Question about providing funding for a Ltd Company


G

Graeme Nicholson

Lets say that two friends are planning to go into business
together and that each has borrowed £10K to use as start up
capital

The business will be in the form of a Ltd company - with the share
capital being divided 50 - 50.

They both have repayments on their respective £10K loans.

My question as follows:

Would they be well advised to transfer the £20K under a loan
agreement? By this I mean as it would relate to the tax
implications?

For instance one of the directors is already employed with full
time job (and will not be undertaking any paid duties for the
company). Thus if he made a loan to the company; how would the
repayments be treated for tax purposes i.e. would he have to pay
Income Tax on them?

We're planning to get an accountant in the very near future but I
just thought I'd ask the group first.

Best Regards

Graeme Nicholson
 
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A

Andrew McGee

What's the alternative to a loan in this case?

Surely the only other way to do it is to have them put the money in as share
capital; but then there is no interest and no repayment - they only get
dividends.

Or have I missed the point?

Andrew McGee
 
D

Doug Ramage

Graeme Nicholson said:
Lets say that two friends are planning to go into business
together and that each has borrowed £10K to use as start up
capital

The business will be in the form of a Ltd company - with the share
capital being divided 50 - 50.

They both have repayments on their respective £10K loans.

My question as follows:

Would they be well advised to transfer the £20K under a loan
agreement? By this I mean as it would relate to the tax
implications?

For instance one of the directors is already employed with full
time job (and will not be undertaking any paid duties for the
company). Thus if he made a loan to the company; how would the
repayments be treated for tax purposes i.e. would he have to pay
Income Tax on them?

We're planning to get an accountant in the very near future but I
just thought I'd ask the group first.

Best Regards

Graeme Nicholson
If the loans to the company were interest free, there should be no tax
implications. But make sure the paperwork is correct to ensure that the IR
will not classify it as net remuneration and thus subject to PAYE & NI on
the grossed up amount(s).
 
R

Ronald Raygun

Graeme said:
Lets say that two friends are planning to go into business
together and that each has borrowed £10K to use as start up
capital

The business will be in the form of a Ltd company - with the share
capital being divided 50 - 50.

They both have repayments on their respective £10K loans.
There is no VAT on loan interest, so if this is leading to where
it normally does, forget it. :)
My question as follows:

Would they be well advised to transfer the £20K under a loan
agreement? By this I mean as it would relate to the tax
implications?

For instance one of the directors is already employed with full
time job (and will not be undertaking any paid duties for the
company). Thus if he made a loan to the company; how would the
repayments be treated for tax purposes i.e. would he have to pay
Income Tax on them?
There would of course be no tax on any capital repayments, only
on interest received. He would have to pay tax on that amount of
interest he receives from the company, which exceeds the interest
he pays to the lender. If the difference is zero, there is no
benefit to be taxed.

But if the company pays more interest than the lender takes,
then he does receive a taxable benefit. Ah, wait, I think I
can see where it's leading. Are you thinking what if the
company profit is in the £10k-£50k band and therefore pays
corporation tax at a marginal 23.75%? Then if the company
pays the directors via excessive loan interest what it would
otherwise pay as dividends, there could be a tax saving,
because the company would not be taxed on interest (it's an
expense) and the director would have to pay tax at the savings
interest rate of 20%/40%, whereas if the same excess were paid
as dividend, it would not be an expense to the company and so
would be taxed at 23.75%, with the director then paying an extra
0%/25% on the dividends received. The effective rate of tax to
the director would be 23.75%/42.81%, and so its cheaper to get
the dosh as interest than as dividend.

The position is reversed where the company profit is below £10k
or above £50k but below £300k, since the corporation tax rates
are 0% (giving an effective 0%/25%) and 19% (giving an effective
19%/39.75%). Since in both cases the effective rates are below
20%/40%, he's pay less tax by taking the dosh as dividends.

Above £300k, and especially if below £1500k, the situation is
reversed again, and he'd pay less tax by taking the money as
interest.

Chances are the IR have this sussed and will re-classify any
excessive interest as dividends if it suits them.
 
J

Jonathan Bryce

Andrew said:
What's the alternative to a loan in this case?

Surely the only other way to do it is to have them put the money in as
share capital; but then there is no interest and no repayment - they only
get dividends.

Or have I missed the point?
With a loan, you have a slightly better chance of getting the money back if
the company goes bust.

