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:
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.
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.
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:
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:
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: