Tax and HMRC Requirements for Limited Companies

Registering with HMRC

Companies House automatically notifies HMRC when a limited company or limited liability partnership is incorporated. Soon after your business has been set up, you should receive a letter from HMRC at your registered office address advising you of your tax obligations and requirements. This letter will also contain your business Unique Taxpayer Reference (UTR). You will need to use this for all tax related matters.

Limited companies must register for and pay business taxes to HMRC on all forms of taxable income - this includes Corporation Tax and Value Added Tax (VAT). Limited liability partnerships are not required to register for Corporation Tax; instead LLP members have to register individually for Self-Assessment. LLPs do however have to register for VAT if their annual taxable turnover exceeds the current VAT threshold.

Corporation tax and Company Tax Returns

The trading status of all incorporated companies is either ‘active’ or ‘dormant’. If your company is not carrying on any form of business activity, it is dormant. If your company is trading, it is considered ‘active’ for corporation tax purpose and it must be registered with HMRC within three months of any form of business activity taking place. ‘Business activity’ can mean any of the following:

• Selling goods or providing services with a view to making a profit.
• Buying goods and services.
• Leasing or purchasing land or property.
• Receiving income from rental property or sales.
• Managing investments - buying shares in another company and receiving dividend payments.
• Issuing dividend payments to shareholders.
• Earning interest.
• Employing staff and operating payroll.
• Paying directors’ salaries.
• Advertising your products and services
• Paying accountancy fees through a business bank account.
• Any other significant accounting transactions (monies spent or received) that must be entered into your company’s accounting records.

Registration process

You must register for corporation tax on HMRC’s website by following these steps:

• Create a Government Gateway account by providing your own name, an email address and a password.
• View and accept the Terms and Conditions.
• Take a note of the User ID displayed on the screen.

Provide the following details about your company:

• Unique Taxpayer Reference (UTR).
• Registered company name in full.
• Company registration number (CRN).
• Date your company became active - this will determine the start of your corporation tax accounting period.
• Address where your company’s principal business activities take place.
• Nature of main business activities.
• Accounting reference date (ARD) - the date your annual accounts are made up to. Companies House will provide this information but it is normally the anniversary of the last day of the month of company formation.

This information will be used to work out your company’s 12-month corporation tax accounting period. Shortly thereafter, you will be given deadlines for filing Company Tax Returns and paying corporation tax at the end of each accounting period.

Corporation tax accounting period

Your accounting period for corporation tax will normally be 12 months’ long, and it will usually match your company’s financial year. Your financial year is the time covered by your annual accounts. Your accounting period will start on the date your company becomes active for corporation tax. It will end on the ARD of your annual accounts.

In the first year of trading, you may find that your accounting period is slightly longer than 12 months. This happens if a company is incorporated during a month and starts trading as soon as it is incorporated, so the trading period will be 12 months plus the part of the month when you began trading. If this is the case, you will have to prepare two Company Tax Returns: one return will report on the first 12 months; the other return will report on the additional days/weeks.

After the first year, your accounting period should align with the 12-month financial year covered in your annual accounts. It is possible to shorten your accounting period if required by following the correct procedures with HMRC.

Preparing a Company Tax Return

HMRC requires a Company Tax Return every year, even if your company fails to make a profit. You must deliver tax returns online on form CT600, with full statutory accounts and accurate computations and calculations detailing how the final figures were worked out. You may wish to hire an accountant to assist with this.

Paying corporation tax

Corporation tax is charged on all taxable income after the deduction of salaries, wages, costs, expenses and reliefs. You will not receive a tax bill from HMRC - you are responsible for working out how much tax your company owes every year by preparing annual accounts. Most small companies can use HMRC’s online accounts template, but it may be worth hiring an accountant if you have no experience in this area.

You must submit the relevant corporation tax payment to HMRC electronically - you cannot pay by post. The various options available to you are:

• Faster Payment through online or telephone banking
• CHAPS
• Bacs
• Direct Debit
• Online by debit card or credit card
• At your bank or building society
• At the Post Office

Bear in mind the amount of time required for payments to reach HMRC. If your payment arrives late, you may be fined. However, if you pay your tax early, HMRC will pay you interest.

Deadlines

Your corporation tax payment deadline will fall before the deadline for sending your Company Tax Return:

• You must pay corporation tax no later than 9 months and 1 day after the end of each accounting period.
• You must file a Company Tax Return no later than 12 months after the end of each accounting period.
• Full statutory accounts must be included with the Company Tax Return.

Dormant company requirements

If your company is inactive (dormant/not trading) you will not have to prepare a Company Tax Return or annual accounts for HMRC if your company has been dormant for the entirety of its accounting period, nor will you have any corporation tax liabilities. You will still be required to complete dormant company accounts for Companies House.

You must notify HMRC as soon as possible after company formation if your company is not trading, otherwise you may be asked to prepare a Company Tax Return. You can report your company’s dormant trading status by contacting your local corporation tax office - you will find their details on any official letter you receive from HMRC regarding tax.

Value Added Tax (VAT)

Value Added Tax is charged on most goods and services that are bought and sold. Businesses can add VAT to the prices they charge on the goods and services they sell to their customers.