Also, it is easier to get the capital repaid. With dividends, you would
have to wait until the company makes profits before you can get the money
back. With loans, you can get the money back any time, subject to
available funds.
 
M

Max Power

With a loan, you have a slightly better chance of getting the money back
if
the company goes bust.

Also, it is easier to get the capital repaid. With dividends, you would
have to wait until the company makes profits before you can get the money
back. With loans, you can get the money back any time, subject to
available funds.
Sort of makes you wonder why people bother with shares at all.
You have much more rights as a bond holder.
 
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B

Bradley Bungmunch

Lets say that two friends are planning to go into business
together and that each has borrowed £10K to use as start up
capital

The business will be in the form of a Ltd company - with the share
capital being divided 50 - 50.

They both have repayments on their respective £10K loans.

My question as follows:

Would they be well advised to transfer the £20K under a loan
agreement? By this I mean as it would relate to the tax
implications?
The 20K is your start up capital. IOW, the nominal value of your
company will be 20K.

Should the company ever get wound up, you get the initial 20K (less
debts owed) back.

For instance one of the directors is already employed with full
time job (and will not be undertaking any paid duties for the
company). Thus if he made a loan to the company; how would the
repayments be treated for tax purposes i.e. would he have to pay
Income Tax on them?
Other on-going loans to the company are know as director's loans.
Money that you lend to the company can be reclaimed at any time
(without any worries about tax or NI or capital gains - unless the
company pays interest on the loans) - as long as the company remains
solvent. Money lent by the company to you, must normally be less
than 5K and must be repaid in full by the end of the tax year to avoid
any problems with tax and NI.

We're planning to get an accountant in the very near future but I
just thought I'd ask the group first.
Get an accountant. The paper work for a startup, via an accountant,
will be about 150 gbp, but his advice is what you really need.




=====================



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G

Graeme Nicholson

Bradley Bungmunch said:
On Tue, 11 Nov 2003 02:25:00 +0000 (UTC), "Graeme Nicholson"


Get an accountant. The paper work for a startup, via an accountant,
will be about 150 gbp, but his advice is what you really need.
Actually we've already started the company via
www.fastormations.com


What sort of areas do you think we should get advice on? For
instance what should I say when I ring up the accountant to
arrange for an appointment?

Basically we're just a trading company. That is I buy goods from
the US then and sell them via Ebay.co.uk (and we do plan to have
our own website in the near future).
 
G

Graeme Nicholson

Andrew McGee said:
What's the alternative to a loan in this case?

Surely the only other way to do it is to have them put the money in as share
capital; but then there is no interest and no repayment - they only get
dividends.

Or have I missed the point?
Hi Andrew, no point - this was just an honest question. You see I
wasn't sure if the repayments would be subjected to Income tax or
not

I thought that perhaps we'd just have to transfer the £20K as a
sort of "gift". Then that we would both have to repay the loans
with money taken as wages from the profits - which didn't really
appeal.
 
G

Graeme Nicholson

Ronald Raygun said:
There is no VAT on loan interest, so if this is leading to where
it normally does, forget it. :)
Not today Ronald - although that "same old scheme" keeps poping to
mind from time to time (one day I'll get it to work or least
understand why it can't)
There would of course be no tax on any capital repayments, only
on interest received. He would have to pay tax on that amount of
interest he receives from the company, which exceeds the interest
he pays to the lender. If the difference is zero, there is no
benefit to be taxed.
This is just what I wanted to hear.
But if the company pays more interest than the lender takes,
then he does receive a taxable benefit. Ah, wait, I think I
can see where it's leading. Are you thinking what if the
company profit is in the £10k-£50k band and
<snip>

Nope, there was no ulterior motive to the question, wasn't
thinking about CT whatever. I'm hoping that if we just pay
ourselves the absolute minimum and that all the profits are
reinvested in stock then CT shouldn't really kick it. Then we work
just work on building a "nest egg" and then figure out how we can
get our hands on it in it in the most tax-efficient manner
possible.
 
B

Bradley Bungmunch

Actually we've already started the company via
www.fastormations.com
If you've started up this company with a seed capital of 20K but have
chosen the budget £19.99 formation (limited to companies with a
nominal value of £100) then you're already in the wrong.

If you've told your creditors that you need 20K gbp to start the
company then you must issue 20K gbp of shares.

If you've borrowed that money personally, then all liability for
repayment lies with you personally, i.e.- they can take your house.


