International Correspondence Lawyers & Financial Experts
ICL DIRECTORY
Company Formation & Tax Rates
United Kingdom
Kindly supported by:
M&N Group Limited
Contact person:
Karen Milliner F.C.I.S.
Address:
The Quadrant
118 London Road
Kingston upon Thames
Surrey, KT2 6QJ
Tel.: +44 (0)20 8974 5252
Fax: +44 (0)20 8974 5588
Email: info@mn-group.com
Website: http://www.mn-group.com
| Sole Trader *1 | Private Company Limited by Shares (Ltd) *1.1 | Public Company Limited by Shares (Plc) *1.2 | |
| Company law | not applicable | Companies Act 2006 | Companies Act 2006 |
| Company purpose | any | any | any |
| Subscribers / Shareholders | 1 | minimum of 1 shareholder | minimum of 2 shareholders |
| Capital requirements | - | no capital needs to be paid up | GBP 50,000- only GBP 12,500 needs to be paid up in cash |
| Liability | The sole trader is personally responsible for any debts run up by his/her business. | limited by shares, shareholders are not liable for the company's debts (unless they have personally guaranteed a bank loan, for example) | limited by shares |
| Costs of incorporation | nil | GBP 175 registration fee + other legal fees | GBP 175 registration fee + other legal fees |
| Incorporation formalities | - | Memorandum and Articles of Association and forms 10 and 12 lodged at Companies House | Memorandum and Articles of Association and forms 10 and 12 lodged at Companies House |
| UK Legal requirements | - | Must have a Registered Office in the UK Statutory Books must be retained in the UK |
Must have a Registered Office in the UK Statutory Books must be retained in the UK |
| Company name | own names, or a business name *2 | free + company form *2.1 | free + company form *2.1 |
| Formalities | low | moderate | moderate unless listed on the stock exchange; if listed then high |
| Credit / funds | good | possible | possible |
| Accounting obligation | yes *3 | yes *3.1 | yes *3.1 |
| Management | Sole trader | at least one director + one secretary *4 | at least two directors + one qualified secretary |
| Nationality | any | any | any |
| Credibility | good | good | very good |
| Taxation | Income tax *5 | CT *5 | CT *5 |
- - - - - - - - - - - - -
| Income tax | Corporate tax | Profit tax | M. B. tax | VAT | |
| Tax rate | see *5.1 | 30 % *5.2 | - *5.3 | - | 17,5 % *5.4 |
*1 Being a sole trader is the simplest way to run a one-person business, and does not involve paying any registration fees. Keeping records and accounts is straightforward, and you get to keep all the profits. But you are personally liable for any debts that your business runs up, which can make this a risky option for businesses that need a lot of investment.
- You make all the decisions on how to manage your business.
- You raise money for the business out of your own assets, and/or with loans from banks or other lenders.
*1.1 Limited companies exist in their own right, distinct from the shareholders who own them. This means their finances are clearly separated from the personal finances of their owners. A private company is by far the most popular (and generally the most suitable) type of company for a small business, or private investment entity which proposes to trade as a company. A private company will also often be used as a subsidiary in a group of companies, to avoid, with respect to that member of the group, the strict requirements which are mandatory for public companies. There is one feature which is common to all private companies, namely, a private company cannot lawfully offer shares in or debentures of the company to the public, either directly or via an offer for sale - section 81 of the Companies Act 1985.
Private companies have certain advantages over public companies. These include:
- A private company may commence business immediately upon the certificate of incorporation being issued; a public company on the other hand needs to obtain a trading certificate from the Registrar of Companies under section 117 of the Companies Act 1985.
- A private company need only have one director - section 282(3) of the Companies Act 1985; a public company on the other hand must have at least two directors - section 282(1) and the Company Secretary must be a qualified person for example a Chartered Accountant, Chartered Secretary or Solicitor.
