X

Archive for Blog

Our (hopefully) insightful ramblings…things that occupy our mind!

What are alphabet shares and why do business owners need to be aware of them?

What are alphabet shares?

Limited Companies are traditionally formed with a nominal number of ordinary shares. As the company grows and more shareholders are added, alphabet shares are certainly something to consider.

Dividend waivers vs alphabet shares

Dividends are received by all the shareholders of a Limited Company, in proportion to their personal shareholdings. Should there be a need for one shareholder to be paid a different amount to the other shareholders, there either needs to be a dividend waiver or the share structure needs to be amended.

  • If you believe you’ll use dividend waivers on a regular basis to distribute company profits disproportionately to the same class of shareholder, then it’s advised to use alphabet shares as a permanent alternative method.
  • HMRC are more likely to question dividend waivers
  • Waivers can be seen as unreliable as all shareholders must give their consent each time
  • Alphabet Shares do not need the consent of all shareholders, as dividends are declared by reference to shares held, meaning that dividends declared as being payable to holders of Ordinary shares have no bearing on dividends declared as being payable to holders of an Alphabet share
  • It is possible to attribute rights or restrictions to alphabet shares. This could be in relation to voting rights or or rights to distribution on wind up.
  • Alphabet shares allow freedom and flexibility in paying dividends, so payments can be made to a certain class of share without having to pay the same amount in dividends to each company shareholder. If your Limited Company’s shareholders are taxed at higher rates than one another (if at all) then alphabet shares are a particularly good idea.

Settlement Rules

Whether you decide to use dividend waivers or alphabet shares, it’s important to understand whether either is caught by the Settlement Legislation.  In short, the Settlement Legislation is designed to expose and punish anyone who uses dividend waivers or alphabet shares purely to divert income from one person to another, thus resulting in a tax advantage.

For alphabet shares it’s particularly important to understand that a lack in voting rights (for example) could result in being caught by the Settlement Legislation.

To ensure you do not fall foul of the Settlement Rules, we advise you do the following:

  • Any new shares made under the alphabet scheme must be an outright gift and have exactly the same rights as the original ordinary shares. Restrictions cannot apply (such as being non-voting, carrying lesser rights to capital, or promise to return shares on demand). You must not make the shares redeemable preference shares.
  • If you decide to gift shares to spouses, it’s recommended to show that they have an active interest in the running of the company, such as becoming a director, the company’s secretary or even an administrator.
  • Only pay dividends into a bank account that holds the recipient’s name (such as joint accounts) to ensure you don’t attract unwanted HMRC attention.
  • Remember that in order to claim Entrepreneur’s Relief should you decide to sell the company, a 5% share is required.
  • Pay some dividends to each type of share, so as to minimise the risk of HMRC claiming that dividends should not be paid, unless one class of share was not allocated any dividend.

What’s the difference between buying, Hire Purchase, or leasing business-asset


We are often asked what the differences are between buying outright, hire purchase and leasing business assets. So here is a summary of how they work for tax, VAT and what’s shown in the accounts for each method.

The choices will depend on what finance is available, but each method has different treatments for tax, VAT and accounting purposes.

Buy – Outright purchase with cash or a bank loan

How it works for tax
The depreciation charge is not allowable for tax relief but you can claim capital allowances.
100% tax relief may be available up to a maximum of £200,000. This does not apply to cars and the excess over £200,000 gets a lower rate of writing down allowance
Qualifying energy saving or environmentally beneficial equipment gets a 100% tax deduction.Loan interest used for the purchase is tax deductible.

How it works for VAT
If the purchaser is VAT registered, the VAT is claimed back on the VAT shown on the suppliers invoice.VAT can’t normally be claimed on cars.

What the accounts show
The cost of the asset goes on the balance sheet usually as a fixed asset and it is depreciated.


Hire Purchase – The asset usually includes an option to purchase at the end of the term

How it works for tax
This is the same as for an outright purchase.The finance charge is normally an allowable tax deduction.

How it works for VAT
VAT is normally payable with the first installment and claimed back in the normal way.
VAT can’t normally be claimed on cars.

What the accounts show
The asset on HP is shown as if it was purchased i.e. the cost of the asset goes on the balance sheet and it is depreciated.
The hire purchase amount due is shown as a liability on the balance sheet, which is reduced by the HP payments (excluding the interest element).


Operating Leases  – The asset isn’t owned but rented and returned to the owner at the end of the rental period e.g. contract hire

How it works for tax
The tax relief is given for the rental paid, except where the asset is a car with a Co2 emission exceeding 130g/km, where there is a 15% reduction in the tax claimable amount.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.  This restriction does not apply to maintenance charges shown separately on car contract hire.

