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.

 

As Your Business Grows

As your business grows you will need to ensure that you keep things in order. The key to a successful business is effective management on all levels and keeping on top of the books is one of the aspects that create the biggest headaches in the early days. This need not be the case now, gone are the days of heavy ledger books and endless tapping on the calculator, the internet is now bursting with bright, user friendly bookkeeping packages with more features than the average small business could ever need. Choosing the one that fit’s the needs of your business should be your main influence along with the ease of use and compatibility with other technology.

By keeping clear bookkeeping records, you will be able to monitor all aspects of the financial status of your business which will be particularly relevant in ensuring that you remain tax compliant especially as your turnover draws near to the VAT Registration Threshold, which is currently £83,000 and for ensuring that your business can afford to take on staff.

Bookkeeping Software

There are packages on the market now to suit just about every budget and manage everything from the basic day to day bookkeeping through to robust reporting and analysis tools. The latest trend is moving away from the desktop and into the cloud offering access from your PC and through smartphones. So how do you decide which is the best option for you? For the tech savvy small business owner on the go a package that offers a solid mobile app that can handle the everyday functions such as invoicing and recording expenses will prove to be an administration asset, couple this with an on the go payment processing app such as iZettle and you can virtually manage most things from the palm of your hand. For those who prefer the big screen option then there are no end of choices there too.

Most providers offer the opportunity of a free trial, usually one month, make the most of this and if time allows trial several simultaneously, this will allow you to evaluate them clearly using identical data, by the end of the month you will probably find that you are only working with one package, the one that works best for you!

The other big advantage linked to cloud based packages is the ability to share information in real time, this can be valuable if you find you need assistance.

Taking on employees

As time goes on you may find that you need to take on an employee to assist with some aspects of the business. It is vital that you manage this correctly as failing to do so will result in penalties and fines.

When you decide that your business is ready to take on an employee you will need to ensure that the correct processes are followed, in the majority of cases you will need to be registered as an employer with HMRC and report your payroll information in real time using appropriate software. Most Accountants will be happy to offer compliant payroll services. Don’t forget to take into account your responsibilities in terms of your employee’s eligibility to work in the UK and so forth. You can use background checking services such as uCheck in order to ensure you are aware of anything that may have appeared on their criminal record.

You will also need to ensure that you clearly understand your obligations as an employer, employment law is complex and the penalties for employers in breach can be astronomical, one of the best resources for employers is Acas, originally set up by the government in 1896 as a voluntary conciliation and arbitration service, Acas have now separated from the government and now give advice to 800,000 callers per year with respect to employment related questions, resolving disputes and promoting good practice through their training courses.

VAT

As mentioned previously, the current VAT Registration Threshold is £83,000, put simply, this means that once your business turnover reaches this level within any 12 month period you should register for VAT. This is compulsory. In some cases, it may be advantageous to register voluntarily before you reach this level, this is particularly beneficial if your business sells a high volume of zero rated or exempt goods such as Children’s clothing and certain cold foods for example, in this instance you would then be able to reclaim VAT on eligible expenses.

When to register

If you are registering voluntarily then you may do this at any time; however you should take appropriate advice to ensure that it would be clearly in the best interests of your business to do so.

If you have reached the VAT Registration Threshold then you must, by law, register for VAT within 30 days of your business exceeding the threshold, if you register late then you must pay the VAT from the date from which you should have been registered, and HMRC may also add an additional penalty depending upon how late the registration was notified and how much VAT was due.

Managing VAT

Once registered for VAT you will need to complete and submit your VAT Returns, usually every 3 months. You should ensure that your returns are correctly calculated and that all records are kept in order.

You may wish to instruct your Accountant to manage your returns.