You already have one limited company that you’re the director and shareholder for. But what are the implications of setting up a second company?
There is a lot to think about, so let’s break it down into manageable chunks:
Each company should have completely separate bank accounts, customers, suppliers and record keeping.
If you’re thinking of an online accounting software like Xero for your record keeping, then you would need to set up two Xero organisations (we can help with this)
Simply speaking, each company completes it’s own accounts and tax return, and reports to HMRC separately.
Each company’s profits will dictate the right rate of corporation tax.
- From 1 April 2023, profits up to £50,000 will be taxed at 19%, bu profits over £250,000 will be taxed at 25%.
- For profits between £50k and £250k there is a marginal tax rate (get in touch for help on this)
However, complications may arise if the companies are seen to be “associated”. In this case their combined profits will establish the correct rate of corporation tax.
If your companies are deemed to be “associated” then the profits will be added together to work out the correct rate of tax.
For example, if you have two companies and they have profits of £40,000 and £50,000, then their combined profits of £90,000 mean that they’ll be taxed at the marginal tax rate. Separately, they would each have been taxed at only 19%.
So what are associated companies?
These companies are associated if:
- one of the companies has control of the other, or
- both are under the control of the same person or persons (this will essentially be you as the director)
However, the companies must also have “substantial commercial interdependence” – have a look at Dave and Doreen Haddock below for an idea of this.
There are 3 main ways that companies can be dependent on each other:
- Financially interdependent – one company lends to the other, guarantees its borrowings or both have a financial interest in the same business
- Economically interdependent – both companies have customers in common, or the activities of one company benefit the other
- Organisationally independent – the companies share the same management, staff, premises or equipment.
The rules can be quite complicated, so always speak to us or a trusted advisor of your own.
Again each company registers separately for VAT, and get a unique VAT number.
They would each then be responsible for submitting their own quarterly VAT returns, and paying over any VAT due each quarter, or receiving VAT refunds.
Artificial separation for VAT
It’s never a good idea to set up two businesses so as to keep both of them under the VAT thresold (£85,000 at the moment).
The VAT office will see through this, and treat the 2 businesses as an “artificial separation”.
Think of a fish and chip shop, in the same building as a fish and chip restaurant.
- Dave Haddock runs the fish and chip takeaway, and his wife Doreen Haddock runs the restaurant.
- The combined revenue of both businesses is £150,000, which means they have to declare VAT.
- So they’ve got clever, and have set up 2 businesses:
- one is the restaurant, with revenue of £80,000
- the other is the takeway with revenue of £70,000, so they think they don’t need to register for VAT.
The VAT man is not happy. He’s looking at what is going on in these businesses, and finds that:
- they share the same premises, and same landlord
- they have one business rates bill
- they have the same customers, and same suppliers
- For all intents and purposes, this is one business.
Mr VAT man challenges the separation, and treats the two businesses as one.
They would also have been associated companies for corporation tax (see above).
As an individual, you can have as many sources of personal income as you choose. These can be a combination of employment, self-employment, dividends, property income etc.
So you can have 2 or more companies, and take salaries and dividends from both. As long as you declare all of this income on your personal tax return, and pay any tax and national insurance due, you’re all good.
Be aware though that you only get one personal allowance, one dividend allowance, and one NIC allowance.
Our usual guidance is to take a low salary up to the personal allowance from your company, and as profits allow, take any extra income as dividends.
* this is very generic guidance, and everyone is different, so make sure you get the right guidance for you
If you have a 2nd company, you shouldn’t take a salary from this company too, as you’ve already used up your personal allowance.
Always read the small print in any contracts you have between you, your company (or companies) and your customers and suppliers.
Are there any clauses that stop you being a director or shareholder of another company?
Check the articles of association that were created when your companies were set up, also check any shareholders’ agreements. Are there any clauses stopping you setting up a 2nd company?
Think about how you communicate to your customers, suppliers, and other stakeholders. What is each company responsible for, and who can people turn to if they need support, or have issues?
If you have more than one company, you are equally responsible for each company.
We have a great blog (with a quick video too) explaining your legal responsibilities.
There is a lot to think about, and each situation is unique, so do get in touch if you’d like to talk everything through with us.
Also check out our other Limited Company guides here:
- Do I need a limited company?
- How do I take cash out of my limited company?
- Should you buy a car through your limited company
- Should I buy an electric car through my business?