What the accounts show
The rentals appear on the profit and loss account as an expense.


Finance Lease

How it works for tax
For short term leases tax relief is normally  given for the finance lease payments,  with a 15% disallowance  for cars with Co2 emissions exceeding 130g/km
For long term leases tax relief is given in line with the accounting treatment  and capital allowances claimed.

How it works for VAT
VAT is charged on each rental. Most businesses will be able to claim back 50% of the VAT on a car.

What the accounts show
For short leases (up to 7 years) the rental payments are shown as an expense on the profit and loss account.For longer term leases the asset is shown on the balance sheet and depreciated. 
There is  also a liability shown for the future rental payments.

I am a UK VAT registered business: how do I reclaim VAT on expenses incurred in Europe?

How to reclaim VAT on purchases abroad: refunds of VAT in the European Community for EC and non-EC businesses. 

Under the Thirteenth VAT Directive (86/560/EEC) UK businesses visiting other EC countries are able to claim VAT refunds on VAT incurred in those countries.

  • For a UK registered business the application is made online, via HMRC’s VAT services (log in to HMRC/the Government Gateway, go to VAT services and scroll down to see VAT EU refunds).
  • If the business has an agent, the agent is required to obtain authorisation (go online) for their client and then it may access the service.
  • A separate online application is required for each Member State in which a claim is to be made.
  • The refund period must not exceed one calendar year or be less than three calendar months unless the period covered represents the remainder of a calendar year following submission of an application which covers the earlier part of the year.
  • Claims must be made by 30 September following the calendar year that the VAT is charged.
  • Member States have their own special requirements; details can be obtained from the relevant tax authority.

Minimum claim level:

  • €400 euro if a claim covers a period of more than three months but less than a year
  • €50 euro if a claim covers a whole year or the remainder of a year (ie where a claim covers the whole period between the end of a prior claim and the end of the year)

Am I eligible to make a claim?

You can make a claim from an EU country if:

  • You’re not VAT-registered in that EU country and don’t have to be or can’t be registered there
  • You don’t have a place of business or other residence there
  • You don’t make any supplies there, unless
    • They’re transport services for the international carriage of goods
    • The person you’re supplying pays VAT on them

What can I claim?

A business can claim VAT on goods and services purchased during the refund period, and VAT on goods imported into the UK during the refund period.

No claim is allowed for VAT:

  • That has been incorrectly invoiced, or where VAT has been charged on the dispatch of goods to another member state, or the export of goods outside the EU.
  • On the purchase of a motor car
  • On goods and services used for business entertainment. As an exception, VAT on entertainment for overseas customers may be reclaimed but only if it is of a very basic nature.
  • On goods and services used for non-business activities.

Only 50% of the total VAT charged may be claimed on hiring or leasing a motor car.

The nature of the goods and services acquired have to be described according to the following expenditure codes.

1. Fuel.

2. Hiring of means of transport.

3. Expenditure relating to means of transport.

4. Road tolls and road user charge.

5. Travel expenses, such as taxi fares, public transport fares.

6. Accommodation.

7. Food, drink and restaurant services.

8. Admissions to fairs and exhibitions.

9. Expenditure on luxuries, amusements and entertainment.

10 Other.

Many Member States will require sub-codes in addition to the main codes set out above, and where applicable, these sub-codes will appear as completion options on the electronic portal. Where code 10 is used, without an accompanying sub-code, a narrative description of the goods or services must be entered in a free text box, using the language(s) required by the Member State of Refund.

If an invoice includes items covering more than one expenditure code the code relating to the highest proportion of expenditure is the one that should be used.

Currency of EU VAT Refund claims

All invoices entered on EU VAT Refund claims must be expressed in the currency of the Member State of Refund or the claim will be rejected by that Member State. If a claim is to a Member State where the Euro is not the national currency and a business has invoices that are in Euros they must be converted. The exchange rate used should be as on the date of the invoice as provided by the European Central Bank (ECB).

Responsibilities of a company director

Many people reading this will no doubt already be company directors, while a few may be thinking about establishing a company and becoming its director.

The beginning point for any company’s director, and consequently the starting point for any company’s director, is to learn a little bit more in detail about the roles and duties of the directors.

Although a company is owned by its shareholders, they entrust the administration of the company to the directors (even though in most cases, the shareholders and the directors are the same people). Clear and reasonable duties for the directors are essential both to safeguard the interests of the subscribers as well as the directors themselves. Consequently, the directors understand what is required of them, what they are to do and what not to do. Should the directors fail in their duties, the consequences could be serious.

