How the finance for business and planning of tax can prove helpful in the process of new company registration UK

20 Nov

In order to start a new venture, or run an already registered business, there may be a need of a long term or a short term finance for the businesses even when they wish to expand their business, because when you do not have enough resources, then how to open a company in UK? It is nearly impossible. Hence, for the convenience of readers, the sources of finance and the loans, equity finance and lease are brought into discussion in this article. In order to give an insight into the planning of tax, this blog includes the planning for employment situations and the remuneration packages if someone’s mind has struck with the idea of business and wants to have a new company registration UK.

Sources of Finance

Whenever you start a business, you are in need of funds to start up or expand, and it may occur that the requirements of the business cannot be fulfilled by the entrepreneur himself. Banks, partners, new shareholders and other lenders can be contacted for the outside capital. One might think that from which sources, he can acquire finance for the business, these sources include:

  • Personal capital of the entrepreneur.
  • Short term, medium term or long term loans from the banks.
  • Arrangements for leasing and hire purchase.
  • Bank overdrafts.
  • Loans from land mortgages.
  • Loans obtained from private individuals.
  • Issuance of shares for incorporated businesses.
  • Arrangements of leasebacks and sales.
  • Invested capital by partners.
  • Issuance of loan stock for the incorporated businesses.
  • Institutions for venture capital.

There is a difference between the treatments of tax for loan finance and for equity similar to the case of difference of implications of tax in equipment lease and its purchase outright.

Implications of Tax of Loan Finance and Equity Finance

When a person is performing the procedure to set up new company companies house, then he may acquire the finance through loans and acquire the relief for tax for the paid interest. A company may raise the finance through an issuance of shares to the shareholders.

Loan Finance

You might already know that if, for the purposes of trade, a company is a part of loan relationship, then any debits are subtracted during the computation of its profits. However, if the relationship of loan is not for trade purposes, then any credits or debits are pooled. A total credit on the pool is charged in the form of an interest income.

It should be noted that the capital costs are treated in a similar manner as the costs of interest which are taxable or allowable. Hence, if a company makes an issuance of a loan at discounted price and makes the repayment of it eventually at par, then the capital cost is permitted.

A partnership or the trader alone cannot ask for the subtraction in the case of repayments of capital for the loan finance. If the interest is suffered in its entirety and merely for the purposes of trade, only then the trading deduction is available.

Equity Finance

The companies have a choice to raise their finance by the issuance of shares to shareholders. In this way, capital can be raised for both the purposes of trading and other purposes. It is also up to the companies that they can make the distribution of profits among different shareholders in numerous ways, out of which the most common method is the payment of dividends. In the computation of taxable profits, the price of distribution among shareholders is not allowable.

Types of Shares

The main types of shares and their features are mentioned below:

  • Ordinary Shares: The shareholder has the entitlement to a share of profit whose distribution is done as a dividend, also he is entitled to the right to cast his vote on the matters that have an effect on the company. He also holds the entitlement to a share of assets whenever a winding up occurs, but it must be kept in mind that the shareholders cannot precede the creditors.
  • Preference Shares: In the event of a liquidation and for the payments of dividend, these shareholders have a preference over the ordinary shareholders. Mostly, the dividend is an amount that is guaranteed, but if ordinary shareholders get more of the distribution, then the increment cannot be acquired by the preference shareholders.
  • Convertible Preference Shares: The payment of dividend made on these shares is less than a non-convertible share of preference as a usual practice, but there is a choice to convert them to ordinary shares in future at the date and prices already set.

Professional and Legal Expenses

The professional and legal expenses related to the non-trading or capital items are not allowable. The fees incurred is a part of this, such as, the issuance of share capital. However, there is a relaxation in the form that subtraction is allowed to companies according to the rules of loan relationship for the incidental prices in order to acquire loans for business (medium or long term) and for the issuance of loan stock.

Rules for the Income received by Investors

An income is taxable for the receiving party if the interest income is acquired from a company on loan stock etc. This income has suffered 20% tax at source if its payment is made on unlisted loan stock.

The dividend income, as acquired from a shareholding in a company, is liable to tax only to some extent to an individual if he is an additional or higher rate payer of tax. It should be noted here that the tax suffered on interest income can be repaid but the dividend income’s tax credit can never be made subject to repayment.

In the hands of a shareholder of the UK company incorporation, a UK dividend income is not liable to tax.

In the case when an original creditor makes the disposal of his debt, no loss or no gain can occur. The person who buys the debt, unless he is in connection with the original creditor, can have an allowable loss and a chargeable gain.

