Things that a director should know

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Starting up a limited company is an exciting time – it’s a big step for you and your business. It is easy to get carried away in the excitement and not take in all of the things you are required to do to be compliant with all the company and tax laws, and it is possible you might miss opportunities for how to manage your company better.

I’ve previously written about the compliance requirements and how to take money out of a company, which I would recommend reading if you haven’t already done so.

Working from home allowance

If your employment requires you to work from home, then you can claim an allowance of £6 per week for doing so. This applies to company directors who are employees of their own company. You can either claim this as a deductible expense of employment on your tax return, or you can get your company to pay this to you as income which isn’t taxable. The latter is probably the best of the two approaches as it also allows the company to save a small amount of tax.

Trivial benefits

A limited company is allowed to buy things for their staff – called trivial benefits – provided certain terms are met. It needs to be worth £50 or less, it isn’t cash or a voucher, it isn’t a reward or in the terms of their contract. These purchases can be claimed as a tax deductible expense as long as all of this criteria is met. For directors of small companies, you cannot receive more than £300 of trivial benefits in a year. The rules around this are on the government website.

Director’s loan accounts

Directors who are the only shareholder in a company will often take money out as and when they require it for personal expenses. This is allowable – it will be classed as a loan unless you declare it as dividends. Often dividends are declared at the end of the year for the amount that a director has taken out of the company.

A complication arises in that you can only declare dividends up to the amount of profits within the company, after taxes are calculated. You can therefore get into the situation where there is cash available to take out of the company but as the year end accounts haven’t yet been calculated, the tax hasn’t been paid so the funds within the company might be needed to go towards that tax bill.

If this happens, you have taken out more than can legally be declared as dividends so some or all of it might need to remain as a director’s loan. This can become a problem because if the director’s loan account isn’t cleared by the time the tax return is due (9 months after the year end) then there is a hefty charge on the outstanding amount. This charge can be reclaimed but it is a lengthy process and much better avoided if possible. The loan can be cleared either by putting funds back into the company or legally declaring dividends when more income has been received. It is best to check with an accountant how to proceed in this matter.

If a company has more than one shareholder, then dividends need to be split in proportion to their shareholding, so this adds complexity. In this instance, I would recommend not taking money as and when it is needed but have regular declarations of dividends if necessary.

Travel and subsistence

It is possible to claim your travel costs when working for a limited company provided certain conditions are met. The key one is that you cannot claim travel for a permanent place of work – so if you have an office you can’t claim for travel there and back. You can however claim for travel expenses over and above that, for example if you need to visit a client on site.

It is possible to have a car owned by your company, however unless it is used solely for company business with no personal usage, this comes with a tax charge on you as an individual.

It is often best to claim for mileage on a personal car which is more generous than just the cost of petrol as the mileage allowance allows for the cost of insurance, repairs and tax as well as petrol. I would recommend keeping a mileage log of all of your eligible journeys to pass to your accountant at year end.

Subsistence is the cost of food and drinks whist on an eligible work trip – so again, you cannot claim for these when going to a permanent place of work but if you are travelling somewhere outside of the norm, then reasonable expenses are allowable. A cafe lunch is much more reasonable than a meal at the Savoy, for example and generally you cannot claim for any alcohol however soft drinks are fine.

Record keeping

One thing that all company directors need to get their heads around is that you have to keep all of your financial records. Ideally you will link any receipts and invoices to your accounting software so that it can be found easily if there is ever a query. It is a legal requirement to keep records for six years from the end of the company financial year they relate to, and there is a potential penalty of £3,000 if records are not adequately kept.

On top of this, if you are VAT registered, you are required to be able to provide evidence for every invoice for purchases on which you are reclaiming VAT. It is not possible to reclaim VAT without this evidence.

It can be a bit daunting at first to work out exactly how to keep on top of your record keeping, however using software and finding a good accountant will help you to ensure that you are compliant with all of the regulations.

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