Setting up Your Business – Part 1

Once you have your Business plan in place you will need to ensure that you follow the correct steps to get things run smoothly and that you remain tax compliant. If you are currently working full time and intend to begin your new venture on a part time basis until you are ready to expand further, then you will need to take this into consideration when deciding on the best business structure.

The best business structure is whatever works best for you and depends upon your personal circumstances. The business structure you choose will define your legal responsibilities such as how your profits are taxed, how you can personally draw profit from the business and your personal responsibilities if the business makes a loss.

This week we will delve into a couple of the business structures that might work for your start up;

Sole Trader

Running your own business as an individual you are responsible for everything from the day to day work right through to paying the taxes. You can employ staff to help with the work if required and you would be solely responsible for ensuring that the relevant taxes are accurately calculated, reported and paid. If the business cannot meet its financial obligations then it would be your responsibility to cover the bills personally, likewise, if the business makes a profit you are free to spend the money as you choose.

The taxes when trading as a sole trader are reported annually through Self-Assessment. You should budget to cover your tax liability to ensure that payments due are made on time in order to avoid penalties for late payment.

The current financial year runs from 6th April 2016 to 5th April 2017 and the standard personal tax free allowance is £11,000. Depending on your personal circumstances you may have a different personal allowance for example, if you are entitled to Marriage Allowance or Blind Persons Allowance then it would be higher and if your total taxable income exceeds £100,000 then it would be lower. You would have no personal allowance if your taxable income exceeds £122,000

The current income tax rates are set out in the table below:

Band Taxable income Tax rate
Personal Allowance Up to £11,000 0%
Basic rate £11,001 to £43,000 20%
Higher rate £43,001 to £150,000 40%
Additional rate over £150,000 45%

In addition to Income tax, you should also expect to pay National Insurance. When Self Employed there are two types of National Insurance that you should take into consideration:

Class 2 National Insurance is due when profits are £5,965 or more per year, the current rate is £2.80 per week

Class 4 National Insurance comes into effect when your profits are £8,060 or more per year. It is calculated at two levels:

  • 9% on profits between £8,060 and £43,000
  • 2% on profits over £43,000

Income tax is generally calculated at the end of the financial year through completion of a Self-Assessment Tax Return. The Return will need to be submitted to H.M. Revenue and Customs no later than 31st January following the end of the financial year giving you almost 10 months to ensure that your accounts have been accurately formulated and that the calculations are correct. The balance of any Income Tax and National Insurance due will also need to be paid on or before this date and if the tax liability exceeds £1,000 you will also be required to make your first payment on account towards the following tax year at this time. This is normally 50% of the tax liability for the current year. A further payment on account would then become due on 31st July.

If you are working as a Sub-contractor within the Construction Industry, then how you pay income tax will be managed differently. In this instance you would be required to register with HMRC under the Construction Industry Scheme. When you work for a contractor they would then deduct 20% of your income as CIS Tax, this will be paid directly to H.M. Revenue and Customs and is then offset against your Tax Liability when completing your Self-Assessment Tax Return. If you have paid too much tax H.M. Revenue and Customs will issue a refund of the surplus balance, if you have not paid enough then you will have to make up the shortfall.

To set up as a Sole Trader your will need to register as Self Employed with H.M. Revenue and Customs. You can give your business a name but you must also ensure that your own name is also present as proprietor on all of your business correspondence.

If you decide to take on an employee you must also register as an employer and if your turnover exceeds £83,000 you should also register for VAT and process quarterly VAT Returns, ensuring any VAT is paid when due. There are plenty of fixed price Accountants who can privide all the information you need on these aspects of running a business, so look for an Accountant East London startups and small businesses have been trusting with their fledgling finances.

Partnership

If you are setting up a business with one or more people you would not be able to set up as a Sole Trader, in this scenario you may consider an ordinary business partnership.

In a partnership you and your business partners share the responsibilities of the business personally and the business partnerships can be shared between the partners and each would pay Income Tax and National Insurance on their share of the profits in the same way as a sole trader would. The share of the profits does not have to be in equal percentages and just like a sole trader you would be liable for any losses incurred.

You should register a business name with HMRC when you register your partnership and allocate a nominated partner to act as the spokesperson and signatory for the business with respect to its statutory filing requirements.

Your business partner does not have to be another individual, a Limited Company, being an entity in its own right and therefore classed for taxation purposes as a ‘Legal Person’, could also become a partner.

If you do not want to be personally liable for any potential business losses, then you may also consider the option of setting up a Limited Liability Partnership (LLP) instead. Partners in an LLP are not personally liable for the debts of the business, their liability is limited to the to the amount of money they invest in the business (we’ll look into this further in next weeks continuation of Setting up Your Business).

