One of the major beneficiaries of the “light-touch” approach that the UK has had over the last 20 years or so is Company Law. The UK has moved from an expensive paper-based system of company formation and reporting to a digital system.
- Companies can now be set up within 1 working day for less than £5 if you use a website such as ours.
- Companies are no longer compelled to have their annual accounts audited and certified by independent auditors.
- Accounts can be submitted online to Companies House by the company and consist of no more than a few lines and notes in the case of very small companies.
- The annual confirmation statement that companies are obliged to submit can also be dealt with digitally with an annual charge of £13.
- Forming a company now requires just 1 adult person (16+), who can be both the sole shareholder and the director of the company.
- Only public companies (PLCs) require a company secretary.
According to Companies House, there were 620,000 incorporations in the financial year ending on 31 March 2018. This would include Limited Liability Partnerships (LLPs), companies limited by guarantee (LBGs) and a few public companies (PLCs). However, the overwhelming majority were companies limited by shares (LTDs). Our website only deals with companies limited by shares, which our overseas customers sometimes call “private limited companies”.
Users of LTDs are usually broken down in the following categories:
- Intending or existing business owners
- Contractors and freelancers who need Personal Service Companies (PSCs)
- Investors who need special purpose vehicles (SPVs)
- Anyone wishing to protect a company name
- Overseas traders wishing to have a UK company
The advantage to business owners of trading through a limited company are as follows:
- Limited liability – Companies have a separate legal existence of their own; Their finances are independent of the finances of their owners (known as shareholders). Consequently, their liabilities are not the liabilities of the individuals who own the company. So, if a business runs into financial problems and cannot pay its debts, the creditors cannot demand payment from the personal funds of the owner/s of the business. This encourages people to go into business by removing the possibility that their personal assets, savings, homes etc. are at risk if something goes wrong with the business.
- Independent finances and reporting – The fact that a company is independent from its owner/s also gives confidence to the customers, bankers, lenders and suppliers of the business. Customers can pay a company for goods and services with the reasonable certainty that they are not paying an individual who may have financial problems.Similarly, suppliers can have confidence that their goods and services will be paid for. Banks can use assets of the business as security without worrying that someone else may also have a claim on those assets. Accounts and other filings at Companies House are available to be viewed by the public and can be used as an assessment of the viability of the company and its history.
- The share structure allows third parties to become shareholders – Successful companies often need injections of cash to finance growth. Companies are free to borrow money from banks and other lenders but debt finance (as this type of borrowing is known) can put too much of a burden on a growing company. Equity finance is an alternative to borrowing and involves issuing shares in exchange for cash which does not have to be repaid. Limited companies can simply issue more shares to accommodate the requirements of the new shareholders. The new shareholders become co-owners of the business and receive an agreed upon share of the future profits.
- Succession and unlimited lifespan – The lifespan of a company is not limited to the lifespan or working life of its owners. This enables family-owned companies to be passed on from generation to generation without having to create lots of paperwork transferring the individual assets or obligations of the business to the next generation. Consequently, there is no costly or fatal disruption to the business if something happens to the owner.
- Low rates of Corporation Tax – Corporation Tax in the UK is 19%, whereas Personal Tax is 45%. Furthermore, in the first post Covid budget, the Chancellor has announced that the current rate of Corporation tax will remain at 19% until 1st April 2023 and thereafter will apply only to profits of £50,000 or less. The main rate will increase to 25% on profits over £250,000. There will be a marginal rate between the two limits. It should be noted that 25% is still the lowest rate of tax amongst all the developed nations. If a business wants to retain profits in order to finance growth, it is clearly easier to do so by paying less tax.
Limited companies are used by contractors and freelancers as PSCs:
The contractor’s own PSC is also his or her own employer and hires out the services of the contractor to third parties. The advantages of doing so are as follows:
- Gross Income – The PSC receives the gross fees and discharges any costs incurred by the contractor as an employee, thus getting tax relief on those expenses. The PSC pays the contractor a combination of salary and dividends out of the net profit. This means that the PAYE deductions are minimised if not avoided altogether.
