Have had more web traffic recently and have managed to acquire a new client today.
It's a one man band, limited company, not VAT registered.
Personally, I think he was ill advised to become a LTD, and was told that it was the most cost and tax efficient way to go by his (ex) accountant but that's another story.
Anyway, expect a few questions to arise but in the meantime, can any one think of the things I should look out for, when dealing with a limited company, that might bite me?
if he's a service provider you might find that agencies would only deal with him using that legal form. Certainly if you want to contract in banking or high finance it's either limited directly or limited via an umbrella company or the agencies won't touch you due to the risk that the contractor might be construed to all intent and purpose as an employee of the client.
The main thing with limited companies is to ensure separation from the owners. Purchases should be in the name of the company.
Don't forget that everything with a limited company is based on the companies year, not the tax year.
You need to file changes and an annual return with companies house.
The director is an employee of the company.
If the company is a service company then IR35 may be applicable. Even if it is not you need to be prepared to argue in IR35 speak with the revenue.
Sure that there's loads that I need to tell you but can't think what off hand so I'll just add to this as and when I think of things.
Let me know any specifics that you have problems with and I'll point you in the right direction.
cheers,
Shaun.
Thought of one! If he pays himself too many dividends the revenue will say that it's really salary and he'll end up paying NI on it.
If he pays himself a fortune in dividends and hardly anything in salary then the revenue will say that it's really salary.
As a director your client has a fiduciary duty of care for the company not dissimilar to the duty of care one has for a child.
-- Edited by Shamus on Thursday 4th of March 2010 04:51:39 PM
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Knew I could rely on you, I will give you more revision soon
He's a refigeration engineer, with a very small turnover (below VAT threshold at least) and his accountant told him to pay himself minimum (below tax threshold) and take the rest as divis. But since setting him up, he seems to have abandoned him.
He was supposed to sort out the PAYE, doesn't return my clients calls (more like cries of help, as he doesn't know whats going on) and generally seems to avoid him.
The client actually got a Tax Coding notice, stating that they (HMRC) are aware that he is between jobs (their words) and that the coding allows for this.
I know of the accountants in question and it surprises me as they are quite a large concern.
Sometimes it seems that the large practices give the small clients to trainee's for practice... Of course, the clients are never told that. and of course, if this ends up an investigation of the client then the client ends up paying through the nose for someone more senior at the practice to hold their hand.
the reality for your client is that they should pay themselves a reasonable salary on which they are able to pay their bills. This isn't what the accountant would say and your client may get away with paying minimum salary... But, the revenue are more and more applying tax retrospectively ass they win cases and this area is one of their bug bears.
For dividends, as this is not a service company I would suggest that the client pays a dividend no more than twice a year (one mid year, one just before the company year end) they can only pay a dividend out of profits.
If the companies not making a profit then they cannot have a dividend.
As for the tax code. The revenue seem to be making a real hash of them at the moment. I got one including having rental income from two properties that I sold three years ago. (now sorted).
Has your client got his yellow book yet for paying his tax & NI?
Don't forget that he also has to pay employers as well as employee's NI contributions (which is what makes dividends so appealing as there's no NI on divi's!).
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
The client has been chasing the accountant since before christmas and hasn't received a thing from him. I am not overly convinced that anything has been done at all.
Having met the client, my impression is that he would give the accountant carte blanche to deal with everything as he doesn't understand that side of things (which after all, is why he approached an accountant in the first place) and would totally rely on the advise given. I suspect that the clients responsibilities haven't been fully explained.
Other than the protection of limited liability, which really will not benefit the client that much, as he only appears to have a few, small value, trade creditors. He is saddled with the responsibilities of a director and the administration of PAYE, all for probably less than 20k a year.
Starting to think that the money printing licence was being drafted as he walked in!!
Sorry, forgot to say that the company is only eight months old
-- Edited by Wella on Thursday 4th of March 2010 06:06:00 PM
Have you sent your clients previous accountant a letter obtaining professional clearance and handover information? If not, my advice would be to do so straight away so you have a clear idea of what exactly has, and has not, been done.
Shamus wrote:If he pays himself too many dividends the revenue will say that it's really salary and he'll end up paying NI on it.