 General duties that apply to all directors as laid out by the companies’ act 2006:

  • A responsibility to function within their powers, as laid out in the company’s Articles of Association, memo and as well as other sources
  • A responsibility to improve the company’s success.
  • A responsibility to apply independent judgements
  • A responsibility to apply realistic diligence, skill and care
  • A responsibility to circumvent clash of interests
  • A responsibility to reject benefits from any third party
  • A responsibility to unveil interests in a planned arrangement or transaction

Even though it has no advantaged status in law, the obligation to promote the company’s success lies at the heart of a director’s responsibilities. Other responsibilities of directors, whether it is specified in UK legislation or not, can be seen as following on from that. In increasing the company’s success for the benefit of its shareholders as a whole, the Companies Act states that directors need to think about the effect of decisions on the reputation of the company and the interests of other subscribers including workers, shareholders, clients, suppliers, as well as the community at large.

Generally, the directors may apply all the powers of the company. However, the company’s Articles of Association may set limitations on the powers of the directors in some areas– a common instance includes limitation on new shares allocation in the company among others. Thus, it is typical of the directors to offer new shares to the current shareholders prior to inviting applications more widely.

Additionally, the articles will define how decisions should be made. Although limited company directors will, as a board, jointly bind the company, the articles generally give power to the board of directors to entrust powers to each director as they deem fit.  The specific role of each director within a company may vary based on the company size, the number of directors, and the nature of the company’s business. The role, expertise and experience of a director will likewise have an impact on their areas and influence their areas of responsibility and coverage.

5 biggest mistakes when forming a UK company

Forming a new company is an exciting time for anyone. Over the years, the UK authorities have made it easier than ever to open a company. You don’t need to fill in lots of forms and send them to Companies House. It’s a matter of using their online portal to form your company.

Once you have finished, and your company has been accepted, you will be requested to print out various forms. This is will confirm that your company has been officially incorporated. It may sound too easy, but there are no hidden catches here.

But what are the biggest mistakes people make when doing this?

Forming the Wrong Company

There are many company types you have to take into account. The average small business will be better off forming a company that allows them to trade as a sole trader. It may be good to have a limited company, but limited companies come with far greater reporting responsibilities, and this extra work doesn’t always pay dividends.

You can form practically any type of company online. Make sure you do your research and don’t form a certain type of company on a whim.

Not Specifying the Shareholders

Technically, you can have as many people as you like working for your company, but if they own any part of that company they have to be mentioned. Shareholders don’t work in the same way as they do in other parts of the world. With a private limited company, for example, the shares are valued at what you say they are valued at, and you can dole them out as you please.

Only public companies have shares that are traded on the open market, and the company needs to generate enough revenue in order to become this type of company.

If you are sharing the company with someone else, they must be mentioned when you form your company, or at least added afterwards. Adding them before the company is formed will involve them placing their names on the Memorandums of Association, which is essentially an agreement to form the company.

How the Company is Run

This is where people tend to start making errors. Dictating how the company is run is a deceptive task because people assume it refers to the day-to-day running of the company. For most companies, they will use what’s known as ‘standard article’. These are a basic legal model that can be inserted via the Companies House website.

You can change this, but by doing so you are waiving your right to register your company online. The vast majority of companies have no business changing these.

Choosing the Wrong Company Address

The company address is more important than you think. It’s where official communications between the UK government and you will be sent. It doesn’t have to be the offices you are operating out of. You can use your home address. The only restrictions are that it must be in the company’s home country, and it has to be a physical address; so you can’t use virtual addresses.

What a lot of people don’t realise is that this address is available to the general public via the official register of the companies of the UK. Make sure you are comfortable with this before choosing your home address.

Failing to Register for Corporation Tax

Sole traders don’t have to worry about corporation tax, which is why most prefer to register as this type of company. If you have decided to start a private limited company, you have a legal duty to register for corporation tax within three months of forming your company so you can begin trading.

Without registering for it, you are legally unable to begin trading. And even if you never earn enough to actually pay corporation tax, you still have to be registered for it and you still have to file.

Conclusion

The responsibilities of a company director are to file your company right. By avoiding these mistakes, you can avoid running into trouble. What are the biggest challenges you have faced when trying to form your company?

CLOUD ACCOUNTING LLP

#NumbersinBlackandWhite

ONLINE CHARTERED ACCOUNTANTS

BELFAST ADDRESS
Catalyst Inc,
Titanic Quarter
Belfast
BT3 9DT
+44 2895 219365


LONDON ADDRESS
New Broad Street House
35 New Broad Street
London EC2M 1NH
+44 207 971 1002

Name: Cloud Accounting LLP
Email address: richard@cloudaccountingni.com
Phone: +447868663538