. The alternative method is to calculate the NIC due on a payment-by-payment basis as for any other employee. When the final payment of a director’s salary/bonus in the tax year is being made the NIC due must be reassessed on an annual (or pro-rata annual) earnings period.

This does not mean that a director will pay any more or any less NIC than an employee.

Own Limited Company to permanent employment

If you decide to return to permanent employment (and your limited company ceases trading) if PAYE has been operated on your salary you will be provided with a form P45 showing details of your gross pay, tax deducted and the code operated for the year to date. When you provide this P45 to your new employer the PAYE system will continue as described above and again, by 5 April the system should have adjusted to ensure the correct tax is deducted for the year.

Where it has not been necessary to set up a PAYE scheme no P45 will be provided to you. When you commence with your new employer and advise them you do not have a form P45 you will be required to provide certain information to your new employer. You will have to provide a declaration regarding your employment sitution and this information will enable your new employer to ascertain what code number is to be operated. It is likely that you will be put on an Emergency code on a week 1/month 1 basis until HMRC are able to advise the employer of the correct code to operate. If this is not established before the end of the tax year (5 April) then it is possible you may have overpaid/underpaid tax. In order to claim the repayment due or if you have an underpayment you will have to submit either a repayment claim or a Self Assessment Tax Return.

If an employer does not have the information to establish the correct code number before the first pay date they will have to use the ‘default’ code number. The default code OT will apply which provides no personal allowances and applies all the tax bands – basic rate, higher rate (40%) and the additional rate (45%), where appropriate.

PAYE and NIC

If your Company is to pay you a salary at or above the Lower Earnings Limit £118 per week or £512 per month (6 April 2019 to 5 April 2020) you need to ensure that your Company sets up a Pay As You Earn (PAYE) scheme with HM Revenue & Customs (HMRC). We can assist you with the registration which is free of charge to all new clients.

HMRC will provide a PAYE reference number to your Company. Subject to the level of any salaries paid (to directors and/or employees) the Company will be required to deduct tax and/or National Insurance Contributions (NIC). As a director of the Company you have a number of PAYE responsibilities including:

  • Operating under Real Time Information (RTI), maintaining PAYE records and preparing relevant forms throughout the tax year;
  • dealing with the deduction of PAYE and NIC from salaries and paying these deductions to HMRC;
  • reporting benefits & expenses for directors and employees (Forms P11D and P11D(b) by 6 July after the end of the tax year.

Interest and Penalties may be charged for late filing and late payments.

See our Tax Rates and Allowances page for details of personal allowances, income tax rate bands, NIC thresholds etc.

 

Limited Companies

Fundamentals

As a Limited Company is a separate legal entity, using this structure through which to operate your business enables you to keep your business affairs separate from your personal affairs.

A limited Company has shareholders who own the business by acquiring a share of the Company’s share capital. The shareholders appoint at least one director to run the Company on its behalf. The director(s) has legal, financial and administrative responsibilities but does not have to have any specific qualifications and can be appointed so long as:

  • They have not been disqualified as a Company Director
  • They are over the age of 16
  • They have not been bankrupt

Tax Status of the Director

For income tax and National Insurance Contributions (NIC) purposes directors are NOT classed as self employed. Directors are officers of the Company and are treated in the same way as employees. Any salary/bonus paid from the Company is subject to PAYE and NIC.

As a director/shareholder you may draw dividends from the Company. If you are a higher rate taxpayer or are required to complete a Self Assessment Tax Return then you will need to register with HM Revenue & Customs (HMRC) and obtain a Unique Taxpayer Reference (UTR) number from HMRC.

  • Dividends from the Company are liable to income tax but not to NIC.
  • Limited companies are subject to Corporation Tax on profits received.
  • Limited companies must be registered with Companies House.
  • Limited companies exist in their own right.

Shareholders may be individuals or other companies. They are not liable for the Company’s debts unless they have given guarantees (for a bank loan, for example). However, they may lose the money they have invested in the company if it fails.

Main Types

  • Private limited companies can have one or more members, eg shareholders. They cannot offer shares to the public.
  • Public limited companies (plcs) must have at least two shareholders and an issued share capital of at least £50,000 before it can trade.
  • Private unlimited companies – these are rare and usually created for specific reasons. It is recommended you take legal advice before creating one.

Set-up

  • Must be registered (incorporated) at Companies House
  • Directors must be at least 16 years of age
  • Private companies are not obliged to appoint a Company Secretary but if one is appointed this must be notified to Companies House
  • Public limited companies must have a qualified Company Secretary
  • Must set up a Company bank account

Records and Accounts

  • Accounts must be filed with Companies House within prescribed time periods to avoid a late filing penalty.
  • Accounts must be audited each year unless the company is exempt.
  • On filing the Annual Return for the first time a letter will be issued to the Registered Office containing the Company’s authentication code and instructions for use of Companies House web filing services.

Directors are responsible for notifying Companies House of changes in the structure and management of the business.

Tax and National Insurance

  • If a Company has any taxable income or profits, HM Revenue & Customs (HMRC) must be informed of the existence of the Company and its liability to Corporation Tax.
  • Companies liable to Corporation Tax must make an annual return to HMRC.
  • Company directors are usually also employees of the Company and must pay both income tax and Class 1 National Insurance Contributions on their salaries.

Liability

  • Shareholders are not personally responsible for the Company’s debts, but directors may be asked to give personal guarantees for loans to the Company.

Corporation Tax

As a private limited company the directors have to:

  • Complete a Corporation Tax Return (form CT600) every year;
  • supply a set of accounts with form CT600.

Companies House Filing

As a private limited company the directors have to:

  • Complete a (annual) return every year;
  • supply a signed set of accounts to Companies House every year.

VAT

The directors may chose to register the business for VAT. Businesses with a turnover of £85,000 are obligated by HMRC to be VAT registered.

As a VAT-registered business the directors have to complete a VAT return form for each tax period, usually every three months. This details how much VAT the business:

  • Has charged the customers;
  • has been charged by suppliers;
  • owes HMRC or is owed by HMRC.

The directors will be sent the VAT return form towards the end of the businesses tax period. The form must be completed and returned with payment (if appropriate), normally no later than one month after the end of the tax period.

PAYE Deductions and National Insurance

If drawing a salary above the Lower Earnings Limit a PAYE Scheme must be set up. More on Director’s Salary here at http://incomemadesmart.com/knowledgebase/paye-nic

IMS support all of the above required tax and accounting responsibilities.