As looked at in the Limited Company or Sole Trader guide, a limited company is a separate legal entity. This means that it can be easy to get caught out with big tax bills and overdrawn DLAs. Here are my top tips for getting it right.

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Set up separate bank account in the company name

Yes, this is a legal requirement for a limited company, but there are still occasions where directors don’t operate a separate bank account for the business.

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Having a separate bank account allows you to keep the business and your personal funds separate, as well as ensuring that you aren’t taxed for all the business income, putting you in an expensive position.

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Only use the business card/bank account for business items​

It is best practice to keep your personal spending and your business spending separate. Not only does it make life easier for your accountant at the year end, but it stops you getting in a mess and risking additional tax.

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Sometimes mistakes happen, where you use the wrong card to pay for your shopping, and that is OK. But, any personal expenses are transferred to the DLA (as discussed next), so it is important to not make a habit of it.

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Understand what a Director’s Loan Account (DLA) is and how it works​

A director’s loan account, or DLA, is an accounting term where an “account” (sometimes visualised like a bank account, or just visible on the Balance Sheet) is used to show transfers made to/from directors. This could be for directors introducing funds to the business, for recording personally incurred business expenses, recording transfers or loans to a director that aren’t salary/dividends, or transferring disallowable expenses at the year end.

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Having a director’s loan that is a creditor, does not cause any tax implications. This would be where a director has input more into the business than has been withdrawn. However, having an overdrawn Director’s Loan, or that is a debtor, will be at risk of additional tax.

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If the DLA is overdrawn at the end of the financial year, a note will be included within the accounts to show the occurrences within the loan during the year. If this loan is not repaid within 9 months of the year end, an additional Corporation Tax charge will be applied to the outstanding balance at a rate of 33.75%. This is known as S455 tax.

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S455 tax can be reclaimed, but this cannot be done until 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. This also needs to be done within 4 years.

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The other important thing about a DLA, is that if the balance at any point in the tax year exceeds £10,000, you are likely to be required to complete a P11D and P11D(b) form, and pay additional tax on the loan as the company (P11D(b)) and as an individual (via your Self Assessment – P11D). 

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If you are ever in doubt about a Director’s Loan Account, speak to your accountant.

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Understand what is allowable as a business expense, as well as the term “wholly and exclusively”

What is allowable will vary depending on the sector you’re in and the type of work you do. Someone running a building company will have different allowable expenses to someone running an IT contracting company. However, the way to define if something is allowable is the same regardless of sector, by using the “wholly and exclusively for the purpose of the business” rule.

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As long as an expense is for the running of the business, or for providing your services, it is allowable. This could be things like, a Microsoft subscription that you use for creating invoices and tracking expenses, business insurance, rent for a unit that you use as an office or pens and notepads for the office and client meetings.

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Should HMRC ever make an enquiry into your business, you need to be confident that you can justify those expenses as wholly and exclusively for the purpose of the business, so don’t try putting through things that aren’t for the business!

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Understand the most efficient way to take money out of the business - don't just withdraw!

When running a limited company, it is important to remember that the funds belong to the company. This means that you shouldn’t just withdraw money from the business bank or put through personal items through the business. Doing this can result in an overdrawn DLA at the year end, as discussed above.

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What is most tax efficient for you, will depend on your personal financial position, but typically for a director who is also a shareholder, with no other income elsewhere, is to take a tax efficient salary and top up with dividends subject to available profits.

It is advisable to discuss your tax efficiency with your accountant, who will know your personal circumstances more clearly.

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​Understand your filing deadlines, and don’t leave it to the last minute!

As a limited company you have strict filing and payment deadlines to meet, and not doing so can result in some costly penalties.

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For Companies House, you have 9 months from the end of your financial year to file your accounts. For example, if you have a year end of 31st January, your filing deadline will be 31st October.

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For HMRC (Corporation Tax), you have 1 year from the end of your financial year to file your tax return, however, you only have 9 months for the payment of Corporation Tax (which you can’t pay until the tax return has been prepared!). Therefore, it is always best practice to think of all the deadlines being 9 months from the year end.

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In order to ensure you meet these deadlines, I would always recommend giving your accountant the information required to prepare the accounts and Corporation Tax returns as soon as possible after the year end has passed. This is not only because it allows them time to prepare them accurately and discuss them with you, but because you will then understand your tax position much sooner. Doing this also ensures that if you end up with an overdrawn DLA, you have the time to return the funds within the 9 months and prevent any further tax to pay.

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The longer you leave it, the less likely your accountant will be able to meet the deadlines, meaning penalties may be issued.

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Penalties

Companies House (9 months filing)

• Up to 1 month  -  £150

• Between 1 - 3 months  -  £375

• Between 3 – 6 months  -  £750

• Over 6 months  -  £1,500

• The penalty will be doubled if accounts are filed late in 2 successive financial years

​Link to Companies House - late filing penalties

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HMRC (1 year filing, 9 months payment)

• 1 day  -  £100

• 3 months  -  Additional £100

• 6 months  -  10% of estimated CT bill

• 12 months  -  Another 10% of unpaid tax

• Late payment penalty – Late payment interest accrues daily, at a rate of 7.75% from 22nd August 2023, increasing to 7.50% from 20th August 2024

Link to HMRC - late filing penalties

Link to HMRC - late payment interest

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If you don’t have an accountant yet, then                             with us to see how we can help you and your business thrive and grow!

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