Limited Company - Director

[bharat27596]

Hello Members,

I am on PSW since last Oct 2008 and will be planning to apply Tier 1 (General) end of Sep 2010. I am still in search of job but not able to find one. I am planning to start a Limited company (consultancy business) where as I will serve as Director.

Can anybody please tell me how can I show £20000 earning? In what accordance do I need to prepare my documents so that I don’t need to face any difficulties last time?

I know that limited companies need to file their returns within 12 months of the end of their accounting period. In my case it will be after (31 Aug 2010)

1) If I choose to keep my profits within the business, do I need to keep all the amounts in the business account or I can use them on daily basis (say I’ll show £4000 when I apply for tier 1)?

2) If I choose to pay myself dividend, how can I do that? Do I need to prepare dividend voucher? If yes, how can I do that?

3) If I choose to pay myself salary, do I need to pay it through payroll team? I have sage payroll software at home.

Do I need to submit all invoices to HO for the evidence of my earnings?

Any additional suggestions are most welcomed.

Await your response.

Thank you all.

[Tony75]

How you can do this legally is outline below.Mind you this is a suggestion but you also need to do your research.
1) Register a Private Limited Company.Two directors or sole trader
2) Issue a shareholding capital of 30000-31000.You can either start the company with the 30000 capital issue or start with 300 and increase to 30000.Divide the shareholding 30000 your own capital and 1000 the other director. if sole trader just issue 30000 shares for yourself
3) Open a business bank account
4) You are legally required to fund your business bank account with your issued shareholding capital of 30000/31000.i.e 1 issue is valued at 1 pound that is 30000 pounds or 31000 pounds.
5) Pay the amount into your account from your savings or loan to fund your business.Very Important (You must declare your source of business funding)
6) Hire an accountant and pay yourself wages and dividend,mind you your dividend must be declare for Tax purposes if you want to claim it as income evidence or economic activity.
7) Your accountant will run a payroll for you and file statutory fillings to
a)HMRC (PAYE/NIC (1st Class) as Director/Employee and Corporation Tax) and
b)Company House Annual account and Annual Return)
Your account we issue you payslips either Weekly or Monthly with your PAYE/NIC liabilities.
9) Your accountant we also issue you both Employer and Employee tax liabilities.Employer also pay NIC that is your company.This will be the amount you will pay to HMRC.
10) NOW THE MOST IMPORTANT PART.Your accountant will register you with HMRC and this takes time like 2-3 months. HMRC will issue you an Employer Number and Account office number. You will need this to pay your TAX Liabilities
11) SECOND MOST IMPORTANT: How do you show you have been paying Tax to HMRC. Go to HMRC Website and register to pay online through HMRC BILL PAY powered by Alliance & leceister.You can Pay Monthly before 19th of each month or Quarterly by 22nd of each quarter as defined by HMRC year schedule.
12) Pay online and print out all your payment to HMRC.
13) You can continue to draw salary until you get work contracts or business but be careful not to deplete your paid up shareholding capital.You can also increase it to 40000 or more to be on the safe side.
14) I will charge you for Intellectual property for this write up (laugh)

[MITM2]

Hi Tony75,

What if operating as a Sole Trader only?
Thanks.

MITM2

[HSK Accountancy Services]

You dont need two directors to open a limited company.

And why whould he needs £30,000 share capital? He can start a company with £1?

[John]

And why whould he needs £30,000 share capital? He can start a company with £1?

I thought that, and then realised that the scheme is to turn capital into salary! No, not tax efficient at all, but it looks like a wheeze to assist in visa renewal.

[HSK Accountancy Services]

And why whould he needs £30,000 share capital? He can start a company with £1?

I thought that, and then realised that the scheme is to turn capital into salary! No, not tax efficient at all, but it looks like a wheeze to assist in visa renewal.

I agree. This will not be tax efficient at all. Plus you cannot use Capital to pay salary. It will be quite complicated to reduce the isssued share capital anyway.