Fastformations offer various other startup packages, which would
probably be more suitable for you, but if anything, they are more
expensive than a good local accountant.


What sort of areas do you think we should get advice on? For
instance what should I say when I ring up the accountant to
arrange for an appointment?

Basically we're just a trading company.
Basically, so are most companies. What ym is that you are an importer
- which means you've got a whole lot of additional regulations to
comply with over and above a company trading only within the UK or EU.

That is I buy goods from
the US then and sell them via Ebay.co.uk (and we do plan to have
our own website in the near future).



=====================



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B

Bradley Bungmunch

Not today Ronald - although that "same old scheme" keeps poping to
mind from time to time (one day I'll get it to work or least
understand why it can't)


This is just what I wanted to hear.


<snip>

Nope, there was no ulterior motive to the question, wasn't
thinking about CT whatever. I'm hoping that if we just pay
ourselves the absolute minimum and that all the profits are
reinvested in stock then CT shouldn't really kick it. Then we work
just work on building a "nest egg" and then figure out how we can
get our hands on it in it in the most tax-efficient manner
possible.
You can retain the profits in your company for as long as you like.
But that doesn't mean that profits aren't subject to CT each year.

You don't seem to realise that the value of your stock is subject to
CT, btw!

Did you really think the taxman hadn't thought of that little
wheeze!!!???


You really do need an accountant!!!!






=====================



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R

Ronald Raygun

It doesn't quite work like that. If the company makes £20k
profit in year 1, there will be CT of £2375 to pay. You can
therefore only re-invest £17625.

The usual method is to pay yourself dividends instead of salary.
If your friend already has a normal job and you don't, you should
pay yourself a salary of £4615, thereby escaping both income tax
and NI, while nevertheless being credited with NI-qualifying years
towards your state pension. Pay yourself the rest as dividends.
They will be free of income tax until you reach the higher rate
tax threshold, whereupon the excess will be taxed at 25%, but no
NI is payable.

Even if you don't need the money, it's probably best to pay
yourself the maximum possible dividend which net profits (and
your non higher-rate taxpayer status) allow, and the re-invest
the money in the company as a loan. That way you can get the
money out again in the future without it being taxed (since it
is already yours).
You don't seem to realise that the value of your stock is subject to
CT, btw!

Huh?
 
J

Jonathan Bryce

Max said:
Sort of makes you wonder why people bother with shares at all.
You have much more rights as a bond holder.
For small owner managed companies, they generally don't.

The advantage of shares to the company is that they don't have to pay
anything if they don't have the money. It works out more expensive though.
The advantage to the shareholder is that they get a vote.
 
J

Jonathan Bryce

Bradley said:
If you've started up this company with a seed capital of 20K but have
chosen the budget £19.99 formation (limited to companies with a
nominal value of £100) then you're already in the wrong.

If you've told your creditors that you need 20K gbp to start the
company then you must issue 20K gbp of shares.
No you don't. For starters, you could sell the 100 £1 shares for £200 each
if you wanted to, and you could also lend the money to the company rather
than use it to buy shares. It is probably better to lend it anyway.
If you've borrowed that money personally, then all liability for
repayment lies with you personally, i.e.- they can take your house.
The bank is going to ask for a personal guarantee whatever way you do it.
 
G

Graeme Nicholson

Ronald Raygun said:
It doesn't quite work like that. If the company makes £20k
profit in year 1, there will be CT of £2375 to pay. You can
therefore only re-invest £17625.
I thought if:

The company makes £20k profit in year 1

We buy stock with the £20K and sell this in year 2

This would be allowable business expenditure so "the £20k in year
1" would be deducted leaving £0 liable to CT

Is this not correct?
The usual method is to pay yourself dividends instead of salary.
I've heard of this but to be honest I don't really understand (or
at least not really in this case).

I know of course that it is usual for shareholders to receive a
share of the companies profits and that this is generally paid via
a dividend. That said I always assumed that this type of
investment would be subject to some kind of tax.

For instance if someone buys say 100 shares of ICI:

Would they not pay tax on the dividends?
And further be liable for Capital Gains on any increase in the
share value?

Do the rules differ between PLC and LTD?
If your friend already has a normal job and you don't, you should
pay yourself a salary of £4615, thereby escaping both income tax
and NI, while nevertheless being credited with NI-qualifying years
towards your state pension. Pay yourself the rest as dividends.
They will be free of income tax until you reach the higher rate
tax threshold, whereupon the excess will be taxed at 25%, but no
NI is payable.
So could I pay myself a dividend of £26885 and this would be free
of any type of tax?

