Company Directors’ Guide

The company directors’ guide is here to help you understand what running your own limited company will mean for you.

There are a lot of laws, duties and responsibilities which govern the director’s role. This guide has been designed to equip you with essential knowledge of the law, tax regulations and expenses rules as they apply to the role of a Company Director.

We’ll also let you know some useful tips to keep you and your limited company as tax efficient as possible.

You the Limited Company Director

To become a company director means you have a legal responsibility to the company and all of its operations.

We have heard many business owners describe the growth of their business as giving birth and their company as their baby. This is actually a very useful analogy because when you establish a limited company it attains its own separate legal identity, whilst remaining your responsibility.

It is crucial that, as a director, you understand that your limited company has legal rights and accountability and that it independently owns any profits or losses. This knowledge can be difficult to apply to your company if you are the only shareholder, employee and director.

Remember: Directors are employees of a company. The shareholders own the company. The amount of the company you own depends on what percentage of the shares you hold.

Can anybody be a Limited Company Director?

Surprisingly…yes.

These are the restrictions around being a company director.

• You must be 16 years old or over
• Your financial history must have no record of bankruptcy
• You must not have any court order which states that you are not allowed to be a company director.

Yep, that’s it. No qualifications, assessments or experience necessary. There is even the possibility that a court could grant you permission to be a company director even if you have previously been bankrupt or forbidden by a court order.

The Nine Company Director Commandments

Be very clear your duties as a director are set in law and the interests of the company are now your only priority. The main legal premise of the director’s role is that you are acting in the best interests of the company.

The interests of shareholders, you or anyone else are a firm second place even if all of these roles are filled by just you.

Here are the nine main commandments that you must abide by in order to carry out your duties successfully and legally as a limited company director.

1. It cannot be emphasised enough that, as director, you must base any decision on the best interests of the company. And what is good for you may not always be good for the company.
2. You must avoid any conflicts of interest in your business affairs. Shareholders must be told if you have any kind of personal gain from any company dealings.
3. Follow the rules of the Articles of Association. These are the legal guidelines you and your shareholders signed when you became a limited company and they govern your decision making.
4. Keep scrupulous, unambiguous company accounts that show a clear and authentic financial picture.
5. It is expected that someone holding your position will conscientiously use their abilities to care for the company entrusted to them.
6. Keep basic factual records up-to-date and inform the relevant authorities of any changes. For example, if a shareholder moves house, you are responsible for informing Companies House and HMRC of their new address.
7. You must maintain the integrity of your decisions by being completely above board at all times. Never accept any kind of benefit from a third party as this could be construed as an outside influence on the company. Accusations of bribery or corruption are hard to overcome, so your business behaviour must be impeccable.
8. You are responsible for the annual filing of a Self Assessment tax return more on this later!
9. Know when you can delete! It is a legal requirement to keep any company records for 6 years after the year end date. Premature shredding could cost you a £3000 fine.

Company Directors and Taxes

They are the constant in any business and, as director, you have the legal responsibility to make sure that your company follows all of the rules.

You must register correctly and adhere to all the deadlines set by Companies House and Her Majesty’s Revenue and Customs (HMRC, or, the Tax Office). The buck stops with you and your company accountant.

Your Responsibilities as Company Director

This is a list of the items that company directors are directly responsible for, just to get you started.

Pay As You Earn (P.A.Y.E.)

• You must register with HMRC to establish the PAYE system.
• You are required to have the Real Time Information software which allows the Tax Office to adjust your employees’ tax payments as changes happen.

Corporation Tax

• First step – register to pay Corporation Tax.
• You have 9 months and 1 day after the accounting year end in which to pay your Corporation Tax.
• CT600 is the imaginative name of the Corporation Tax return form which you have 12 months after the end of the accounting year to file.

VAT

• Most small limited companies opt to pay a quarterly VAT return. There are many other ways to do this and you must evaluate which is best for your company. Whatever you decide, you must have a clearly identifiable VAT payment plan in place.
• HMRC must be told if you are voluntarily registering for VAT or if you estimate that the company will make more than £81,000 in 12 months.

Filing financial statements

• Companies House demands your company’s first financial accounts are submitted 21 months after registration with Companies House.
• You must file your first Annual Return by 12 months after your accounting year end.
• Not forgetting your own personal Self Assessment tax return which must be filed by 31^st January every year.

This may well have created more questions than it has provided answers. But, as the next section details, there are serious financial consequences to any mistakes. So it is crucial that you are totally clear about how these regulations apply to your company.

The Consequences

On average 1,600 company directors every year are prosecuted because they missed deadlines or handed in returns containing insufficient information. This could mean that you are banned from holding the position of company director and personally fined up to £5,000 for each misdemeanour.

Just being a little over a statutory deadline can see fines accumulate at an alarming rate.

Reports of corruption are investigated seriously by HMRC and Companies House. Common examples are; benefitting personally from company money or assets, trading whilst not resolving debts or not registering to pay tax.

This information could be reported to government officials by professionals working in the debt industry. But anyone could report you and remain anonymous.

By following the rules you avoid the stress of the last point. But to adhere to rules you must first fully understand them. So, even if you think you should already know the answer, please ask us all of those niggling questions.

Directors Tax Relief a.k.a. Expenses

Finally…some good news. Isn’t it?

Well….yes and no.

Yes

There are many business expenses that you can claim tax relief for. This is money back your company’s account.

No

If you were expecting a straightforward yes/no list of entitlements you could be left disappointed. Your company accountant will help you with this so you don’t have to know them all.

As company director you need to be aware of what is allowable so that your company can keep the necessary records and receipts.

What does tax relief actually mean?

Fundamentally, the more allowable business expenses you claim for, the less taxable profit your company will have.

Corporation Tax takes 20% of your profits before you can take a dividend. Expenses lower the amount of that profit which can be taxed at this rate.

For example:

Company turnover = £20,000

Allowable expenses claimed = £3,000

Amount liable for Corporation Tax = £17,000

What do I have to do as Company Director?

Two things:

1. Get to grips with the basic rules listed here.
2. Keep detailed records and receipts for everything. You are required to keep these records for 6 years after they have been claimed.

How can expenses be paid?

There are 2 ways to pay an expense; either directly from the company’s bank account or, if you pay for something yourself, as a ‘reimbursed expense’. As a director you can ‘reimburse’ yourself whenever it suits you, but keep the evidence!

Definition is everything

HMRC really do have their own specific language. There are 2 key terms which you need for the next part.

Allowable expense – to HMRC this means a cost that is “wholly and exclusively” necessary to carry out your work duties.

Dual purpose – this is the sort of claim you want to avoid. If there is a dual purpose to an expense it will probably not be ratified by HMRC. This means an item that is used both for work and out of work e.g. clothes.

But even this is not entirely clear cut because sometimes the dual purpose is ‘incidental’ and therefore they would accept your claim. For example, protective clothing you must have for work but could be worn in your personal life.

Most common claims for Company Directors

Oh yes, the confusion starts here!

This final section summarises the allowable expenses that are most frequently, successfully claimed for. As you will see, the regulations are riddled with ifs and buts. The best thing to do is record everything, keep all evidence and let us help you organise it into an official claim.

Travelling to work

This is about using your own personal vehicle for work travel. We need to be careful to use HMRC definitions again here. This does not mean your normal commute from your home to your workplace.

It does mean travelling to a ‘temporary workplace’ to do work that has a completion date of 24 months. As soon as you know that a project will run longer than 2 years, you can no longer claim it as an expense. You should also be able to show that your company has more work of the same kind at a different site once your current contract has ended as part of this ‘temporary workplace’ definition.

It’s a great allowance this one, it covers; parking fees, congestion charges, tolls and meals. But as a limited company you must be able to evidence your claim with receipts, which you might not be used to keeping if you have previously claimed the £5.00 fixed allowance. So – get your file/shoebox/carrier bag ready!

Bills for Accountancy Services

You can claim tax relief on the full cost of your company’s accountancy bill. You cannot get tax relief on accountancy fees which pay for work done on your own personal finances. You must keep the billable time spent on these two sets of accounts completely separate. The latter is considered a ‘benefit in kind’ by HMRC.

Limited Company Start-up costs

Any money you spent on setting up your company can be classed as pre trading expenses. This is great because it includes basics like equipment, office supplies, printing stationery and accountancy advice. To be eligible the expenses need to be incurred within 7 years before the first date of trading.

Accommodation and subsistence costs during business trips

You are entitled to tax relief on accommodation costs when you are travelling for business reasons. Don’t get overexcited, ‘The Savoy’ would not come under HMRC’s definition of a ‘reasonable’ cost. Although you are not doomed to a Walford style B & B either! They are looking for an average priced establishment and the receipt to prove it.

Lunch and dinner are also available expense claims when you are engaged in business travel. If you work 5 hours, you are entitled to lunch. If you work 10 hours you are entitled to dinner. Yes ‘reasonable’ and receipts also apply here!

Planes, trains and automobiles

This means using your own vehicle to travel to a place of business. The rates are different for different vehicles. As an example, if you own a car or van you can claim 45p per mile up to 10,000 miles and 25p for every mile beyond. You need to keep a mileage log as evidence.

There are also other allowances for different types of transport and travel expenses. These include; tolls, congestion charges, parking fees, planes, trains and ferries. Obviously parking fines are not included. The ‘reasonable’ concept is applied to how much you claim in taxi fares.

Equipment

Any indispensable equipment you need to perform your role as director is tax deductible. From desks to software, filing cabinets to printers, these are all considered necessary business purchases by HMRC. It is somewhat surprising given the potential for ‘dual purpose’ in this area, but as long as the personal side doesn’t go beyond a few emails, you can claim tax relief.

Stationery cupboard supplies

This is one of the clearer rules to interpret! If you buy it solely for work and you have a receipt you can claim. This includes printer ink, stamps and the vast realm of assorted stationery we still need in our ‘paperless’ business world.