- Tax Relief on Expenses – The tax treatment of expenses incurred by businesses has always been different from the treatment of expenses incurred by employees. Businesses get relief for expenses if they are “wholly and exclusively” incurred for the business. For an employee to get tax relief, the expense must be incurred “wholly, exclusively and necessarily” for the discharge of the employment. The additional onus to prove that an expense has been incurred necessarily means that some expenses simply do not get tax relief. Furthermore, even if an expense is not going to get tax relief, it is better to pay that out of the income subject to 19% tax rather than out of a salary that may be taxed as high as 45%.
- Lower rates of Tax – If the contractor can leave some of the income he or she has generated in the PSC, it will only be taxed at 19% as opposed to the substantially higher rate of tax incurred by individuals. This allows contractors to build up wealth inside their own company. It should be noted that the IR35 rules relating to contractors can eliminate the benefits of having a PSC, but the small cost of running a PSC may mean that it is useful to have for dealing with the occasional contract that is not within the IR35 rules.
Investors needing Special Purpose Vehicles (SPVs):
SPVs are set up to hold assets and investments. Unless there is a request from a third party such as a mortgage company, the company can be established using standard (Table A) Articles of Association. So the constitution of an SPV is exactly the same as a normal limited company.
- Typically, SPVs are used to hold tangible assets such as freehold and long leasehold properties for letting. The SPV can secure a mortgage against the property and assure the lender that there are no hidden financial problems that could jeopardise the security of the mortgage.
- SPVs can also be used to hold intangible assets such as trade names, domain names, copyright and intellectual property. A trading company can get into financial difficulties for many reasons and then may need to go into liquidation. Any asset that the company holds then becomes the property of the liquidator, who can sell those assets to pay off some of the debt. By having an SPV that holds the intangible assets separately and licences their use to the trading company, the assets can be protected from the losses of the trading companies.
Companies set up to protect a name:
Registering a company at Companies House does offer a measure of name protection.
- Companies House will not allow 2 companies with the same name on its register. The purpose of this is to ensure that there is no danger of the public being misled about the company with which they are dealing. Accordingly, once a company is registered, its name is secure from being used by another company.
- Although this is not a fool-proof method of securing a name, it is a cheap way to provide a large measure of security. For this reason, even sole traders and unincorporated businesses wishing to protect a name often set up a company which they keep dormant as a simple measure of protection.
The problem is that there is nothing to stop an individual setting up as an unincorporated business with the same name as a company already registered at Companies House. Being unincorporated means that it is not registered with Companies House. Stopping a business from using the same name as an established business and stealing the trade of that business requires a “passing off” action in the civil courts. This is very expensive and not to be undertaken unless the litigant is trying to protect a substantial income or asset. However, having a company registered at Companies House can help the action by proving who was first to use that name.
Overseas traders wishing to have a UK company:
Many UK registered companies are set up by overseas residents because of the following reasons:
- There are very few places in the world where it is possible to set up a company as quickly and as cheaply as is possible in the UK. Being able to do so online from any place in the world that has an internet connection makes UK incorporation even more attractive.
- According to a World Bank Report, the UK is ranked in the top 10 places for ease of doing business. It has low rates of Corporation Tax and taxation agreements with all the major trading countries, hence ensuring that there is no danger of double taxation. It has an established legal system that forms the basis of the legal systems present in many countries and is therefore easily understood.
- There are no foreign exchange controls or restrictions. Payments can be freely made to non-UK resident directors, shareholders and overseas suppliers.
- The legal and regulatory system in the UK gives confidence to anyone dealing with UK resident companies.
- Expenses incurred by overseas owners on behalf of their UK company can be set against the profits on which tax is calculated. This includes offshore management expenses, which offers a great scope for reducing the Corporation Tax payable in the UK.
Please note: This article should not be relied upon when making any decisions or taking any action of any kind. Please consult professional advisers before making any decision based on the contents of this blog.