If somebody has £30,000 to play with then best option whould be pay salary everymonth and then pay PAYE etc monthly or quarterly (for visa renewal only). Dividend after tax will be obviously most tax efficient way after charging minimum salary.

[John]

you cannot use Capital to pay salary

Why not? If the company has agreed to pay salary of so much, and has insufficient income to fund that, the capital in the company will get eroded, because the company will be making a loss.

Dividend after tax will be obviously most tax efficient way after charging minimum salary.

Dividends can only be paid out of profits already made, and in the scenario envisaged here, a loss will be being made. So no possible of dividends .... until the balance on the P&L account turns positive.

I reiterate, whilst the envisaged wheeze may work, from the visa renewal point of view, it is extremely inefficient in terms of tax and NI.

However there are genuine situations where this sort of thing may occur, naturally. That is say someone is a software developer and starts to write a new program. Inevitably the income of the company will be little or nothing for ages, so the company will make a loss initially, but at a later stage, when sales commence, hopefully the project will be become successful financially.

[Tony75]

Wheeze.
It’s not a wheeze for visa renewal.HSMP or Tier 1 Highly Skilled Worker is a TOP DOG UK visa scheme. You can be employed, self-employed or run a business. You are a (Work Permit-Tier 2, Entrepreneur-Tier 1 and Investor-Tier 1 visa) all in one without the stringent required criteria for these schemes. You need £200,000.00 for Entrepreneur-Tier 1 visa or £1,000,000.00 for Investor/Innovator-Tier 1 visa. Where do UK expect you to get this amount and bring to there country, can you say this is a wheeze to sell settlement visa for foreign nationals to come to UK, the answer is NO, this is a country (UK) that have EXCELLENT THINKERS as LEADERS and understands where there country makes money. That is why everybody wants to come to United Kingdom.
To answer your question, if you go the Sole trader route you will be classified as Self Employed. Also if you are a Sole Director in a Limited Company you may be Self Employed as well according to UKBA based on HMRC definition because you are not answerable to anybody. There are several court cases that have defined this. The Self employed route will require more evidence and documents and you are also burden to show the progress of your business.
The Two director limited company structure and as a Director/Employee in your limited company paying Class 1 NIC and PAYE requires less document and you are also answerable to the other director even though you may have controlling shares. You just need to show your Taxable wages by paying NIC/PAYE and your Personal bank account where the wages is paid to from your business bank account. The Company itself pays the Employer/Employee NIC.
If you pay the £30000 or £20000 into your account as investment and you don’t want to go through issuing of shares you will pay Capital Gain Tax, Corporation Tax because HMRC will see it as a profit in addition to NIC/PAYE Tax drawn as wages.
I think John has dealt with the issuing of shares route. Your depleted paid up capital will appear as a loss on your balance sheet.
Though the main aim of all these ECONOMIC MIGRANT VISA SCHEMES is for you to either use your skills to Work and pay Tax or you bring INVESTMENT whether its £20000 or £2000, 000.00 or £1,000,000.00 as the visa scheme may be and pay Tax on your investment or business.
So the option is yours but be warned Home Office will frown if the PERSONAL INCOME you declared for Tax purposes is not commensurate or tangible. So my advice, draw High Wages and pay your Tax accordingly because you are a separate entity from your Limited Company.
As stated earlier this is just a suggestion, do your research as well, the moderator John has also contributed his own advise.

[John]

You just need to show your Taxable wages by paying NIC/PAYE and your Personal bank account where the wages is paid to from your business bank account.

Yes, and I fully appreciate that not everyone is doing this, but where the salary is being drawn for doing little or nothing, then this is clearly a route for turning capital into income, in order to assist with visa renewal. Well let's put it this way, why else would anyone enter into such a tax inefficient scheme?