VAT registration is compulsory if:

• Your company or LLP generates taxable income in a 12-month period that exceeds the VAT threshold (increases usually by £1,000-£2,000 per year). The current vat Threshold from 1 April 2017 is £90,000.
• Your business receives goods in the UK from the EU worth more than the VAT threshold.
• You expect to go over the threshold in a single 30-day period.
• Your business is not based in the UK, but it supplies goods and services to the UK.

Voluntary VAT registration is available if your taxable income is below the threshold, unless everything you sell is VAT exempt. This can provide a number of benefits to your small business, including:

• Increasing your business profile - It gives the impression that your businesses are larger and more established, because people will assume your annual turnover exceeds the VAT threshold.
• VAT registration number - You can display this number on your company website and stationery to strengthen your professional image.
• VAT refunds - You can reclaim VAT on the goods and services you buy for your business, which is particularly beneficial if you sell zero-rated products and purchase standard-rated goods.
• Reclaim VAT for up to 4 years in the past - You must keep the proper VAT records and invoices to be able to do this.
• Appealing to more clients and suppliers - Many businesses that are VAT registered will only consider doing business with other VAT-registered businesses.

VAT rates

There are three rates of VAT that businesses are charged, depending on the types of goods or services they provide:

• Zero-rate at 0% - zero-rated goods and services like food and drink for human consumption, books and newspapers, children’s clothes and shoes, and motorcycle helmets.
• Reduced rate at 5% - for example home energy saving materials, children’s car seats, smoking cessation products and mobility aids for older people.
• Standard rate at 20% - most goods and services, including alcohol, confectionary, snacks, and soft drinks.

Registering for VAT

Most businesses register online for VAT. You can create an online VAT account with HMRC at the same time. You must register for VAT within 30 days of your business turnover exceeding the threshold. Failure to do so may result in a penalty.

Once you have registered, HMRC will provide an online VAT registration certificate which will contain the following details:

• VAT number.
• Deadline for submitting your first VAT return and payment.
• Effective date of registration. This will be the date your taxable turnover exceeded the threshold, or the date you asked to register if it was voluntary.

From the effective date of registration, you must do the following:

• Charge the correct rate of VAT on your goods and/or services.
• Pay any VAT due to HMRC - payments should be made electronically by Direct Debit or online banking.
• Submit a VAT Return to HMRC in most cases for every 3-month period - the deadline is usually 1 month and 7 days after the end of each three-month accounting period.
• Keep VAT records and a VAT account.

You may wish to appoint an accountant to help you deal with your tax affairs if you have no experience in this area.

Self-Assessment for directors and LLP members

Company directors and LLP members have to register for Self-Assessment (SA) in order to pay Income Tax and National Insurance on their total annual earnings. Most directors are also shareholders, which means they often receive a combination of a salary and dividends. Directors may also receive directors’ loan payments, benefits and expenses. Salary payments will be taxed at source if they exceed the Personal tax-free Allowance threshold, but any additional income has to be reported through SA in order to be taxed.

LLP members are viewed as self-employed, so they are taxed individually through Self-Assessment on the income they receive through the partnership - the LLP itself will not pay any tax, but it may have to pay VAT. Each LLP member pays Income Tax and National Insurance at the end of every tax year on their total taxable income after the deduction of business overheads and expenses.

Registering for Self-Assessment

You must register for Self-Assessment on HMRC’s website by 5th October after the tax year for which you require submitting a tax return. The tax year runs from 6th April to 5th April the following year. It can take around 20 working days to complete the registration process, as HMRC will post out information you need to register after you have started the process, so be sure to give yourself plenty of time.

To register for Self-Assessment, you will have to create a Government Gateway account, and provide details about you and your business, including your National Insurance Number. HMRC will then send two letters to your contact address:

1. One letter will contain your 10-digit Unique Taxpayer Reference. This number is required for filing tax returns and paying tax. N.B. this number is not the same as a company UTR.
2. The other letter will contain your Activation Code. You must use this code within 28 days to activate your online account. When this is complete, you will be able to file Self-Assessment tax returns online and pay Income Tax.

Filing Self-Assessment tax returns and paying tax

Self-Assessment tax returns must be submitted to HMRC by post or through your online account. The deadlines are:

• Postal tax return - 31st October after the end of the most recent tax year.
• Online returns - 31st January after the end of the most recent tax year.
• Income Tax and Class 4 National Insurance - 31st January after the end of the most recent tax year.

Class 2 National Insurance must be paid on a weekly basis or twice per year during each tax year. Class 4 National Insurance is charged as a percentage of the total Income Tax liability - it must be paid with the final Income Tax payment by January 31st.

Registering as an employer

You must register your company or LLP as an employer if you hire any staff. For limited companies, directors are classed as employees, because they normally receive a salary. You must ensure you register as an employer before the first payday, because it can take up to 2 weeks; however, you cannot register more than 2 months before you start paying people (if you register online you can only register 28 days in advance).

• To register a limited company as an employer, you will have to create a new online account (or log in to your existing HMRC account) and select ‘PAYE for Employers’ on the online tax registration form, then follow the steps. If your company is registered for corporation tax, you will already have an online account.
• To register a LLP as an employer, you will have to complete an online registration form. The applicable form will depend on the number of partners in the LLP.

HMRC will send two letters to your registered office address with your PAYE and Accounts Office reference (within 5 working days) and an activation code for PAYE Online (within 10 working days). You will require this information to send payroll and PAYE information to HMRC, and pay PAYE tax and National Insurance Contributions.