If he pays himself a fortune in dividends and hardly anything in salary then the revenue will say that it's really salary.
-- Edited by Shamus on Thursday 4th of March 2010 04:51:39 PM
Hi Shaun,
That's interesting. The majority of my clients are limited companies and they all use different accountants. On their accountants advice, most of them pay a directors fee of equivalent to their personal allowance via the payroll with the rest of their income in dividends. My (limited) understanding was that this was an acceptable form of directors renumeration.
My apologies to everyone if I have taken this post off topic!
-- Edited by Amy8n on Thursday 4th of March 2010 06:29:49 PM
Shamus wrote:If he pays himself too many dividends the revenue will say that it's really salary and he'll end up paying NI on it.
If he pays himself a fortune in dividends and hardly anything in salary then the revenue will say that it's really salary.
-- Edited by Shamus on Thursday 4th of March 2010 04:51:39 PM
Hi Shaun,
That's interesting. The majority of my clients are limited companies and they all use different accountants. On their accountants advice, most of them pay a directors fee of equivalent to their personal allowance via the payroll with the rest of their income in dividends. My (limited) understanding was that this was an acceptable form of directors renumeration.
My apologies to everyone if I have taken this post off topic!
-- Edited by Amy8n on Thursday 4th of March 2010 06:29:49 PM
Thats v. interesting amy, i say as i scratch my chin, that is exactky what i thought was the best route for directors.
well done wella!
-- Edited by lor on Thursday 4th of March 2010 06:44:55 PM
probably not good advice from me as I'm sure that the revenue are more lenient with most directors than they are with those of one man service companies.
The revenues stance for such companies was always that if a director could not live on their salary then the dividend was regarded as salary.
I just know that I'm going to spend the rest of the evening now trying to find where that's actually written down on the HMRC website.
I know that it is, I've seen it... Just can't remember where!
We've not finished with this point. I'll be back.
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
probably not good advice from me as I'm sure that the revenue are more lenient with most directors than they are with those of one man service companies.
The revenues stance for such companies was always that if a director could not live on their salary then the dividend was regarded as salary.
I just know that I'm going to spend the rest of the evening now trying to find where that's actually written down on the HMRC website.
I know that it is, I've seen it... Just can't remember where!
Shaun, I told you I'd give you more revision, just hope it isn't distracting you from your "real" studies.
Amy, thanks for the input, the client is contacting them directly on this occasion. Excellent website by the way (Couldn't resist checking it, after seeing the logo) Is it new?
Been through all of my old bits and pieces (my office floor now looks like the Somme!). Basically HMRC really, really don't like it and to pay disproportionate dividends is just asking for an investigation... BUT... No matter how hard they come on it seems that they don't legally a leg to stand on.
They used to use this to go after IT contractors but once father Christmas gave them IR35 they moved onto using that to beat the entrepreneurial spirit out of people instead.
The general advice over on accounting web seems to be that the client should pay themselves a salary sufficient to count towards the annual requirement for a state pension. Also, although dividends can be taken more regularly it's a good idea to restrict them to quarterly.
One proviso though. Dividends cannot be paid if the company is running at a loss.
right, off to sit up the corner and hang my head in shame for the poor advice earlier.
Shaun.
-- Edited by Shamus on Thursday 4th of March 2010 08:15:18 PM
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Bill, Well done on getting the new client.I am sure you are more than capable of getting things back on track for the client. I would agree that things may be starting to pick up as i have has two enquiries this week although i think one of them was just after some advice. It just goes to prove the point that people choose big accountancy practices as they think that they are going to get everything done correctly and this is not always the case. Well done stephen
Congratulations, i would agree with you in that i also think things are picking up. I also think it comes down to hard work and 'hanging' on in there and having faith in the services you provide.
Regarding the salary vs. dividends, HMRC don't like this one bit and i've even had a heated debate with a representative from HMRC at a small business gathering about it. They'll try and persuade any business owner not to conduct there affairs in this way. That being said, i advise my clients to use the minimal salary and dividend renumeration process.
What level of service are you going to offer this client? Will you complete the submissions to companies house?