- A private company limited by shares or by guarantee (but not an unlimited one) need only have one member - the Companies (Single Member Private Limited Companies) Regulations 1992. The sole member may be the same person as the sole director. If a public company (or an unlimited company) carries on business for more than 6 months with less than two members, a member during this period may be held personally liable for company's debts - section 24 of the Companies Act 1985. Furthermore, a public (or unlimited) company may be wound up by the court if at any time the number of members is reduced below two - section 122(1)(e) of the Insolvency Act 1986.
- The provisions relating to the retirement of directors on reaching the age of 70 do not apply to a private company (unless the company is the subsidiary of a public company) - section 293 of the Companies Act 1985.
- The statutory restrictions which apply to a company making a loan, etc., to its directors apply less rigorously to a private company (unless it is the subsidiary of a public company); - section 330 and the definition of 'relevant company' in section 331(6) of the Companies Act 1985.
- A private company (not being a member of a group including a public company) may give financial assistance for the acquisition of its own shares, if the net assets of the company are not reduced by the acquisition or, to the extent they are reduced, if the financial assistance is provided out of distributable profits - sections 155 - 158 of the Companies Act 1985.
- A private company may, in certain circumstances, do by written resolution, things which would otherwise have to be done by resolution of the company in general meeting or at a class meeting - sections 381A - 382A and Schedule 15A of the Companies Act 1985.
- A private company may elect to dispense with the need to hold annual general meetings - section 366A of the Companies Act 1985.
On the other hand, a private company has certain disadvantages as compared to a public company. These include:
- A private company is prohibited from making an offer to the public (whether for cash or otherwise) of shares in or debentures of the company and also may not allot or agree to allot shares in or debentures of the company with a view to their being offered for sale to the public - section 81 of the Companies Act 1985.
- A private company's shares or debentures cannot be listed or dealt with at The Stock Exchange - section 143(3) of the Financial Services Act 1986.
*1.2 Essentially, a public company is appropriate if it is intended to raise money from the public, by the issuing of shares or debentures in the company, in order to fund the proposed business of the company. At present, the requirement is that a public company must have allotted shares having a nominal value of at least GBP 50,000 and at least a quarter of them (i.e. GBP 12,500) must be paid up - sections 11, 117 and 188(1) of the Companies Act 1985.
*2 If you decide to use a business name, there are a few rules to bear in mind. The name must:
- not be offensive
- not include the words limited, plc or equivalent
- not contain sensitive words and expressions (unless you've obtained permission to use them)
*2.1 You cannot choose a name that is the same as that of a company that already exists, and you should avoid:
- Company name ends with limited, plc or Ltd (or Welsh equivalent) - this must not be used anywhere other than at the end of the name.
- The name isn't offensive.
- The name isn't the same as - or very similar to - one already in the register.
- The name doesn't include any sensitive words or expressions.
*3 You have to make an annual self-assessment return to the Inland Revenue. You must also keep records showing your business income and expenses.
*3.1 Accounts are filed with Companies House. A "shuttle" annual return (form 363s) will be sent before the anniversary of incorporation each year. It needs checking, amending and returning to the Companies House with the appropriate fee. The directors and secretary are responsible for notifying Companies House of changes in the structure and management of the business.
*4 The directors are the persons who will be responsible for managing the business and affairs of the company and for ensuring, along with the company secretary (or company secretaries), that the company complies with the Companies Act 1985. Shareholders are not personally responsible for the company's debts, but directors may be asked to guarantee loans to the company. A director or company secretary may also be a member/shareholder of the company. If there is only one director, this must be stated in the company's articles of association and this director cannot also be the company secretary.
