Private Limited Company

[monkeybiter]

I discovered an acquaintance of mine is the director/shareholder of a private ltd company, he has two friends who are the other two shareholders. He is in full time employment, as is his wife.

I am just being nosey and naturally suspicious but, is there some sneaky tax advantage or similar?
I'm not interested in causing him any 'inconvenience', just curious.

 

[morturn]

Maybe, a private limited company will have to pay corporation tax on taxable profit, but the directors can be exempt from some higher bands of personal tax.

A private limited company, as opposed to sole traders also has the advantage that more tax deductible costs and allowances that can set against profits.

 

[RogerS]

If the company is profitable then he is entitled, along with the other directors, to take dividends which IIRC are pretty tax-efficient.

 

[lurker]

This is one of the reasons only little people pay tax.

Also you can spend spend spend on the company credit card and then walk away from your losses and let your suppliers pick up the tab when things go t.i. t. s up.
Then you buy the assets for 3p and start all over again

 

[Roughcut]

If he is a private landlord it's fairly common to set that up as a limited company.

 

[bugbear]

I discovered an acquaintance of mine is the director/shareholder of a private ltd company, he has two friends who are the other two shareholders. He is in full time employment, as is his wife.

I am just being nosey and naturally suspicious but, is there some sneaky tax advantage or similar?
I'm not interested in causing him any 'inconvenience', just curious.

You may recall Lord Birt didn't work the BBC, despite being Director General; he worked for a company whose sole activity was selling the services of Lord Birt. That was mainly about tax.

BugBear

 

[Phil Pascoe]

As do many working for the BBC now, although I believe the BBC has succumbed to outside pressure.

 

[pcb1962]

This is one of the reasons only little people pay tax.

Actually as a limited company director receiving dividend payments you pay the same tax as anyone else, the savings come because you don't pay National Insurance on dividends.

 

[Sheffield Tony]

Yes, trading through a limited company gives you more scope in how you pay yourself to minimise tax. You can pay dividends from profit, in which case most of the saving comes because don't pay Employer's or Employee's NI on that. It used to be that the company paid corporation tax (~20% for a small company, similar to standard rate income tax), and the dividend came with a tax credit that effectively meant no further income tax was payable. This is changing, now you have to pay 10% (I think) income tax on share dividends. That erodes the benefit of paying via dividends a little.

You may recall Lord Birt didn't work the BBC, despite being Director General; he worked for a company whose sole activity was selling the services of Lord Birt. That was mainly about tax.

This is one of the things that has been made more difficult too, with the introduction of IR35 in 2000 (Just as Lord Birt finished as DG !). If your "company" has only one customer, you have to confess it is a "service company" on your tax return, and it can be deemed that it is all a tax dodge and you are effectively an employee of your client, and your tax recalculated on that basis. Lots of tradesmen also were / are playing that game.

 

[lurker]

This is one of the reasons only little people pay tax.

Actually as a limited company director receiving dividend payments you pay the same tax as anyone else, the savings come because you don't pay National Insurance on dividends.

Is there anyone in the country who does not understand National Insurance is also a tax?

 

[beech1948]

It is disappointing that the undercurrent of resentment to LTD companies still exists.

A "Service Company" is just a LTd company by another name.

1) ANYONE can start a Ltd company using form from Companies House and a small fee. That is ANYONE and EVERYONE.

2) Most people have no knowledge or comprehension about Ltd Co and propagate these myths.

3) As a Ltd Co director you are responsible for every action or inaction of your company and the penalties under the Law can result in long terms of imprisonment.

4) A Ltd Co must produce annual accountancy reports to HMRC at a cost of £1500 to say £3500 for a small Co and the accountant must sign off that the accounts are true and real representation of the state of the company or else.

5) IF you take a salary then you pay exactly the same tax as everyone else. There is no way to avoid this. If you run a Ltd Co and have a full time permanent job then HMRC simply adds the total salary together and charges you accordingly. The Ltd Co must deduct the tax at source as well as NI. No Escape.

6) A slight advantage is that you can choose your salary as to how small or large it is or even none at all.

7) The difference between the costs of running the Ltd Co and the Revenue or Income of the Ltd Co are decreed to be profits and are all subject to tax. Currently corporation tax is I think about 21% ( may now be 19%) and this is typically about 10% less than average tax for a man earning £60k. Thus it is advantageous to take dividends instead of salary. You could even take quarterly or monthly dividends though the later case would attract HMRC investigation. No NI is paid on dividends.

Ltd Cos have been in existence for almost 180 yrs and are a normal and legal way to work with HMRC.

The newspapers, the BBC, ITV etc etc simply stir-up a hornets nest of innuendo and craaaaap every now and again when they need to misrepresent something to the public to sell newspapers.

The RULES for Ltd Co are openly available on the .gov sites, Companies House and those dodgy companies who offer to start such an enterprise for you at high costs.

Have we got it now. Ltd Cos are NORMAL, LEGAL ways to establish a company.

Finally the limited protection to personal assets a Ltd Co provides can be set aside by a court and access to your personal property can be made to recover the value of any unpaid taxes. So if your a naughty director you can suffer greatly.

Those directors who close one company in distress and open another quickly do so within the legal framework that exists. Its rubbish but the Law exists. A company can be put into liquidation, its assets sold off to the wife/friend/second company quickly and easily and a new company restarted to use those assets if its within the legal framework.

Sorry for the lecture guys. I just get a bit irritated at the myths, legends and untruths which are hinted at, accused unfairly by those who have not gone out and found the facts.