This article gave a brief overview of the CIS Scheme with respect to Sole Traders however it is a far more detailed subject that, if relevant, should be covered in more depth. The CIS Scheme is also relevant to partnerships and Limited Companies too however the process of offsetting and reclaiming overpaid tax is different and more complex. Contractors working outside of the Construction Industry through a Limited Company should also speak with their Accountants regarding IR35 (Intermediaries Legislation) which is the tax and National Insurance contributions legislation that may apply if you’re working for a client through an intermediary such as a Limited Company. If IR35 applies, all payments to the intermediary are treated as your employment income and the intermediary must pay any tax and National Insurance contributions due. It ensures that you pay roughly the same amount of tax and National Insurance contributions as if you’d been directly employed by the client. Like CIS, this is a complex aspect which would require further exploration if applicable. It’s best to seek specialised tax advice for Contractors as the rules and regulations will be different to set ups for other business types – specialist contractor Accountants will be able to advise you of exactly what is and what isn’t applicable to your situation.

Join us next week for part two of our guide to business structures to learn more about setting up as a Limited Company and how this might be the right selection for your business.

Choosing Your Accountant

What do Accountants Do?

Accountancy services are expensive and time based, but most start-ups will find the advice and potential financial benefits of hiring an expert accountant make this one of the most sensible investments for any new business. Effective accountancy support will minimize tax liabilities; avoid incurring financial penalties for failing to comply with company and tax regulations; and give confidence in reported business performance. The cost of an accountant needs building into a start-up’s budgets. You should appoint an accountant as early as possible.

There are six times as many accountants in the UK than family doctors, and more in the UK than the rest of the EU put together. Finding one is not a problem, finding one that will be right for you is.

There is confusion amongst many new business start-ups as to what an accountant actually does and this is not helped by accountants pushing add-on service which you may not need. So fundamentally an accountant produces accounts, which are a statement of a business’s performance over a particular period (usually a year) and its financial position at one time point (its year-end.) Other general services usually provided by accountants include: personal and corporate tax; payroll; business planning; and bookkeeping, whilst specialist services include audit; inheritance tax planning and trust work.

Choosing the Accountant for you.

The first step in choosing an accountant is to determine the services that you are going to use an accountant for and those that you will undertake in-house or subcontract to a cheaper specialist. What you should consider essential are:

General tax advice

An accountant is best placed to review your personal finances and expected business outcomes, and to advise on tax saving and prudent financial steps (e.g. whether you should be a limited company or a sole trader; how much of your income should be put away towards tax liabilities and the level of pension contributions you should be making; how best to take your earning in pay vs. dividends; and the most tax efficient method of financing a motor vehicle.) This is advice you need when you start in business and annually thereafter.

Preparation and submission of tax returns

Corporation tax returns and personal self-assessment returns are best left to an accountant to avoid errors and penalties.

Accounts

The finalization of the business accounts by an accountant will give reassurance to you on the accuracy of reported performance and give confidence to other parties such as banks and tax authorities.

Others divestible elsewhere include:

Bookkeeping

There are many excellent cloud computing package which integrate to the business bank account and create comprehensive electronic records of income and expenditure. These could be maintained by yourself or a member of staff or even an external bookkeeper. They usually have options to integrate VAT returns, and will enable you present a sensible set of management accounts to your accountant with him then being able to view any supporting documents immediately.

Payroll

Again there are many stand alone payroll packages available to operate yourself which are compliant. If this is going to take too much of your time because a large number of staff have to be paid weekly, then a payroll bureau is cost-effective.

Preperation

Prepare a written brief for the prospective account:

  • A personal summary of your income streams; assets and investments; mortgage and debt; pension provisions and tax history
  • A business description covering: industry; expected level of activity; employees; and funding availability.
  • These are the services I seek, and this is when I will need them.
  • This is how the business records will be kept, and the standard and detail of accountancy information available to you to undertake your service.

Selection Process

Go and see three prospective local Accountants. Ideally one who’s a referral from friends and family who have their own businesses, or by asking your bank; solicitor; or potential customers or suppliers to your business. If you can’t find any local accountants through referrals, you can always begin your search online. For example, if you live in London you would search for: London Accountants.

Once you’ve selected your favourites, contact them and ask for an initial consultation and discuss your business brief with them. Questions to ask them include:

  • Clients that they already have in your industry
  • Their experience with specific specialist services that you need (e.g. fund-raising)
  • How they can help you minimise potential tax liabilities compliantly
  • Their accessibility throughout the year if unforeseen financial problems arise
  • And of course likely fee levels for the services sought.

Then make the choice based on these meeting; the strength of the referral; and your view as to which accountant will best serve your needs.

