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What is a Limited Company?
A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
What is a Sole Trader?
If you start working for yourself, you’re classed as a self-employed sole trader – even if you’ve not yet told HM Revenue and Customs (HMRC).
As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them.
You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.
You’re personally responsible for any losses your business makes.
The key Advantages and Disadvantages of Companies are shown below.
How do you form a Limited Company?
You can form your company directly with Companies House for £15, it normally takes 24 hours
- the company’s name and registered address
- names and addresses of directors (and company secretary if you have one)
- details of shareholders and share capital
Personally, I find it easier to use a formation agent such as Company Wizard for £16.99
Often using an agent will mean the company is formed quickly, sometime within a couple of hours.
What are the next steps?
Once your company has been formed you need to:
- Open a bank account for the Company, this can often take a couple of weeks
- Register for Corporation Tax
- Register for other taxes (if they apply to your business) – VAT, PAYE, CIS
- Appoint an accountant (recommended but not compulsory) – Form 64-8
- Set up your accounting software
- Create shareholder agreements, contracts and other legal documents (if required)
The s660 rules (or settlements legislation) have been around since the 1930s.
The rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate. (Contractor UK)
There are some interesting cases where business owners have tried to pass shares to their children unsuccessfully
Copeman v Coleman  22 TC 594
A company had been formed to take over the taxpayer’s business. He held the shares equally with his wife. Later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child’s personal allowance. (http://swarb.co.uk/copeman-v-coleman-1939/)
Crossland v Hawkins  39 TC 493
The taxpayer, a well known film actor, agreed to work through a company for three years being paid £50 per week. The shares were transferred to his wife and accountant. His father in law set up a £100 settlement for the benefit of his children of which his wife and accountant were the trustees. The fund was used to subscribe for the remaining 98 shares. He appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement was a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. (http://swarb.co.uk/crossland-v-hawkins-ca-1961/)
Butler v. Wildin  STC 22
A company was formed by two brothers who acted as unpaid directors. Shares in the company were initially held by their infant children, which were paid out of gifts from their grandparents. The company acquired a development site using a bank loan, which was guaranteed by the brothers. The company subsequently became profitable, and dividends were subsequently paid to the infant shareholders. The High Court held that the children’s investment of ‘trifling sums’ in the shares and the parent’s provision of services to the company constituted an arrangement. An element of bounty was given by the parents in the free provision of their skill and services, and by adopting any financial risk in the company’s venture. Dividends paid to those children born before the arrangements were made (but not dividends in respect of shares transferred to children born afterwards, as there was no apparent arrangement to benefit future children) were taxable on the parents, under what is now section 660B.(http://www.taxationweb.co.uk/tax-articles/business-tax/is-that-settled-then.html)
Which brings us to the new case of Jeremy Vine
Mr Vine appears to have been using his ten-year-old daughter Martha to avoid tax payments.
The presenter of the Jeremy Vine Show and the TV quiz Eggheads, has been funnelling cash through a limited company, Jelly Vine Productions, of which she is a shareholder.
Did you know that in the case of Mr Brown v HMRC Mr Brown was able to claim a tax deduction for the loss in his share value without having to sell his shares? Its true, its known as a NegligibleValue Claim and HMRC have Help Sheet on it (286).
A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.
Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.
When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.
If you sell or close your business, you may be able to claim Entrepreneurs’ Relief – this means that you only pay 10% Capital Gains Tax on any qualifying profits.
There’s no limit to how many times you can claim Entrepreneurs’ Relief, and you can claim up to £10 million of relief in total during your lifetime.
To claim Entrepreneurs’ Relief you must:
- own at least 5% of the shares in the business for a year
- be a director, partner or employee of the business
To claim Entrepreneurs’ Relief you must have been trading for at least a year.
Full details are on the HMRC Helpsheet HS275
But here are some pitfalls to avoid…….
- Entrepreneurs Tax Relief is not available to companies, so if your company sold the part of its business then that won’t qualify, it’s common for a buyer to want to buy the assets into a New Co but ask that the old company remains alive in case of future claim.
- Significant Non Trading Activity could be a problem too, some business contain investments and if these were more than 20% in terms of turnover, net assets, time spent by directors or profit it could mean that your business is not counted as a trading business
- Less than 5% share ownership this can be an issue where share options are granted and exercised before a sale
- Voting rights of classes of shares or when at an AGM votes are based on a show of hands
- Shares transferred to a non working spouse prior to sale to save tax – to qualify you have to be an employee/officer and hold the shares for a year
There is a common mis-conception that if you give something away it doesn’t have any tax implications, unfortunately, that isn’t the case.
When you give away shares you usually work out your gain or loss as if you’ve sold the shares at market value. The market value is the price you would expect to receive if you sold them on the open market. This also applies if you sell them for less than their full value.
There are some exceptions:
- if you can claim Gift Hold-Over Relief
- if you give the shares to your husband, wife or civil partner
- if you give shares to a registered charity
To qualify for Gift Hold-Over Relief, the shares must be in a trading company, or the holding company of a trading group, and one of the following must apply:
- the shares aren’t listed on a recognised stock exchange
- you’ve at least 5 per cent of the voting rights in the company
You don’t pay Capital Gains Tax when you give (or otherwise dispose of) shares, to your husband, wife or civil partner, providing both of the following apply:
- you’ve lived together for any part of the tax year in which you made the gift
- the gift isn’t ‘trading stock’ (trading goods bought for resale)
You won’t have to pay Capital Gains Tax on a gift of shares to a registered UK charity.
You can ask HMRC to check your market valuation by submitting Form CG34 it will take at least 2 months.
Settlements Legislation S624/S660
If you think moving shares in your company between yourself and your spouse sounds like a great way to save tax, think again!
Since the 1930’s we have had Settlements Legislation which prevents you from giving income or assets to someone else in your family in order to pay less tax.
Where the anti-avoidance Settlements legislation applies, all income transferred by a settlement is treated as that of the settlor.
The Growth and Infrastructure Act 2013 comes into force on 1st September 2013 and Section 31 makes changes to the Employment Rights Act 1996 inserting section 205A Employee Shareholders.
205A Employee shareholders(1) An individual who is or becomes an employee of a company is an “employee shareholder” if—(a) the company and the individual agree that the individual is to be an employee shareholder,(b) in consideration of that agreement, the company issues or allots to the individual fully paid up shares in the company, or procures the issue or allotment to the individual of fully paid up shares in its parent undertaking, which have a value, on the day of issue or allotment, of no less than £2,000,(c) the company gives the individual a written statement of the particulars of the status of employee shareholder and of the rights which attach to the shares referred to in paragraph (b) (“the employee shares”) (see subsection (5)), and (d) the individual gives no consideration other than by entering into the agreement.(2) An employee who is an employee shareholder does not have—(a) the right to make an application under section 63D (request to undertake study or training),(b) the right to make an application under section 80F (request for flexible working),(c) the right under section 94 not to be unfairly dismissed, or(d) the right under section 135 to a redundancy payment.
Giving up employment rights might not sound like a good idea for employees but there are tax advantages for both the employee and employer:
- Dividends are not subject to PAYE or National Insurance
- Dividends would not be used as Pay in Auto Enrolment
- Capital Gains Tax Allowances should make most gains tax free
- The employer will benefit from cost savings on the sacrificed employment rights