Owning and operating a limited company in the UK might seem daunting, especially when faced with the intricacies of financial management, tax obligations, and legal boundaries. Novice business owners, in particular, can easily find themselves overwhelmed. To help you navigate these challenges, we've outlined some common tax mistakes made by limited companies and provide guidance on how to avoid them.
Misunderstanding Ownership of Business Earnings - Personal Use of Business Earnings
A widespread misconception is that the money earned by a business directly belongs to the owner. This outlook can cause serious financial and legal issues. When you establish a limited company, you create a distinct legal entity. Regardless of owning 100% of the company shares, the finances in the business account belong to the company, not to you personally.
The proper ways to extract money from your business include:
- Paying yourself a dividend
- Drawing a salary
- Reclaiming expenses
- Borrowing money (be aware, if it's not paid back within nine months, it's taxed at 32.5%)
Taking money outside of these methods can result in serious legal repercussions.
Overlooking Payroll Duties - Not Setting Up a Payroll
Regardless of whether you're the only director in your limited company, you're still legally an employee. It's important to establish an official payroll and register it with HMRC, notifying them each time you pay yourself. This is a task your accountant can manage, easing your administrative burden.
Ignoring Responsibilities While Not Trading - Failing to Inform HMRC About Non-Trading Status
Just because your company isn't actively trading doesn't mean there are no obligations to fulfill. While you're not required to file a corporation tax return in this stage, you do need to inform HMRC that you're not yet operational. Additionally, you're required to submit annual accounts to Companies House, even if the entries are largely zeroes. Avoid penalties and potential deregistration by staying compliant.
Neglecting Regular VAT and Payroll Reporting - Not Regularly Reporting to HMRC
As a limited company owner, your responsibilities go beyond payroll and VAT registration. Once registered for VAT, you must consistently provide returns to HMRC, even if there's no tax due. As of April, you're required to submit returns quarterly instead of annually, which can be done online. Similar diligence applies to your payroll; HMRC must be notified whenever you make a payment. Non-compliance could lead to penalties, but your accountant can assist in keeping these tasks on track.
In conclusion, understanding the inner workings of a limited company, identifying common mistakes, and adopting strategies to avoid them are crucial skills for business owners. This knowledge includes understanding the company's legal structure, director responsibilities, and financial obligations. It's also essential to be aware of the potential risks and penalties of non-compliance and take proactive steps to mitigate them. The silver lining is that many of these responsibilities can be effectively managed by a professional accountant, allowing you to focus on the core aspects of running your business.
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