The best way to ensure a successful relationship with your accountant over the longer term is to give him the information that you agreed to provide him with accurately and promptly. Pay him prompt, because most of his costs are payroll ones. When the accounts are completed annually make a point of going to see him to discuss them and the progress of your business. Ask him to explain anything that you don’t understand, and invite him to offer any suggestions for improvement. Remember that his fees are time based. Don’t make frequent calls to him for advice on matters that you could easily research yourself or could be addressed to a more junior member of his staff. Remember he is an accountant not a magician. Paying a large tax bill should be taken as a sign of business success in the knowledge that your accountant has done everything possible to minimise it.

 

The Transition from Employment to Self-Employed 

Starting a business

In recent years, more and more people are starting businesses or becoming self-employed with a variety of motivations. For some it is lack of availability of suitable work, others seek the flexibility that regular employment fails to offer and others who feel it is the only way to do the type work they really want to. In April 2012 the Office for National Statistics recorded an increase in the number of Self Employed works of 84,000 within a three-month period which is the highest rise since records began in 1992. At that time there were 4.2 million people in Self Employment. By 2014 15% of the workforce were Self Employed bringing the total up to a new record high of 4.6 million. In addition, the number of self-employed people aged 65 and over has more than doubled in the past five years.

Self-employment or starting your own business can be a way of using your knowledge and skills to earn money or turn a hobby or passion into a way of life. It also allows you to work flexibly and decide on your workload. For example, you may choose to work part-time or only during certain times of the year, if your venture is solid and bringing in enough income part time then you will most likely consider leaving your existing employment to focus full time on your Self Employed business.

Important things to consider

If you’re thinking about becoming self-employed or starting your own business, there are some important things to consider, especially if your aim is to leave your current employment.

1. Creating a business plan

This should have a careful estimate of anticipated income and expenditure over the first years of your business, based on your market research. You will need this if you have to seek a loan for your start-up costs and it will also be exceptionally useful as a reference point when deciding how best to structure your business, for example, as an employee you pay income tax and National Insurance as a deduction from your wage or salary, when you begin working for yourself you will then need to correctly calculate any tax due and you are then responsible for paying this to H.M. Revenue and Customs. Failure to correctly calculate, report and pay any tax due on time can, and will, result in penalties and surcharges being levied against you. You may consider at this early stage to seek the advice of a reputable Certified or Chartered Accountant who will be able to look at your personal circumstances to ensure you start on the right foot.

2. Financing your business

If you need to borrow money for your start-up costs, consider how much you require and where you will get it from. Banks may not be willing to lend money if you have a poor or no credit rating, or you have no collateral. This may not be an issue in the early days if your Self Employed work is on a part time basis and your current employment can support your day to day expenditure as well as your living costs, however, you will need to clearly evaluate the cash flow of your business before you hand in your notice.

3. Checking taxes and benefits

Make sure you seek advice about how becoming self-employed or starting your own business will affect your taxes and any benefits you receive.

4. Decide upon the structure of your business

Having found yourself an appropriate Accountant make sure you seek advice about the best legal structure for your business. There are many possibilities however the most common one is Self Employed, usually one person working for themselves. As a Self Employed person you own 100% of the profits within your business and are responsible for 100% of the tax payable on those profits even if they remain in the business bank account. If you are starting a business with one or more other people you may choose to structure it as a partnership. It is important to agree the management terms of the business with respect to the percentage split of profits, level of personal drawings and who is responsible for what. This is usually set out within a partnership agreement. When partnership accounts are drawn up the profits are divided between the partners and you will then be responsible for tax upon your share of those profits. Finally, you may decide to incorporate your business and trade as a Limited Company either alone or with others. This can often be highly tax efficient as a Limited Company is an entity in its own right. In the case of most smaller Limited Companies you would, as a Director, pay yourself a salary, you may or may not pay tax and National Insurance from this depending upon how much salary you allocate, this can then be ‘topped up’ with Dividends if the Company is within sufficient profit. Dividends for those earning below the higher rate of income tax would be tax free up to £5,000 and thereafter taxed at a lower rate than standard PAYE. The Company itself would pay Corporation Tax on its profits at a rate of 20% and is set to be reduced to 18% by 2020

5. Running your business

Start as you mean to go on! The key to keeping your business compliant is to ensure that you keep good business records. Few people in this day and age rely on complex books and ledgers but rather opt to use solid accounting software. This is a highly competitive market with a vast array of providers all claiming to be the best. In reality, there is no ‘one size fits all’ and it is strongly advised that you try out the demo versions before you commit to a specific package to make sure it suits your requirements.

Some of the key players include xero, quickbooks, freeagent and sage. All run a cloud based offering on a monthly subscription. There are also some good free options such as wave and quickfile.

Once you have all the key information and tools in place you will then be well positioned for the transition from employment to Self-Employment.