First year trading

Jaco70

I employ a labour-only sub contractor, and a year ago his accountant suggested he form a limited company and register for VAT.
Neither of these things really affect me, I simply deduct 20% tax from his earnings, send this to HMRC, but now pay VAT on his weekly invoice, which I didn’t previously.

He is under the impression that because this is his first year trading, he will get a big rebate from HMRC. He has in my opinion misunderstood information provided to him by his accountant, but I can’t think what was meant by his agent during their conversation.
I fear he is in for a disappointment when they submit his return.

He is familiar with the usual allowances for clothing, office space etc, as he has been a LOSC for many years, but he is under the impression that the first year as a limited company comes with some kind of special bonus. Whilst I’ve gently warned him that I’m sceptical, he’s inclined to listen to a financial professional, understandably. 

Jeremy535897

It sounds more likely that the refund is in respect of the 20% deductions of tax you are making. If the limited company has a modest corporation tax liability it may recover the CIS deductions in excess of that corporation tax liability.

Jaco70

Jeremy535897 said:

It sounds more likely that the refund is in respect of the 20% deductions of tax you are making. If the limited company has a modest corporation tax liability it may recover the CIS deductions in excess of that corporation tax liability.

Ahh, that makes sense. I don’t know why I didn’t think of that. 

I think what may work against him on that though, is the fact that he earns quite a lot, maybe 70k. On which he will only have had 14k deducted at source. 

Jeremy535897

Yes, but if he leaves it in the company, there is only corporation tax at 19% (currently) on his profits, and there will be expenses to come off what you are paying. Alternatively the company could pay him a modest salary within his personal allowance (which reduces corporation tax), then dividends up to the start of the higher rate at a tax rate of 8.75%, and could pay into a pension scheme, again reducing corporation tax. Properly advised, he might find that there is quite a lot of tax to come back.

Jaco70

Jeremy535897 said:

Yes, but if he leaves it in the company, there is only corporation tax at 19% (currently) on his profits, and there will be expenses to come off what you are paying. Alternatively the company could pay him a modest salary within his personal allowance (which reduces corporation tax), then dividends up to the start of the higher rate at a tax rate of 8.75%, and could pay into a pension scheme, again reducing corporation tax. Properly advised, he might find that there is quite a lot of tax to come back.

That’s good, I hope that’s the case.

I’m fairly well aware of his personal circumstances though, and I know that he pretty much lives to his income, so there’s unlikely to be anything left in the company, bar a grand or two at the most.

I suppose that the fact he takes it all out as earnings means it will be considered income, minus any expenses he can legitimately claim? There will be quite a few of these though, as he owns and runs a van, buys tools etc. 

Jeremy535897

He won't take it all out as earnings, but will take dividends beyond a certain level of earnings, if well advised (although there was a lot of upset about furlough on this subject).

Jaco70

I spoke to him and following his meeting with his accountant, he's getting a rebate of over 13k. I don't claim to  understand it, but obviously his accountant wasn't misleading him.

Jeremy535897

It may be that the refund is due to the company, but the reckoning comes a bit later. It's hard to judge without the facts.

Jaco70

Jeremy535897 said:

It may be that the refund is due to the company, but the reckoning comes a bit later. It's hard to judge without the facts.

I had a similar feeling, but I was way out with my initial thoughts that he’d misunderstood the accountant, so I’ll assume it’s all ok.

Obviously I don’t know the details of his return either. I just pay him money every week and deduct tax. 

I’m pleased he hasn’t been disappointed though, and maybe I’ll change accountants myself now  😂

Pennywise

Has he put is wife as director/shareholder of the limited company to use her personal allowance and basic rate band?

Or maybe the refund is from SA payments on account which may have been too high - the refund may only be temporary as small ltd cos don't pay POAs so he may get a shock 9 months after year end when CT bill arrives?

Jaco70

Pennywise said:

Has he put is wife as director/shareholder of the limited company to use her personal allowance and basic rate band?

Or maybe the refund is from SA payments on account which may have been too high - the refund may only be temporary as small ltd cos don't pay POAs so he may get a shock 9 months after year end when CT bill arrives?

From what I know of his set up, yes his wife is a fellow director and doesn’t have any other income. Secondly, I very much doubt that his self assessment payments in previous years would have been too high, although just my guess.

With regard to paying your spouse, I pay my wife a very small wage for helping with office matters (6k a year tops) and my accountant is always warning me not to be greedy on this issue. He says if I pay her 20k, to reduce my income (which ideally I’d like to do), HMRC may want evidence of what she contributes to the management of the business.