Small Business Owners
- Guidance Manual -
Dated: 24 June 2008
1. Introduction................................................................................................................ 3
2. Limited Company ...................................................................................................... 4
Running a Limited Company.......................................................................................... 6
Tax Matters ..................................................................................................................... 7
Appendix 1.......................................................................................................................... 9
Checklist: setting up and registering a limited company ................................................ 9
In Business ...................................................................................................................... 9
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Becoming a business-owner is not as daunting as it may seem at first sight. Over 1,400
entrepreneurs prove this every week in the UK by starting their own (and in many cases
home-based) business. This guide can assist you with effectively incorporating a limited
company and running your own small business.
In the next chapter it will be outlined how you incorporate a limited company. What
benefits you can expect from incorporating your own limited company. What is involved
in running a limited company. And what tax matters to deal with.
We hope you enjoy reading the Guide and find it a practical source of information on
your journey to become the owner / operator of your own small business.
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2. Limited Company
A limited company is a corporation that’s liability is limited by the amount of unpaid
share capital. Shares are issued in the corporation usually to the director(s) and there will
usually only be a majority or sole shareholder. The unpaid amount of share capital is
usually zero, so the liability of the shareholder if the company fails is limited to that
In a private limited company, there must be at least one director. From 6 April 2008,
however, it will no longer be necessary for private limited companies to have a company
Setting up a limited company can either be done through Companies House or by a
Company Formation Agent.
1. Companies House
If you incorporate a company yourself, you will need to send the following documents,
together with the registration fee to the Registrar of Companies, an organisation that
keeps the records of all companies incorporated in the United Kingdom:
A memorandum of association
Articles of association
Each of these documents and how to obtain them is explained below.
MEMORANDUM OF ASSOCIATION sets out the company name, the registered office
address and the company objects. The object of a company may simply be to carry on
business as a general commercial company. The company's memorandum delivered to
the Registrar must be signed by each subscriber in front of a witness who must attest the
signature. In other words: when you sign the Memorandum of Association – do so in the
presence of someone who will sign the form as a witness to your signature.
ARTICLES OF ASSOCIATION is the document which sets out the rules for the running
of the company's internal affairs. Like the Memorandum, the company's articles delivered
to the Registrar must be signed by each subscriber in front of a witness who must attest
FORM 10 gives details of the first director(s), the company secretary and the intended
address of the registered office. The registered office can be at the same address that you
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establish and run your business from, or it can be located somewhere else. The Company
Directors must give their names and addresses, date of birth, occupation and details of
other directorships they have held within the last five years. Each officer appointed and
each subscriber (or their agent) must sign and date the form.
FORM 12 - is a statutory declaration of compliance with all the legal requirements
relating to the incorporation of a company. It must be signed by a solicitor who is
forming the company, or by one of the people named as a director or company secretary
on Form 10. It must be signed in the presence of a commissioner for oaths, a notary
public, a justice of the peace or a solicitor. There is usually a £ 5 fee payable to the person
that witnesses the statuary declaration.
Form 10 and 12 can be downloaded from the Companies House website
(http://www.companieshouse.gov.uk/forms/formsOnline.shtml). The Memorandum and
Articles of Association are not provided by Companies House, but can be purchased from
a Legal Stationer. You will find these organisations listed in Yellow Pages.
Once these four documents have been completed, you should return them to Companies
House together with the relevant filing fee. The standard registration fee is, at present,
£20. Companies House will incorporate the company in eight to ten working days after
they receive the documents. Companies House also offer a Same Day Incorporation
service, the registration fee for which is £50.00 and must be correctly received before
More information can be obtained from the Companies House website at:
2. Company Formation Agent
Using a company formation agent is usually quicker and less costly than doing it yourself
through Companies House. The agent will fill in all the necessary documents and usually
just requires a signature and payment. Once an available name is chosen, registration can
be completed in a matter of hours or days. The entire incorporation process can be done
online. Company Formation Agents often offer Registered Office and Company
Secretary services as well at a fee.
