Investing in a Limited Company (LC) is an effective way by which informed investors can “wall off” their personal assets from the liabilities of the business. Starting or sharing in the ownership of a Limited Company helps investors protect personal assets from adverse scenarios against the business. For this reason, a Limited Company is more a suitable form of business ownership. Since LCs operate in a very turbulent business environment marred with constant changes in legislative and economic conditions, it is imperative that they minimize costs and improve the value of output. There are a myriad tax benefits that accrue to the Limited Companies and trickle down to the shareholders. These benefits play a significant role in reducing the costs incurred in business. Here are the five major tax advantages associated with a Limited Company.
Pass-Through Taxation Benefits
A Limited Company itself does not have to file corporate tax returns. In essence the company is not held responsible for the tax imposed on its profits. Instead, the LC benefits from the Pass-Through Taxation policy since the shareholders or members report their respective shares of the profit and loss on their individual tax returns. In some instances, the company deducts the tax due before it distributes the profits to the owners.
Advantage from VAT Flat Rate Scheme
Making a choice to own a Limited Company at the expense of the other forms of business ownership is worth the effort. In fact, when you invest in a limited liability company you get to capitalize on the current VAT system that charges the customers more tax and provides for remission of a lesser amount. For example, given the current anomaly in the VAT system, your company is justified to charge its clients VAT amounting to 20% of the cost of a particular product, but only needs to remit a lower amount ranging from between 12%-15%.
Tax Efficient Company Closure
This involves a natural extension of the Income Deferral process applicable when you opt to lock your income away in the Limited Company for some years in order to make some reasonable tax savings. In essence, this happens when the company has fulfilled its mandate and the stakeholders consider closing down the company via Members’ Voluntary Liquidation. The funds available in the company are then distributed as capital, shareholders take advantage of the CGT annual exemption and the amount of capital left is finally taxed at just 10%. In the event that a shareholder retires, he/she can opt not to withdraw the funds invested as capital, but as dividends with no further tax charges.
Low Salary/High Dividend
There are special cases when a Limited Company allows its employees to become shareholders of the business. Such an arrangement benefits the shareholders in the sense that they may decide to convert part of their salaries into dividends in order to avoid paying huge taxes under the PAYE system. This is advantageous since the owners’ dividends are taxed at lower rates than their salaries. In the end, the shareholders save on the income tax and carry home more money.
Tax Allowances and Reliefs
As a director holding key stake in the Limited Company, you become entitled to tax relief for business expenses you incur. The tax relief reduces the tax bill payable for business mileage or fuel, tools and specialist clothing, capital expenditure, professional fees and subscriptions among others.
Social Investment Tax Relief
The 2014 budget has factored in a social investment tax relief that encourages social investment by scrapping 30% of investment costs from income tax liability for the financial year 2014/2015. This relief also enables investors to defer their Capital Gains Tax (CGT) liability if they invest in social ventures.
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