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;
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.
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.