Company formation can cost as little as £25 and there are many online agents available
on the web. When you search for ‘Company Formation UK’ on the web, you will find a
large amount of Company Formation Agents offering their services.
It may be worth checking to see if you can also get your company name as a domain
name on the internet. (A domain name is www.yourcompanyname.co.uk for example.)
This is advantageous because you can set up a website with the same name as your
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Benefits of Contracting through your own limited company:
The most tax efficient way of working;
Claim a wide range of expenses - accountancy fees, equipment, software etc;
You have complete control of your financial affairs;
Running a Limited Company
A private limited company must have at least one director. If there is only one director,
this must be stated in the company's Articles of Association. From 6 April 2008, it will no
longer be necessary for a private company to have a company secretary, although if the
company chooses to have one, the duties and authority of the secretary remain the same.
A limited company is a legal entity in its own right, separate from its owners. That
means that the directors of a company cannot treat the company or its profits as their
own. All turnover and profits in the company have to be properly accounted for.
Directors are personally responsible for submitting yearly accounts and the company's
annual return to the Registrar of Companies.
1. Annual Return
The Annual Return (Form 363) is a record of general information about your company,
e.g. the address of your registered office, details of your directors, secretary, shareholders
and share capital. A letter is issued to the company's Registered Office each year just
before your Annual Return is due. If the information has not changed during the year,
then this is a very quick and easy job, but the Annual Return must be delivered back to
Companies House within 28 days of the made-up date given on the form, this is usually
the date you incorporated the company, otherwise penalties will be incurred.
If you file or would like to file online via the Companies House website the letter
provides all the necessary information to enable you to do so. If, however, you want to
file on paper, a telephone number is provided on the letter so you can request a paper
The Companies House web filing service is quick and more secure. Also the cost of filing
an Annual Return online is £15 compared to £30 for a paper submission.
2. Annual Accounts
All limited companies must keep accounting records and file accounts for each
accounting period with the Registrar of Companies. Special exemptions, however, mean
that small or very small companies can deliver an abbreviated version of these accounts.
Abbreviated accounts of a small company must include the abbreviated balance sheet and
notes; and a special auditor's report. There are also, however, exemptions for small and
very small companies from having to supply audited accounts.
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When your limited company meets the criteria for a small or very small company, you
can file small abbreviated audit exempt accounts, and these can be filed using the
Software Filing or WebFiling services of HMRC. For more information visit the
Companies House website: www.companieshouse.gov.uk.
3. Time Limits
There are strict time limits for filing annual company accounts and returns and penalties
will be imposed for late filing.
A limited company has to pay Corporation Tax on the profits it makes, PAYE (Pay As
You Earn) or employment income tax to its employees, and employers’ National
Insurance Contributions (NICs). By careful tax planning, however, the tax liability of a
company can be reduced by, for example, the use of dividends.
As a business owner and entrepreneur you can reduce the amount of tax you pay within
the rules set by HMRC. After providing an overview of the various tax matters, we will
give you some example calculations of how to optimise your company’s revenue to be
more tax efficient. Dealing with the tax matters of your own company really is not
complicated once you understand how the various components work.
1. Corporation Tax
Limited companies making up to £300,000 profit a year pay 20 per cent corporation tax,
which is going to rise to 21 per cent in 2008/09, and 22 per cent in 2009/10. Corporation
tax, however, is paid only on ‘profits’. Basically this is the amount remaining after
salaries have been paid, expenses have been deducted and dividends have been issued.
A limited company has to pay its employees and that includes any directors.
Remembering that the company is a separate legal individual to you, the company will
pay you a salary and, just as would happen in any employment, income tax and NICs
must be deducted before you receive your pay. The company also pays 12.8% of the
salary in NICs and is responsible for paying this and the employee's income tax and NIC
deductions to HMRC.
However, as everyone receives an annual tax personal allowance and there is a further
amount of approximately £2,000 that is only taxed at 10%, you can take a salary of, say,
£6,500 (up to which point no NIC is due) and only pay tax of around £200.