So £26885 + £4615 salary = £31500 per year for me free of Income
tax and NI

Perhaps they meant Capital Gains tax instead of CT (does this make
more sense?).
 
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J

john boyle

Graeme Nicholson said:
The company makes £20k profit in year 1

We buy stock with the £20K and sell this in year 2

This would be allowable business expenditure so "the £20k in year
1" would be deducted leaving £0 liable to CT

Is this not correct?
No. Buying stock isnt allowable business expenditure, only the cost of
the stock items you actually sell is allowable.
 
J

john boyle

In message said:
The bank is going to ask for a personal guarantee whatever way you do it.
If they borrow the dosh as individuals then they wont.
 
R

Ronald Raygun

Graeme said:
I thought if:

The company makes £20k profit in year 1

We buy stock with the £20K and sell this in year 2

This would be allowable business expenditure so "the £20k in year
1" would be deducted leaving £0 liable to CT

Is this not correct?
Yes, this is most definitely not correct.

Buying stock is not an allowable business expenditure in the way
you think. Profits are the difference between sales and purchases,
but when working out the profit it's only the purchase cost of goods
sold that you deduct from sales income, not the purchase cost of
stock in hand.

You start with £20k invested cash which you turn entirely into
stock, which you sell at 100% mark-up and end up with £40k cash.
That means you've made £20k profit. It makes no difference whether
you turn half or all of the money into new stock, the company still
owns £40k worth of stuff (being either money or stock) which is
£20k more than it started with. It would be unwise not to convert
all the cash into new stock, unless you're confident you will have
generated at least enough cash from new sales by the time the tax
on profit becomes due.
I've heard of this but to be honest I don't really understand (or
at least not really in this case).

I know of course that it is usual for shareholders to receive a
share of the companies profits and that this is generally paid via
a dividend. That said I always assumed that this type of
investment would be subject to some kind of tax.

For instance if someone buys say 100 shares of ICI:

Would they not pay tax on the dividends?
Yes, but dividends come with a built-in tax credit which is enough
to meet the income tax liability of those dividends unless the
recipient is in the higher tax bracket. So a "normal" taxpayer
pays no tax on dividend income.
And further be liable for Capital Gains on any increase in the
share value?
Yes, but not until they're sold.
Do the rules differ between PLC and LTD?
No, but with small LTDs you generally only issue shares to a
negligible nominal value, and inject the serious cash as loans
instead of share capital.
So could I pay myself a dividend of £26885 and this would be free
of any type of tax?

So £26885 + £4615 salary = £31500 per year for me free of Income
tax and NI
Yes in principle, not quite correct with the old numbers, old chap,
which seems to be one of your weaknesses (explains why you can't
understand why VAT scams are impossible).

The higher rate tax threshold is £30500 *of taxable income* (you seem
to have inflated it by £1000 for some reason), and the £4615 personal
allowance is *in addition*. Therefore you can pay yourself £4615 as
salary free of income tax and of NI, *plus* £30500 of dividend income,
on which there is no NI anyway, also free of IT. This assumes you have
no other income whatsoever, such as from bank interest or capital gains.
On each extra £1 of dividend you would then pay 25p income tax, as a
result of a process too complicated for you to understand.
Perhaps they meant Capital Gains tax instead of CT (does this make
more sense?).
No, I think he meant what I illustrated above, that the sales profit
remains taxable even though the money by which it is represented has
been converted into stock.
 
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J

Jonathan Bryce

Graeme said:
I thought if:

The company makes £20k profit in year 1

We buy stock with the £20K and sell this in year 2

This would be allowable business expenditure so "the £20k in year
1" would be deducted leaving £0 liable to CT

Is this not correct?
No. Lets look at a simple example. You buy widgets for £1 each, and sell
them for £2. No other expenses. In year one, you buy 20,000 widgets, and
sell them all. At the end of the year, you buy another 20,000 widgets for
sale next year.

Your accounts would look like this:

Sales 40,000

Cost of Sales

Purchases 40,000
less closing stock (20,000)
------
(20,000)
------
Profit before tax 20,000

Tax (2,375)
------
Retained Profit 17,625
======

Next year, you sell these widgets, and buy another 20,000 at the end of the
year:

Sales 40,000

Cost of Sales

Opening stock 20,000
Purchases 20,000
less Closing stock (20,000)
 

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