ExEcutivE REPORt Hazards of Incorporation
Company tax law can trip up a business and its owners, especially when the rules around running a company are not understood. So where do owners go wrong? asks Helen Thornley.
A
company is owned by its shareholders and run by directors although in a small
business these are often the same people. Even so, the assets of a company belong to the company, and the director-shareholder can’t use the company account as their personal piggy bank, even if they own 100 percent of the shares.
If the director wants access to cash held by the company, they will need to pay themselves a salary or vote dividends, both of which will have tax consequences for the individual.
Transfer of assets The transfer of assets such as property, plant and machinery can all have tax consequences. There are reliefs and elections available to mitigate the tax costs of incorporation, but certain conditions will need to be met. Particular care needs to be taken with assets which are used both in the business and personally, and also with land and property.
If the decision is taken to transfer property in there will be upfront costs, including fees for transferring any mortgage to the company, and taxes such as Stamp Duty Land Tax (or LBTT/LTT in Scotland and Wales) and Capital Gains Tax. The property will also form part of the company’s assets in the event of a claim against the company. But if the property is kept out of the company – which may allow for the charging of rent and help to protect it from claims against the company as well as being simpler – that could reduce the availability of Business Property Relief (BPR) in the future and claims for tax reliefs on future sales could be affected.
Overdrawn directors’ loan account If the director has put money or assets into the company then the company owes the director. The problem arises where a director draws more money out of the company than
the company owes them, which is effectively treated as a loan to the director. If this loan is not repaid within nine months of the company’s year end, the company must pay what is effectively a penalty charge of 32.5 percent of the amount overdrawn at the year end to HMRC. Either the director will need to transfer money (or assets) back to the company or vote themselves more dividends or salary – which will have a personal tax consequence – to give them the funds to repay the loan.
Statutory duties A company director must fulfil, by law, certain responsibilities to the company. These include acting to promote the success of the business and exercising reasonable skill and care as well as avoiding or managing conflicts of interest between what is for the benefit of the company and what would benefit the director personally. Failure to do this can result in serious legal consequences for the director who might be held liable personally for any failures to uphold their duties.
Companies House and company accounts Company accounts are more formal than partnership accounts and
need to be prepared in accordance with specific reporting standards, and filed with
If the director is overdrawn by more than £10,000 at any time during the year, they must also pay interest to the company at a minimum rate set by HMRC or be assessed to a benefit in kind.
Informing customers and suppliers It is important to inform customers and suppliers of the business that the business has incorporated as they need to know they are now dealing with a different legal entity. In addition, all websites, email signatures, letterheads, stationery, invoices, order book etc all need to be updated to show the company’s name, where it was registered, the registered number and the address of the registered office. A company that does not disclose all the details required risks fines for both the company and the directors.
Companies House where they are then made publicly available.
Directors also need to ensure details held
by Companies House are kept up to date. Further, there other Companies House filings required by law such as the annual confirmation statement.
Tax complexity In addition to preparing the company accounts, the company will need its own Corporation Tax return, while it is very likely that the directors will continue to need to complete and file personal tax returns via self-assessment to report salary, interest or dividends paid by the company.
In summary It’s very easy for a business owner to misunderstand the law in relation to companies. Good advice is essential. n
Helen Thornley is a technical officer at the Association of Taxation Technicians.
16 Executive Hire News - Nov/Dec 2022
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