I normally get directors to make a standing order each month to cover their personal allowance with the reference 'Salary' and a further monthly payment of whatever they need and as long as they believe their will be enough taxed profit/reserves to cover it with reference 'Dividend'. This helps to convince hmrc that it is a dividend and not salary (monthly board meetings/dividend vouchers can be drawn up to substantiate this too). You also need to ensure that the directors loan account doesn't go overdrawn (there is a £5k de minimus regarding BIKs) but the director could be subjected to a S419 tax bill which can only then be reclaimed once the loan is repaid (and certain timing issues are overcome).
Neil I do intend to offer him the complete service.
Rob, interesting how you handle salary, how do you square this with PAYE and submissions for NI and tax. Also it's a bit early in the morning for me and I'm only on my first caffiene fix couldn't work out BIKs? (probably kick myself when you tell me)
The one lesson I have had reinforced in this regarding clients is Communication. I think that the main problem the client has had, has been the fact that despite his requests, nobody was talking to him and he has voted with his feet.
It is true that HMRC don't like this salary / dividend route as it is the most tax efficient way for companies to work and mean HMRC don't get as much tax as they would like. It is however, currently a perfectly acceptable way of extracting money from your company. There are rumours that this won't last for long as HMRC are looking for ways to get round this and thus extract more tax from businesses.
To ensure dividends are seen as dividends, they need to be supported by the correct paperwork - eg board minutes and dividend vouchers. Dividends can be taken whenever and how often you like as long as there is profit in the company. The nature of dividends also means they are not normally a regular payment and so dividend payments of the same amount each month have the danger of being seen as wages rather than dividends.
Zoe wrote: To ensure dividends are seen as dividends, they need to be supported by the correct paperwork - eg board minutes and dividend vouchers.
Hi Zoe In the case of my client, he can sit around his kitchen table, say to himself "shall I have a dividend" then say "yes", then write a note to himself. Does this count?
Even though he is just one person and in reality isn't going to hold a formal board meeting with himself, he should still have the proper paperwork to protect himself in the case of an HMRC investigation.
I am not in the office today but have a template for the board minute and dividend vouchers that I can let you have on Monday if you would like?
I was only jestin in my last post. Like I said earlier, I think for this client becoming a Ltd Co was a bit of an overkill. I just can't see the justification, apart from a relatively small NI saving and the liability protection can anyone see any advantage he will have.
Perhaps it's me but in this instance I can only see negatives for him.
I have a client who was sole trader, she got a new accountant who advised her to go Ltd in 2007. She couldn't get her head round not being able to use the company as her personal piggy bank no matter how many times I told her. I had a word with the accountant when he came to do the 2009 year end. He came last week and said words to the effect that "due to new legislation meaning it was not as lucrative for her to be Ltd" (I don't know of any) she was going back to sole trader from 5th April this year. Now call me suspicious but I think he was worried about the way she'd be using the company. Anyway I think this to'ing and fro'ing is likely to trigger an investigation which could be very interesting.
Sheila (back from a week in sunny but cold Carnforth in the caravan)
I even commented in an earlier posting "where's Sheila when you need her", now I know. Despite the chill I hope you enjoyed the break.
I think I have a suspiscious mind as to who benefits when a small company is advised to go Ltd. Many years ago I had a small business I started with a friend. We were advised by our accountant to go Ltd from the start (this was in the days when audited accounts were required). In hind sight and with the knowledge and experience I have gained since then, I see the only person that benefited was the accountant.
Going back to what you suggested regarding a standing order to "Salary". How would you deal with the PAYE aspect, are you suggesting taking a single annual salary payment through PAYE and repaying the directors loan account for the Salary standing order?
Bill
-- Edited by Wella on Saturday 6th of March 2010 11:57:42 AM
No this would be a monthly payment of, say £500 in order to use up personal allowance. The obvious benefit here is that the company's profit is recuced by £6k but the director pays no personal tax and ni (there will be minimal ers ni at the end of the year at this rate). Dividends are then paid monthly (Again assuming enough profit is made), and the benefit here is that because the dividend comes witha 10% tax credit, then the director will not pay any further tax/ni unless his overall income puts him into the higher rate band. The company will not pay ers nics on dividends either. The question of whether it is worth incorporating, apart from benefits of limited liability, credibility etc, becomes a question of how much taxable profit is likely to be made. CT is now marginally higher than income tax but of course theer are these benefits of dividends. Converesley the added compliance issues and extra work for the accountant which means a far higher accountancy bill may outweigh the benefits. As a rule of thumb, I wouldn't suggest incorporating unless the business had taxable profits of at least £20k. I haven't done the maths but that would probably lead to a tax bill differentiation of around £1000, of which the accountancy bill will eat into big time and he will have to get used to running his business in a much more professional manner (which is no bad thing I guess!)
