In recent years there has been a surge in one-person limited companies and a subsequent fall in sole traders as more and more people wake up to the potential tax advantages of incorporating their business. While incorporation can bring a number of advantages in terms of the tax you pay on earnings, it does also introduce a number of new tax reporting obligations which make your self-assessment tax return look like a walk in the park.
In this guide for one-person limited company consultancies, we’re going to take a look at the HMRC obligations for contractors and consultant one person limited companies, as well as the potential problems consultants can find themselves in with HMRC.
1. Corporation Tax
Limited companies are separate legal entities to the directors who manage and own them. As such, the company will have to pay taxes on its profits, and directors will have to pay tax on any income they receive from the company.
The company must pay corporation tax on its annual profits. From April 2015, the first £300,000 of profit is taxed at the small company rate of 20 percent; the next £1,200,000 is taxed at the variable marginal rate; while profits over £1,500,000 are taxed at the main rate of 24 percent. The overall rate of corporation tax is set to fall to 19 percent in 2017, and to 18 percent in 2020.
You will have to prepare and file a corporation tax return for your accounting period. This should include:
• Your profit and loss for corporation tax (this is different from the profit and loss shown in your annual accounts);
• And your corporation tax bill.
You can produce the return yourself or pay an accountant to prepare and file the tax return on your behalf. The deadline for filing the tax return is 12 months after the end of the accounting period it covers. If you fail to submit your corporation tax return by the deadline, you will be subject to late filing penalties.
If you cannot afford to pay your corporation tax bill on time, you should contact HMRC immediately as you may be able to get more time to pay, or agree to pay your bill in instalments by direct debit. By contacting HMRC, you may also be able to avoid late payment penalties. Be aware you should not take dividends if there are HMRC tax arrears as to do so could cause serious problems for the director personally if the company has to close insolvently.
2. Income Tax / Self Assessment
Limited company consultants must settle their income tax liabilities by submitting a self-assessment tax return. Your tax return must be submitted by the 31st January each year along with the payment. You may also be asked to make payments on account on the 31st Jan and 31st July towards the tax liability for the current year, which assumes the same level of income as the previous.
You will be subject to penalties for failing to file your self-assessment tax return on time. You should also contact HMRC immediately if you’re unable to make your self-assessment tax payment to arrange Time to Pay.
3. Value Added Tax (VAT)
If your limited company generates a turnover of more than £82,000 for any 12 month period, you must register for VAT. VAT is a tax applied to all services you provide to your clients. The standard rate of VAT you charge to the client is 20 percent. Essentially, you are collecting this tax on behalf of HMRC and must register within 30 days of your business’s turnover exceeding the threshold. If you register late, you will have to pay what you owe from the date you should have registered. You may also have to pay a penalty depending on how late your registration is.
As a one-person limited company, you are responsible for submitting an online VAT return to HMRC each quarter, together with an electronic payment. If you can’t make a VAT payment when it falls due, you should contact the HMRC business payments support service to see if they can assist you. You should also be extremely careful, as an inability to make a VAT payment can be an indicator that the company is insolvent. Continuing to trade as a limited company while insolvent can lead to wrongful trading and make you personally liable for a proportion of the company’s debt.
4. National Insurance
Consultants also need to register for PAYE for themselves (if you are drawing a salary) and any employees, as National Insurance contributions (NICs) will have to be made on any salary or bonus payments over £8,060. Most consultants pay themselves a small salary, often below the NICs threshold, instead of taking the majority of their money in the form of dividends.
Penalties are applied to the late payment of NICs, and a company director could even be made personally liable for the amount due via personal liability notice (PLN).
5. Dividend Tax
As a company shareholder, paying yourself a dividend is one of the most tax efficient methods of taking money out of a business. New dividend tax rules will come into force in April 2016, which will increase dividend tax for the majority of consultants. However, dividend income is not subject to National Insurance contributions, representing a significant tax benefit for company owners.
Currently, no tax is payable on dividend income which falls below the higher rate income threshold. Higher rate taxpayers and additional rate payers must pay 25 percent and 30.56 percent respectively, which means taxpayers in every band pay less than they would on earned income.
How can we help?
If you’re struggling to make any of the above tax payments, please get in touch with the experts at CompanyDebt.com for free advice. Making HMRC payments is the most common challenge consultants and contractors face when dealing with company creditors, and our experience working with HMRC means this is a problem we’re perfectly placed to help with. Call 08000 746 757 or email [email protected] or seek help on the Live support on the right-hand side at the bottom of the page.