Incorporate in haste and make mistakes at leisure
Company tax law can trip up business owners. So, to understand where they make expensive mistakes, Aftermarket sought the advice of two accountants for their top five causes for concern. First, we spoke to Helen Thornley, Technical Officer at the Association of Taxation Technicians.
Helen Thornley makes the point that in being a separate legal entity a company needs its own bank account and the funds in that account belong to the company. She says “a company is owned by the shareholders and run by directors.” Even so, she reminds us that “the assets of a company belong to the company, and director-shareholders can’t use the company account as their personal piggy bank, even if they own 100% of the shares.”
Directors wanting access to company cash will need to pay themselves a salary or vote dividends, both of which will have personal tax consequences for the individual.
Transfer of assets
The second cause for concern for Helen is that of asset transfer. She warns that “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.”
Thornley says that “particular care needs to be taken with assets which are used both in the business and personally, and also with land and property.” Then there’s the question of whether or not to transfer property such as trading premises into the company.
If the decision is taken to transfer in, then apart from upfront costs including fees for transferring any mortgage to the company, and taxes such as Stamp Duty Land Tax (LBTT/LTT in Scotland and Wales) and Capital Gains Tax, Helen cautions that “the property will form part of the company’s assets in the event of a claim against it. 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 – that could reduce the availability of Business Property Relief in the future and claims for tax reliefs on future sales could be affected.”
Overdrawn directors’ loan account
The third mantrap outlined by Helen follows from failing to keep company and personal expenditure separate as it can lead to an overdrawn directors’ loan account – “if this is not spotted early there will be interest and penalties to pay.”
In overview, if a director has put money or assets into the company then the company owes the director. The problem arises, as Helen tells, where a director draws more money out 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% of the amount overdrawn at the year end to HMRC.”
The net effect is that 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. If a 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 on a benefit in kind.
Informing customers and suppliers
Another area where Helen sees directors make mistakes is over the failure to inform customers and suppliers of the business that it has incorporated and that they are now dealing with a different legal entity. As a result, she advises that “all websites, email signatures, letterheads, stationery, invoices, order book etc. need to be updated to show the company’s name, where it was registered, the registered number, and the address of the registered office.”
There are fines for both the company and directors for non-compliance.
The last of Helen’s five trouble spots revolves around company directors not fulfilling their legally-set responsibilities to the company. She says that these include acting to promote the success of the business, 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.”
Next month: Advice from Kieron Batham-Tomkins.