Wheeze? Definition found on the internet :-

noun: (Briticism) a clever or amusing scheme or trick)

[HSK Accountancy Services]

you cannot use Capital to pay salary

Why not? If the company has agreed to pay salary of so much, and has insufficient income to fund that, the capital in the company will get eroded, because the company will be making a loss.

Dividend after tax will be obviously most tax efficient way after charging minimum salary.

Dividends can only be paid out of profits already made, and in the scenario envisaged here, a loss will be being made. So no possible of dividends .... until the balance on the P&L account turns positive.

I reiterate, whilst the envisaged wheeze may work, from the visa renewal point of view, it is extremely inefficient in terms of tax and NI.

However there are genuine situations where this sort of thing may occur, naturally. That is say someone is a software developer and starts to write a new program. Inevitably the income of the company will be little or nothing for ages, so the company will make a loss initially, but at a later stage, when sales commence, hopefully the project will be become successful financially.

Hi John & Tony both,

Who ever wheezed this scheme by using the share capital was unfortunately not familiar a law called company's Act which governs all UK based company.

Once share capital is issued then company can not simpley take it out. It has to get the permission from company house by providing the solvancy report. Their are strict rules for PLC but Private company can do by passing a reslution etc if they have enough spare money.

In this case company is already making a loss. So they cannot provide that.

The point about making losses. It is illegal to operate as being insolvant. If a company cannot pay its contracts it has to declare itself as bankrpt first and then court or adminsitrator will pay any pending liability including employees.

I dont think so someone liked to be bankrpt in order to get the HSMP renewal. Plus I am not sure that payment will be accepted by Home Office as earned incoe.

@ Tony- The two directors approach may looks better in comparison of one director but still there are laws when the veil of incorporation can be lifted if it is found this is not a real company doing real trading?

I hope that clear some issues. If anybody still in doubt feel free to PM me and I will be happy to offer my professional advice.

[John]

Who ever wheezed this scheme by using the share capital was unfortunately not familiar a law called company's Act which governs all UK based company.

I don't wish to give the impression of defending the scheme but surely no one is talking about a reduction of share capital.

So why are you thinking that they are talking about a reduction of share capital?

[HSK Accountancy Services]

Who ever wheezed this scheme by using the share capital was unfortunately not familiar a law called company's Act which governs all UK based company.

I don't wish to give the impression of defending the scheme but surely no one is talking about a reduction of share capital.

So why are you thinking that they are talking about a reduction of share capital?

Hi John,

Indirectly this will be treated as reduction of capital in the eye of Law. Because the director is also the 100 % or 90 % share holder as well.

If the commited to pay the salary by doing a contract does not mean they must pay that from out of capital.

As I said earlier on as soon soon the directors or any officer of the company realised they are not making any profit and cannot pay their bills they have to stop trading and legally apply for insolvancy.

There are genuine situations like the company is expecting a loan, or others funds or they are genuinelly unaware the company is paying out of capital then the above situation cannot be ignored but that does not appear to be applicable in the above scenrio.

There are always exceptions and genuine cases but I am taking more as a general.

In any case for the purpose of HSMP visa renewal I would not advise to use that scheme anyway.

I am an accountant and not a legal expert but the company law is quite strict in these kind of cases.

I would advise a proper search on Google about capital reduction provisions.

Cheers

[Sky_High]

Overall I do not see this as impossible but I am afraid when more and more people start to do this HO will be impose more restrictions. Although it depends upon different factors but I am expecting at least 6K cost for NI and Tax (employer and employee).

[Sky_High]

Why some one not have say 10 pound as share capital and than 20000 pound as cash/reserves. Some one can spend that cash (without touching 10 pound sare capital) to buy assets, stock and pay its employees etc.

[Jk2007]

Consider the following situation:

A company formed with minimum share capital (say 200 shares @ £1 each.) Then the company has made money through contracts, and salary was paid from the income generated.

