There are a few different options when it comes to setting up a limited company, the most common being:
- Your accountant sets it up for you
- You use an online formation company
- You set it up yourself with Companies House and HMRC
When you have the option to do it yourself, you may be wondering why so many people choose to have their accountant set up their limited company for them. Why pay your accountant to do it when you can use a cheap online formation company, or do it yourself relatively free?
You absolutely can do it yourself, but – you need to know what you’re doing. The online form may seem simple enough, but do you really understand what you’re doing – and the implications of getting it wrong?
Most people opt for paid support because it can cost you a lot more in the long run to sort out any issues if everything isn’t set up correctly.
We’ve seen the pain DIY has caused clients many times, and we want to share these cautionary tales so you can avoid the pain yourself.
Setting up the company, but not advising HMRC of the correct trading status/trading start date
This means HMRC will have incorrect information from you and will expect corporation tax returns for certain periods where you could actually be dormant. If you don’t file those returns then you will receive an automatic £100 fine – at least! We’ve recently had a case of 2 x £100 fines, where we would only have charged the client £175 to set it all up properly. In the long run the mistake ended up costing them an extra £25.
Another outcome of this scenario is having to spend hours sorting this issue out with HMRC yourself (appealing fines, trying to get through to HMRC, writing letters) which still may not necessarily result in a cancelled fine. Or spending money getting your accountant to sort out the mess for you – which will likely cost more than their original fee for setting it up for you in the first place.
The shareholding is not set up to reflect tax planning opportunities
We’ve see this happen in a few detrimental ways:
- A business owner has set up their company with one share just for themselves, meaning we need to adjust the shareholding to be the most tax efficient, so you can split shares with a spouse/partner accordingly for dividend purposes. If not done properly the first time this could cause problems down the line when needing to allocate shares to a spouse/partner or business partner.
- The business owner has set up 1000 plus shares at £1 each (if not more!) initially. This means that the shareholder is investing 1000+ in the business, and down the line if things go wrong this £1000 plus cannot be recouped. You will lose it!
- Shareholdings are allocated to different shareholders at the wrong split or share class, meaning all dividends will need to be distributed as per the shareholdings set up. This may not actually reflect what the shareholders should be paid or the requirements of the company.
An example of this is the company being set up with 50/50 shareholding, where one shareholder is working and should be paid the majority of the shares, and the other shareholder is not working and should only be paid a minority via dividends. If the shareholdings are 50/50 then both shareholders should be paid equally. There are ways of ensuring the split/mix is set up correctly to reflect the correct remuneration levels.
When setting up with Companies House the Corporation Tax side of things is automatically set up too
In order to do this, you need to know what you should be telling HMRC. When you will be starting to trade? Will you be dormant for a while or start trading straight away? Do you need to be VAT registered? Do you need PAYE or CIS registration?
You also want to make sure the correct taxes are applied for as part of the set up to ensure you’re only registered for those you need, and not registered unnecessarily for those you don’t!
- You don’t want to register for VAT when you don’t need to – but similarly if you need to, you want to make sure that you do register! check out our VAT basics blog and our blog on registering for VAT voluntarily for more information on whether or not you need to register.
- If you’re paying yourself (or employees) a salary then you need to register for PAYE – the most common error we find is people not registering for paying themselves – and therefore losing the tax benefits of having a salary and dividends through the business. Some people’s circumstances do mean that a salary isn’t beneficial and therefore isn’t a requirement for PAYE, but this needs to be assessed on a case by case basis. Unfortunately, we are seeing more and more people who aren’t registered and should be, and they are overpaying in tax as a result. It’s a simple, but costly, mistake to make.
- As a limited company CIS is more complex than if you’re a sole trader, especially if you also have your own subcontractors, as well as being a sub contractor for your customers (See!? confusing already). Did you know that there are two types of CIS for a limited company? It is vital that you register correctly for CIS. We see too many people, especially when transitioning from sole trader to limited company, not registering as a limited company and still using their sole trader UTR. This can cost you thousands in extra accounts fees and tax!
Get support from an Accountant and rest easy knowing you’re set up correctly
Yes it will cost you to speak to an accountant and have them set up your limited company. But that money will guarantee you it will be set up correctly with the correct registrations, and the company structure will reflect your goals and intentions for the company. It’ll also mean you don’t have to fork out more money in the long run to sort out any issues!
How it works at PPF
We would go through the required structure in your free Proposal Meeting to ensure we understand your goals. That way we can advise on how the company needs to be set up to achieve those goals (and be most tax efficient!). Our fee then covers the set up, the Companies House fees, and also covers registering you with VAT, PAYE and CIS if you need to be!
Save yourself the long term stress and talk to us today about setting up your new limited company. All you need to do to get started is fill in our quick questionnaire to book your discovery call.