 

[doctor Bob]

Well put beech.

I'd just like to add that setting up and making a go of a company, employing people, dealing with HSE, insurances and general shiteness is difficult, hence most folks stick with the hum drum world of employment.
Every major debt I take on is covered by my home as a guarantee.
At the moment I hate it with a passion, I'm too busy and feel like I'm having a breakdown everyday, but as I keep emphasising to my misses, when you are an employer rather than an employee it is just not feasible to have a breakdown. Therefore there is a good chance I will just be a mass murderer at somepoint, so watch it.

 

[RobinBHM]

Being a Ltd Company these days isnt an easy way to avoid exposure to debt recovery. Banks and landlords will automatically require directors to be guarantors. Suppliers may also do the same, many now have insurance cover for customer accounts and therefore keep very tight credit control.

 

[NickWelford]

I am aware of people who buy their everyday things through the company thereby reducing the profit and reducing tax liability. Many things can be listed as legitimate expenses. Plus if you happen to be VAT registered, I'm sure much tax is reclaimed.

 

[beech1948]

Nick,

If a company trades above the VAT threshold of around £84,000 then you must apply for a VAT account. Failure to do so will result in HMRC paying a visit and charging you very high % penalty fees as well as recovering the missing VAT. Payment is to be immediate and you will be on the VAT peoples sh*te list for a few years.

VAT has too be collected by you and sent to VAT man every month. Failure to do so results in expensive penalties.

Under the VAT threshold you do not need to add VAT to your bills BUT you also can not claim back any VAT paid on your suppliers invoices/bills.

VAT claim backs NEVER are as large as the sums you need to pay the VAT man.

Finally the VAT man can enter your place of work, your second job sites, your home, your caravan or whatever at a moments notice and take away anything they want to to show you as a no good miscreant.

HMRC can be quite brutal. The VAT man makes the SAS look like childminders. Never get them alarmed about you as you will not enjoy it.

 

[beech1948]

Nick,

Yes you can buy stuff through your company but it is then not yours it belongs to the company. Capital items eg a computer have to be accounted for and written down over several years to get any benefit from. Try buying three cars through your company and also doing the road tax and insurance through the Co and HMRC will soon get round to doing a full scale office visit and inspecting every bill, expense claim, etc.

I have only ever been through one inspection in some 30+ yrs trading. It took 4 days, cost me £6000 in accountants assistance and resulted in an underpayment to HMRC of £289 some 3 years prior to the investigation. They go back 7 years. With fines and interest that cost me nearly £3000.

So nearly £10,000 over 4 days plus loss of sales etc etc for a silly little error. Damn. Thank God for insurance. See your accountant about this.

 

[Sheffield Tony]

A "Service Company" is just a LTd company by another name.

Not in the context of the question asked on tax returns. It helps identify the use of a limited company principally for tax minimisation.

 

[Phil Pascoe]

Historically customs and excise were given rights of entry when the inland revenue weren't because search warrants were granted by magistrates (backed up by the clergy) who in places like Cornwall were themselves the worst smugglers, so were reluctant to grant a warrant to raid another magistrate. I assume when the Inland Revenue and the Customs and Excise were merged the powers that were assumed by the joint authority are those of the original Customs and Excise.

 

[beech1948]

SheffieldTony,

No. Simply wrong. A Service Co is a Ltd Co and subject to the full set of fiscal and taxation laws. There is no escape.

The spin about Service Co's has been done by the press and government to set up the unthinking public to hate the ideas.

I have recently retired from my business but still run a consultancy as a personal service company. I get a few tax advantages from it as I have previously mentioned but I get no extra tax reduction than any other Ltd Co. I have to do this as many customers will not accept any other status than a Ltd Co. eg Self employed is not acceptable.

The whole idea of Service Co to avoid tax is a myth. After all you lose upto £3500 in accountancy payments before you get any gain and that takes some getting back.

What is it you feel these service companies do that is avoiding tax....be detailed and ready for a rebuttal.

 

[Sheffield Tony]

SheffieldTony,

No. Simply wrong. A Service Co is a Ltd Co and subject to the full set of fiscal and taxation laws. There is no escape.

The spin about Service Co's has been done by the press and government to set up the unthinking public to hate the ideas.

I have recently retired from my business but still run a consultancy as a personal service company. I get a few tax advantages from it as I have previously mentioned but I get no extra tax reduction than any other Ltd Co. I have to do this as many customers will not accept any other status than a Ltd Co. eg Self employed is not acceptable.

The whole idea of Service Co to avoid tax is a myth. After all you lose upto £3500 in accountancy payments before you get any gain and that takes some getting back.

What is it you feel these service companies do that is avoiding tax....be detailed and ready for a rebuttal.

There's obviously some sensitivity here, and I think you are perhaps reading things into my posts I did not intend. I'm not faulting anyone for minimising their tax by legal means. I am a company director too, and of course take some interest in tax efficiency.

As stated previously, being a shareholder of a limited company makes it possible to use share dividends to completely(*) avoid employer's and employee's NI, which is a possible answer to the OP's question. I'm not saying it is wrong either morally or legally. The "Service company" question on the tax return relates to IR35. As I understand it is aimed at preventing people using a limited company as an intermediary solely to minimize tax and avoid NI, as mentioned here.

And small companies are mostly not required to provide audited accounts, so if you know how you don't actually need an accountant but can do it yourself. Might not be good use of your time though.

(*) Almost - it is worth paying a little NI for state pension entitlement.