PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Forming a company

Starting a new business

Some businesses will want to operate as a limited company. You are strongly advised to take professional advice as regards setting up and running a company. You should consider the following:

1.You and your company are separate. A company is a separate legal entity from you, and its funds are not yours. If you don’t keep to these boundaries you could end up in a lot of trouble with HMRC.

2. Look at the tax bills. You need to look at the total tax cost for both you and the company before deciding whether this is the best option for you. It is a complex equation.

3. Taking money out of your company. Money you take out of the company will usually be paid as either salary or dividends. You need an understanding of tax and company law to get this right.

4. Providing your services through a company (sometimes called a ‘Personal Service Company’). If you have a company through which you provide services to your clients or customers, you may come within special rules for personal service companies (often referred to as ‘IR35’). These provisions defeat any tax advantages of trading as a company, as compared to being a direct employee of the organisation you are working for.  You may also be affected by the Agency legislation and Managed Service Company rules.

This is a complex area where you should take professional advice.

5. Tax avoidance. Companies can sometimes enable you arrange your affairs so that you pay less tax. HMRC may challenge such arrangements.

6. Administration.  The records that you need to keep are more complex than for a partnership or sole trader. Annual accounts must be prepared in an agreed format and information submitted to Companies House. A tax return has to be completed for the company and tax paid on its profits.

7. Payroll. As you will be an employee of your own company, you need to operate a payroll. Tax and National Insurance may be due on directors’ salaries and fees. You will need to consider private use of company cars, and other benefits. Returns must be made to HMRC and your company will be fined if the returns are late.