A director of a private company:
- may also be a member/shareholder of the company - (for example, a sole director may be the member/shareholder, or one of the members/shareholders if there is more than one - similarly, if there is more than one director, any of them may also be a member/shareholder);
- need not be a natural person - a company or Scottish firm may be appointed as a director of another company. This is implicit in various provisions of the Companies Act 1985 (e.g. sections 289(1) and 305(4));
- need not have any special formal qualifications;
- must not have been disqualified by a court from acting as a company director (unless he or she has been given leave (permission) by a court to act as a director for a particular company);
- must not be an undischarged bankrupt (except with leave of the court) - section 11(1) of the Company Directors Disqualification Act 1986;
- in the case of a company proposed to be registered in Scotland (as opposed to 'England and Wales') - must not be under the age of 16 - section 1(1)(a) of the Age of Legal Capacity (Scotland) Act 1991;
- in the case of a company proposed to be registered in 'England and Wales' (as opposed to 'Scotland') - need not be of any particular minimum age, however, careful consideration should be given as to whether a proposed director who is a minor, has the legal capacity to consent to act as a director and to carry out the duties of a company director;
- need not be younger than any particular age (i.e. there is no maximum age limit) unless the private company is a subsidiary of a public company. (If the private company is a subsidiary of a public company, a director of the subsidiary must not be over the age of 70 unless specifically approved by a general meeting of the company - section 293 of the Companies Act 1985. The word 'subsidiary' is defined in sections 736 and 736A of the Companies Act 1985.);
- may be a non-British national - however, it is possible that UK immigration laws may restrict the work activities which such a director may undertake whilst in the UK. If in doubt, advice may be sought from the Home Office Immigration and Nationality Directorate; and
- may, under the Companies Act 1985, be from an overseas country (i.e. outside of England, Wales or Scotland in terms of residency, domicile, citizenship, place of incorporation or all or any of those concepts). Nevertheless, this general proposition may be subject to any applicable foreign investment rules which may apply from time to time.
*5 As you are self-employed, your profits are taxed as income. You need to pay fixed-rate Class 2 National Insurance contributions (NICs) and Class 4 NICs on your profits.
Companies that are resident in the UK are subject to CT on their profits (income plus gains) arising in an accounting period. Company accounts prepared for a period of more than 12 months are apportioned between the first 12 months and the remainder. Non-resident companies may be subject to CT where they trade in the UK through a permanent establishment.
- A company incorporated in the UK is treated as UK resident.
- A non-UK incorporated company is treated as resident in the UK if its central management and control is exercised in the UK.
*5.1 Income Tax
Income tax is charged on all income that arises in the UK. UK residents may also be liable for income tax on income arising overseas.
- Personal allowances are deducted from income before calculating income tax at rates determined by the amount of an individual's income. The married couple's allowances are available only if at least one spouse was born before 6 April 1935. Relief for the married couple's allowances is restricted to 10%.
- The extra age allowances above the basic single personal and married couple's allowance are reduced by GBP 1 for every GBP 2 where total income is more than the age allowance threshold.
- The family element of children's tax credit is paid directly to the main carer and is not an income tax deduction. The maximum credit for 2007/08 is GBP 545 (GBP 1,090 for babies up to 1 year old). The credit is reduced by 6.67% of joint income over GBP 50,000.
Self-employment
Tax under Schedule D Cases I and II is normally charged on the profits earned in an accounting period. Deductions can be made against gross income for expenses that are wholly and exclusively incurred for business purposes.
Tax is normally charged on the profits of the 12-month accounting period ending in the tax year.
- In the tax year in which the business is started, tax is charged on the profits of that tax year, calculated by apportioning accounting periods if necessary. Any profits taxed twice are treated as overlap profits.
- Businesses that started before 6 April 1994 may have transitional overlap profits. These are profits assessed in 1997/98, but actually earned before 6 April 1997.
- In the tax year in which the business ends, tax is charged on the profits of the final period plus the profits of any previous accounting period ending in that tax year. Overlap profits are deducted.
Losses can be carried forward against future profits of the business. Losses can also be relieved against other income and capital gains of the same or the previous tax year.
Losses in the first four tax years of a new business can be carried back and set against income of the previous three tax years.