Subscriptions to professional journals and bodies

Many professional bodies have agreements with HMRC so that you can claim if they are relevant to your job. There are very strict rules around this area and if there is any doubt about the body’s relation to your work then it will not be considered.

Your office at home

This doesn’t mean coming back home and doing extra work. HMRC defines this as a particular part of your home that is completely kitted out as an office that you work from. You must be able to prove this and show that it is a business area.

You can claim £6.00 per week without having to declare it and going over this amount means a large burden of evidence on you.

When it comes to utilities and insurance you must start with a lease between you and your company. Then an estimate is made based on how much of your home’s space you are using as a place of business. If your house has 5 rooms and 1 room is your office, then you can claim for 1/5^th of energy and insurance costs.

Council tax questions are a bit tricky to answer as well. If you are the only member of staff working from your home then you can claim for part of your council tax bill. But then you delve into the area of having to pay business rates instead of council tax.

This hinges on how much of your home is taken up by your office. A thorough investigation is needed to establish your best course of action.

Internet and phone usage

This is a connected and slightly clearer set of rules.

• If you have one landline or mobile for both personal and business calls then you can only claim for the business calls made on that line.
• If you install a business line then your claim can incorporate line rental. Any personal calls will be taxed though as HMRC consider them a ‘benefit in kind’.
• If you have a business mobile then personal calls would not be a ‘benefit in kind’ and you could claim for the complete cost.
• Internet provision that is dual purpose in your own name would be eligible for a partial cost claim. If it is a company account then it would be the whole cost.

Salaries

Salaries and National Insurance Contributions are allowable expenses. The threshold at which you have to pay NI contributions usually changes each year.

As a company director you can set your own salary level is you don’t have a contract with the company or if you are not within the boundaries of employment defining laws called IR35. This designates if you are self-employed and working through your company or if you are an employee of your client.

Pensions

Pensions for employees are 100% tax deductible for your company. The company must have an agreement with a legitimate pension provider and then there is no ceiling as to how much you can put into the pension pot.

Medical insurance

HMRC considers this to be a ‘benefit in kind’ and so such provision would not earn your company any tax relief.

Events

In other words…the Christmas Party! Yes, you are allowed a tax-free event once a year and most companies opt for a Christmas party. Now, here comes the small print;

• The people attending must mainly be staff, although a ‘plus one’ is allowed.
• The cost per head is capped at £150.00, including VAT.
• You could split this cost into more than one event, but it remains set at £150.00 per person.

You really need to keep all of the receipts for this one as HMRC are wise to any attempts to exceed these limits and they will check very carefully!

Entertaining

Conversely, ‘business entertainment’ is absolutely not an allowed expense. You could use company money to wine and dine your customers or suppliers, but it will be taxed.

Presents

In the absence of entertainment, you may feel that gifts are a good way to oil the wheels of your business relationships. If this gift is going to someone outside your company you are entitled to tax relief. Of course, there are a couple of strings attached here. This gift must not cost over £50.00 and it must not be vouchers, alcohol, food or tobacco. So, flowers and toiletries all round then!

Any gifts given to employees of the company are considered to be ‘benefits in kind’ by HMRC and therefore are eligible to be taxed.

Spectacles and eye tests

Yes, people are usually surprised by this one. If you need to use ‘visual display equipment’ (i.e. a computer or clipboard) at work then you can claim for an eye test.

Normally you cannot claim for the glasses or contact lenses that you may subsequently be prescribed because you will not only be using them at work. That pesky ‘dual purpose’ clause again!

Training conferences or courses

The best way to understand the nit-picking around this one is to think of it like this;

If the training intends to make you better at what you already do, HMRC will approve.

If the training is designed to teach you something new, they will reject your claim.

So, if you have the right sort of course, you can claim for its cost and any travel or accommodation expenses attached.

Higher education courses, such as an MBA, are really not popular with the Tax Office. Although they do consider every case individually and may allow your claim if you present a good enough case that illustrates how your learning is increasing your present skill or knowledge level.

Childcare vouchers

Some parents and carers are eligible for Childcare Vouchers if they meet certain criteria. The child must be under 15 years old, or 16 if they have a disability. The child or step child must live with them and be financially provided for by them.

If this sounds like any of your employees then you might be able to give them Childcare vouchers.

The amount is variable and depends on your company’s tax bracket.

Basic rate – Maximum of £243, monthly

Higher rate – Maximum of £124, monthly

Additional rate – Maximum of £110, monthly.

There are two ways of making this payment either through an established voucher scheme or directly to a registered childcare provider. Unfortunately relatives don’t count unless they actually run a childcare service and look after children that are not family members.

Donations to charity

You are entitled to get tax relief on donations to charity. The purpose of the donation must be entirely for trade and must be made to a registered charity. If it is not related to trade you may still be allowed some tax relief.

Company Directors summary

Running your own limited company can be a great way to make money but whilst wearing your Director hat, you must think like a director!

You must follow legally enforceable rules and always put your duty to the company first. It is your responsibility to ensure that your company meets the requirements of all applicable regulations – and not knowing is not an option or an excuse.