Since Friday I have discovered that the client has not taken any salary as such but has been just drawing out money as and when he needed it, to cover his living expenses. Because he is not familiar with the finer points of a limited company or PAYE he has just made a record of how much. I am now educating him and he is really not a happy bunny as he wasn't told anything before.
I don't know how much he has drawn at the moment but what I was wondering, is how to bring him back on track with regard to the money withdrawn and getting him upto date with PAYE, bearing in mind 5 April is just around the corner.
I think a quick tot up of his 'drawings' need to be done. It may be a case of 'sweeping the amounts upto his PA into salary and considering the rest as dividends. This is not how to do it by the book, however worst case scenario is that hmrc will deem all this as salary should an inspection happen and he will have to gross amounts up and pay tax, ni, fines and interest. Personally I think if he gets his house in order from now on, then even with an inspection, a reasonable inspector will give him a little warning only. Though much depends on how much is involved. At least Bill, you are putting him on the right path for which he should be grateful. Never promise an outcome but tell him what could happen.
Not the way to do things but he could state that he only took salary in February. That way everything else is straight.
If you give me the guys tax code and amount he's taken out of his piggy bank assuming that he hasn't had any other job this year I'll tell you how much he needs to pay over in Tax, EMPE and EMPR (got a nice little spreadsheet to handle just this sort of client).
Note that the figures would be for the tax year (so good for the clients impending April 5th), not the company year which for limited companies are quite different than for sole traders that tie in with tax years.
cheers,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Think that I really need to take a speed typing course as my two fingers and a thumb for the space bar never beats him to a post.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
It was my boys birthday and I took him to the flicks to see Avatar... Absolutely the best movie that I have ever seen! the build up through the movie was timed perfectly and at the end neither of us could believe that three hours had gone by. We're now trying to find a cinema that's showing it in 3D so that we have an excuse to see it again!
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I was working the whole weekend unfortunately! Mind it was stuff I should have done already! I went to see Avatar a few weeks ago and it wasn't in 3D and I walked out after half an hour with a headache. It felt like there were all these special effects which were wasted because it wasn't on 3D but I kept being drawn into the depth in the screen. It diidn't clean up at teh Oscars last night as expected. I'd never even heard of the one that won everything!
No probs. My direct email is shaun.morris1@virgin.net as appreciate that it's not good to post details even if nobody can track them back to a person.
If you don't get a reply within an hour of posting me then my spam filters eaten it. Probably best that you post on here to tell me that you've sent it.
Keep going through brain meltdown in the study department. Group cashflow statements are giving the old grey matter real jip and keep popping back on here for light relief. Usually when winding down before bed.
I've managed to avoid a lot of posts that I would have normally picked up but yesterdays ICB thread really brought the grumpy old man out in me again.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I am sure that we will give you enough revision on here as well.
I'm still undecide what to do about the ICB. The changes don't affect me and I have always had good responses from them. I think my main regret is that I should have gone down the AAT route but at the time, there were a lot of things to consider not least the costs. IF (its's a big IF) the ICB raise their profile, within the profession and within commerce, then it may be worth sticking with them but at the moment I view their actions the same as a number of others, that their reason for existence is to generate an income.
I have poked about a bit on Co House website but cant find much, other that they are on their third name, are PRI/LBG/NSC (Private, Limited by guarantee, no share capital, use of 'Limited' exemption) and that they have Total Exemption Small when it comes to filing their accounts. I personally think, that as we are members, they should publish the accounts, so we can see where our money goes.
Bill
Shaun, You've set me off again
-- Edited by Wella on Monday 8th of March 2010 11:56:57 AM