Partnership profits are divided between the partners, who are taxed personally on their profit share on the same basis as self-employed individuals. Partners must include their profit share on their tax returns, and the partnership must also complete a return.
*5.2 Corporate tax
The rate of corporate tax is fixed for the financial year ending each 31 March. Where an accounting period straddles this date, the profits are apportioned accordingly.
- The main rate of corporate tax is 30%. This is charged on the whole of profits where they exceed GBP 1,500,000, and in all cases for close investment-holding companies.
- The small companies rate of 20% is charged on the first GBP 300,000 of profits where profits are between GBP 50,000 and GBP 1,500,000.
- Profits between the lower and upper profit thresholds (GBP 300,000 - 1,500,000), are in effect charged at a marginal rate of tax of 32.75%.
- Profits equal to dividends paid in the period, and after 31 March 2008, to non-corporate shareholders are charged at 20%.
- Where a company has associated companies, all the rate thresholds are divided by the number of associated companies plus one. For example, a company with three associated companies is taxed at 20% on profits between GBP 12,500 (GBP 50,000 divided by four) and GBP 75,000 (GBP 300,000 divided by four). Associated companies are broadly companies under common control.
Corporate tax rates:
| Corporate tax year | 2007 | 2006 | |
| Financial year | to 31.3.08 | to 31.3.07 | |
| Full rate | 30% | 30% | |
| Small companies rate | 20% | 19% | |
| Small companies limit | £300,000 | £300,000 | |
| Effective marginal rate | 32.75% | 32.75% | |
| Upper marginal limit | £1,500,000 | £1,500,000 | |
| Starting rate | 0% | 0% | |
| Starting rate limit | £10,000 | £10,000 | |
| Effective marginal rate | 23.75% | 23.75% | |
| Upper marginal limit | £50,000 | £50,000 | |
| Minimum rate on dividends | 20% | 19% | |
*5.3 Capital gains by companies
A company's capital gains are subject to corporate tax at the normal rates with no annual exemption.
- Companies continue to receive indexation relief on gains and do not receive taper relief.
- Capital gains may be offset by capital losses of the same accounting period or capital losses brought forward from previous periods.
- Roll-over relief is available where business assets are replaced.
- Qualifying disposals of substantial holdings (at least 10%) are exempt. The vendor and the company being sold must satisfy a trading condition and the vendor must have owned the shares for at least 12 months.
- Companies are subject to different identification rules from individuals for disposals of shares and securities.
*5.4 VAT is charged on the value of supplies of taxable goods and services made in the UK, including some exports to EU countries. It is also chargeable on imports of goods from outside the EU. The main rates are zero and 17.5%, but a few supplies are charged at 5%.
EUROPEAN SAVINGS TAX DIRECTIVE EUSTD On July 1st 2005 a new legislation came into force, the European Savings Tax Directive (EUSTD). It is an agreement between the 25 European member states* and applies to individuals who earn interest in one country but have their residence in another. This effects only residents in one of the 25 EU countries, but the British Virgin Islands, Anguilla, Turks & Caicos Islands, Cayman, Isle of Man and Channel Islands have also adopted the EUSTD because of their status as dependent territories** from the U.K. It consists of two systems: Information exchange and withholding tax. Individuals who are subject to the EUSTD have to choose between the two options. Withholding tax of 15% is levied on interest earned after 1 July 2005. This tax rate will increase to 20% w.e.f. 1 July 2008 and to 35% w.e.f. 2011. Exchange of information means an agreement to report interest paid to the individual's resident state's tax authorities. This includes the disclosure of the recipient's identity. As this interferes with the tradition of banking secrecy in some member states, these will adopt the withholding tax system, which does not include the reporting of the recipient's identity.
*EU member states: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom **Other territories: Andorra, Anguilla, Aruba, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Montserrat, Netherlands Antilles, San Marino, Switzerland, Turks & Caicos