A loss or a gain can be experienced by an original creditor as a result of a debt on security.

Decision to Lease or Buy Assets

It is possible, that at some point, the business or the UK company incorporation has to make the decision to lease or buy assets. In this case, the prices of short term leasing can be deductible expenses. The prices of longer term may attract the capital allowances in a similar manner as that of purchasing an asset outright.

If the leasing of assets is done and the duration of lease is not more than five years, then the payments for lease are generally deductible during the calculation of profits liable to tax. If they are leased under a long term lease or purchased on hire purchase, then the cash cost of the assets may be considered as qualifying for capital allowances and the charges of finance are deductible during the computation of profits liable to tax, hence rendering the effects of tax much like those of buying an asset after taking out a loan.

If the purchase of assets is done outright, then the capital allowances may also be found at the cost of purchase. Every year, these will be provided on the basis of a reducing balance. Ultimately, the decision to lease or buy will most probably, be dependent on the funds’ availability and the fact that whether the asset permits the company to keep the funds free in order to finance some other activities.

Planning of Tax

A taxpayer may need some advice on the planning of tax after he is clear about the question of how to open a company in UK? The queries regarding the planning of tax have been answered in this section.

Self-Employment and Employment

A general rule exists that employment does not lead to NIC burdens and lower overall tax, but the self-employment does.

The following points should be brought into consideration when a taxpayer makes the choice between employment and self-employment:

  • An employee should make the payment of NICs and income tax as soon as he/she receives his/her salary, according to the PAYE system and the basis of the present year. A self-employed person makes the payment of NICs and income tax that are payable at least in parts once all the concerned profits have been acquired. Hence, there exists an advantage of cash flow in self-employment.
  • An employee may receive benefits along with the salary. The values of taxable benefits may be less than their original cost to the employee and the employee NICs are not attracted by the benefits. The employer’s class 1A NIC is mostly attracted by the benefits.
  • Although the entitlement of employee to benefits of state may also be higher, it is most likely that an employee suffers eminently higher total NICs as compared to the person who is self-employed. It should be particularly noted that no entitlement of state second pension is acquired by the self-employed.
  • The employees are liable to stricter rules on the subtraction of expenses (that are suffered necessarily, in their entirety and exclusively after the performance of duties) than the self-employed whose expenses are suffered normally, exclusively and in their entirety for trade purposes.

Accountability of Packages of Remuneration

If someone is going to be an employee, then the accountability of tax effects for the Packages of Remuneration should be done.

Employment Situations and Planning for Income Tax

As a usual practice, a reward will be given to an employee largely in the form of salary, but a remuneration package may also include numerous other elements. Some of them bring benefits of tax to only the employee, while the employer can also benefit from some of them.

The treatment of bonuses is done in a similar manner as the salary, except the fact that if a bonus is accrued in the accounts of employer but its payment is done after the duration of 9 months since the period of account ended, then there will be a delay in its deductibility for the purposes of tax.

As far as the bonuses are considered, generally they are liable to the payment of employer class 1A NICs and to income tax. The price of providing benefits is generally subtracted during the computation of the employer’s trading profit, but if a car is provided that emits carbon dioxide at a rate of 130 g/km, then the capital allowances of the employer or the lease payments’ deduction is reduced. However, there exist a huge number of NI free and tax benefits and there are great techniques of planning that can be used to make sure that the employees and the directors receive NIC efficient benefits package. The best way is to make sure that a tax deduction is acquired by the company for the expenditure during the creation of tax and NI free remuneration for employees.

Planning of NIC in Employment Scenarios

The payment of NIC should be done on earnings. This NIC is defined as the profit or remuneration obtained from employment. The packages of remuneration acquire a structure to include the following items that are earnings and would reduce the burden of NIC:

  • Rents: A director who is the owner of a property that is in use by a company could be paid with rent instead of remuneration. However, the relief for associated disposals available on the subsequent property’s sale for entrepreneur will have an impact because of this. The expense of rent is a deductible expense for business but the income considered as earnings for the purpose of contribution for the individual
  • Dividends: The director or shareholders could take remuneration in the dividends form. A requirement of adjustments to bonuses and dividend waivers may be necessary. There are implications of CT as salary and costs of NIC are allowable expenses of business while the dividends are not. In order to avoid NIC, the dividends are one efficient method. However, the income of dividend is not earnings for the purposes of pension. Since PAYE is not applicable to dividends, there is also an impact of cash flow

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