Shareholders in the company, you will usually be the majority shareholder, can draw a
dividend. This is the shareholder’s part of the profits. You may have to pay income tax
on that dividend, but overall you might be better off as you won’t have to pay National
Insurance contributions on it.
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When you choose to run your own payroll, do call HMRC’s New Employer Helpline (see
number below) and ask for a “New Employer Starter Package”. This package contains a
CD-rom providing useful tax information as well as a P11 calculator that helps you
calculate income tax and NIC’s.
It may be advisable to find an accountant and / or payroll provider to deal with the
company accounts, filing deadlines and payroll. There are many of these providers
available through the internet or the yellow pages and usually charge modest fees for
A business can deduct any expenses that are expended ‘wholly and exclusively’ for
business purposes, for example:
The cost of your computer equipment, office equipment, stationery, etc are all
You can also deduct a proportion of the cost of your home as an office. This
could be as much as 20% depending on certain HMRC criteria. This includes
electricity and gas and sometimes council tax.
Other expenses are deductible such as business travel and the cost of professional
services such as an accountant.
The supply of any goods and services, which are subject to VAT at any rate are called
taxable supplies whether you are VAT registered or not. If the value of your taxable
supplies is over £64,000 (currently applicable), you have to register for VAT. If the
revenue of your limited company does not exceed that amount, you do not have to
register for VAT. But you can, however, decide to register for VAT voluntarily. The
advantage of this is that you can claim VAT back from your business purchases. The
disadvantage of registering is having to fill in all the paperwork every quarter.
When you register a new company, the Companies Registrar will pass on the details to
HM Revenue & Customs (HMRC). But you must also contact your own local HMRC
office to let them know that your company exists. If you do not do this, you may have to
pay a penalty.
If you have any questions about tax for companies, you should contact the
HMRC Employer Helpline Tel: 0845 7143 143
For new businesses contact the
HMRC New Employer Helpline Tel: 0845 6070 143
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Appendix 1 – Limited Company Checklist
Checklist: setting up and registering a limited company
As well as registering your business as a company, there are several other things that you
need to do to put it on a proper legal footing. Make sure you:
• Display your company's name clearly on the outside of all its offices or other
places of business.
• Display your company's name clearly on all its business stationery, including
letters, invoices, receipts and cheques.
• Show your company's place of registration, registered number and registered
office address on all its business letters and order forms, as well as on electronic
• Send all the necessary registration documents and forms to the Registrar of
Companies, completed and signed.
• Check you have received confirmation - certificate of incorporation - from the
Registrar of Companies that your application for limited company status has been
successful. The company comes into existence when the Registrar of Companies
issues a certificate of incorporation.
• Contact HM Revenue & Customs.
• If you have a company website, it will need to show the company's name,
registered office and geographic addresses, registered company number, VAT
number (where applicable) and the place of registration. It must also include an
The above checklist is not an exhaustive list for setting up and registering your limited
company. Once you have set the company up, there are several other tax and reporting
obligations that your company must meet from year to year, the most important of these
being to file the:
• Annual Return (Form 363); and
• Annual Accounts
In terms of running the business you will need to provide the following:
Your own office.
Your own equipment including computers, telephones, printers, etc.
Your own stationary and related provisions
Have any necessary insurance related to business.
Providing ‘an office’ at home is simply having a specific space where you provide your
services. A room that is used specifically for business is more appropriate but, in some
cases, it can be an area in a room that is reserved for business.
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Stationery and Invoicing
Every genuine business should have business cards and headed paper for letters,
invoicing, memo, comp slips, etc. This gives the business an identity. You may also want
to design a website to advertise your services. This can be achieved at a very low cost by
using a website builder, for as little as £50.
Tax Protection Insurance
This type of insurance will give you protection in the case of an investigation by HMRC.
The cost is approximately £100 per annum.
There are various providers of this insurance in the market. Search the web for ‘UK tax
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