After several months, suddenly due to market conditions, contracts dry up. During that period (of no income from external contracts), the Director works to create a software product or a website. Can the Director continue to pay herself salary from the company reserves (not from the share capital. The share capital is so minimum in this case anyway)? Is this allowed as per the company laws?

[Sushil-ACCA]

Bharat

course of action

1.if u r employed some where and earning salary £6000+ than No need to take salary from company

2. raise sales invoices of £28000 (say) in 12 months (expenses say £2000)

than yr Income statement and PL Should look like this

Sales 28,000
exp 2,000
pbt 26,000
tax @21% 5,200

PAT 20,800

Dividend 18,000
reserves 2,800

(u got gross dividend £20000 )

Any furhter query ask yr accountant of here

[Sushil-ACCA]

JK2007

YES company can pay salary

it is like when we r working for some one and that company making loss

but still applicant get points for his earning from that company

HO is not concerned form earning of company

HO is concerned from salary income or Dividend receieved

but catch is here when director is paid salary than PAYE SHOULD BE PAID

in time otherwise there will be problem

PAYE cost is more than dividends

[John]

As I said earlier on as soon soon the directors or any officer of the company realised they are not making any profit and cannot pay their bills they have to stop trading and legally apply for insolvancy.

I think you are trying to add something to the legislation that is simply not there. Simply you have added "s soon soon the directors or any officer of the company realised they are not making any profit and" .... but yes, if " cannot pay their bills they have to stop trading" .... otherwise the Directors could be held personally liable for indebtedness created while the company was trading when insolvent.

" legally apply for insolvency"? They might want to do that, but it is not a legal requirement.

[HSK Accountancy Services]

As I said earlier on as soon soon the directors or any officer of the company realised they are not making any profit and cannot pay their bills they have to stop trading and legally apply for insolvancy.

I think you are trying to add something to the legislation that is simply not there. Simply you have added "s soon soon the directors or any officer of the company realised they are not making any profit and" .... but yes, if " cannot pay their bills they have to stop trading" .... otherwise the Directors could be held personally liable for indebtedness created while the company was trading when insolvent.

" legally apply for insolvency"? They might want to do that, but it is not a legal requirement.

John- I used to teach the company law to CA students in UK so i am not making up thingss just to make my point.

I found something for you and other members to read.

Actions Against Directors

Wrongful Trading (Section 214 Insolvency Act 1986)

You continue to trade when you knew or ought to have known that your company was insolvent and had little chance of recovery.

If found guilty a director will be required by the court to contribute to the assets of the company as compensation to those creditors who have suffered due to the wrongful trading.

The level of contribution is generally assessed on the extent to which the company’s financial position deteriorated since it was known or should have been known that it was insolvent with no reasonable prospects of avoiding insolvent liquidation.

A successful prosecution may also lead to action under the Company Directors Disqualification Act 1986, seeking to prohibit you from acting as a company director for a period of between 1 and 15 years.

Defence against such an action would take the form of proving that every step was taken to avoid worsening the position of the creditors or indeed mitigating their loss.


>> top


Fraudulent Trading

You continue to trade with the intention of defrauding your creditors.

If found guilty penalties are the same as those incurred in wrongful trading. In addition however being found guilty of fraudulent trading may result in a limitless fine and / or imprisonment for up to 7 years.

See this link for more details

http://www.businessrecoveryadvice.co.uk ... /intro.asp

Anyway why we are arguing here. If anybody dont agree with me that is fine. I just shared my knowledge to help other members. It is up to them to decide which action they want to take.

[John]

So given that you clearly know the law, why did you attempt to add a further condition " the directors or any officer of the company realised they are not making any profit and" .... which is not there in any of the legislation you are now quoting?

But great that you have quoted the law that actually is there.

[MITM2]

Hi All,

So much has been said and written about the Limited company option but not much about the Sole Trader option...in particular with respect to Tax.
Is it a good time or thread to bring this up or better to start another thread?
Thank you.

MITM2

[John]

I think, given the title of this topic, best to start another topic for Sole Trader.