Business Start-Up Guide

Choosing the right way forward

Whilst this list is not exhaustive, it provides a guide to matters that need to be considered before you start out in business.

  • Business Structure– How are you going to trade in your business?
    •   Sole Trader
    •   Partnership                         
    •   Limited company

Factors to consider are commercial risk, expected profitability, financing, use of cars for business purposes, and of course Tax and VAT implications. 

  • Business Plan – Have you set out your business objectives in writing? It can be very useful to set your plans in writing to help focus the mind. It also be necessary when considering business financing to ensure adequate cash flow is available. How are you going to finance the company? What are the expectations for sales and profitability, and the investment in assets? Have you consolidated all of this information into a formal business plan?
  • Banks & Finance Companies – Consider the need for financing, and the best source of finance for your needs.
  •  VAT – You should decide whether it is beneficial to register for VAT from the outset. The decision you make on this point may affect both the profitability and cash flow of your business and van be dependent on your customer base. 

Things to avoid

  • Tax Penalties – As soon as you have set a start date, ensure that you notify HM Revenue & Customs of your intention to commence trading. Self employed businesses face a fine of £100 if this is not done within 3 months of start up, limited companies face an even stiffer penalty of £300.
  • VAT Penalties - If you register for VAT, submit your returns and pay your liabilities on time to avoid interest and surcharges. 
  • Missing Invoices – Always obtain a proper invoice for any business purchase, a VAT invoice if you are registered for VAT, otherwise you may find that your claim for VAT and tax relief will be denied. 
  • Company Car – Whether you are self employed or a limited company, planning for the use of a car in your business needs to be thought through carefully. Self employed people will need to keep a log of business mileage to back up any claim for tax relief. Limited Company owners will need to compare the cost of running a car either inside or outside the company – potentially high personal tax charges may be payable if this cost comparison exercise is not undertaken.

Important things to consider when starting a new business

Decide which is the right format for your business. There are commercial and tax implications when choosing between Sole Trader, Limited Company or Partnership.


Set up a separate bank account to deal with your business transactions and consider using a separate credit card for business transactions only.

Draw up a business plan to help identify your potential cash flow and any finance requirements.

Consider whether or not you will need to be VAT registered. If you need to register, then this should be done sooner rather than later as the process can be lengthy. There are severe penalties for failing to register for VAT if you need to.

Decide on your stationery requirements and get printing under way.

Ensure you have adequate business insurance.  The current minimum requirement is for Public Liability insurance, however Employers Liability usually just costs a few pounds more.  If using your own vehicle for business purposes, inform the insurer of business use.

If premises are required then be careful not to commit to a long term lease, without appropriate break clauses.

Decide on how you are going to keep your accounting records.

If you need advice on starting a new business, speak to TaxSmart Accounting, we can help you every step of the way.


Should I be registered?


The quick answer is yes, if 

  • Your business services or sales are taxable, and
  • Your turnover (sales) exceeds the statutory registration limit.


Can I register voluntarily?


Again the answer is yes you can – even if your turnover is below the statutory registration limit.


It can be advantageous for you to register voluntarily if: 

  • The nature of your trade means that your costs or purchases include VAT, and
  • Most of your customers are VAT registered and can claim back the VAT that you will add to your sales, or….
  • Your supplies are mainly zero rated for VAT purposes.

 If the answer to the above questions is no then it may be better to delay registration until you have to.


Our advice regarding registration issues: 

  • Never add VAT to your sales invoices UNLESS you are registered – to do so is a criminal offence!
  • Avoid delay if you do need to register otherwise you will incur needless penalties and interest charges, as well as having to pay over VAT which you may not be able to recover from customers.


Special Schemes


Most registered traders simply add VAT, where appropriate, to their sales and pay this over to HMRC, less any VAT input tax paid to suppliers, on a quarterly basis.


For small businesses this can cause cash flow problems.  You may have to pay over VAT added to sales invoices that is still not paid by your customers.


To help with this cash flow problem HMRC have created a number of “Special Schemes”.  The most helpful are:


  • Cash Accounting – If your turnover is within the limits for the scheme you will only need to pay VAT to HMRC when you are paid by your customers.  This is a significant advantage for businesses that have to grant extended payment terms to their customers.


  • Flat Rate Scheme – Traders eligible to join this scheme can simplify their VAT accounting by applying a flat rate percentage to their sales and paying this amount to HMRC.


  • Annual Accounting – With this scheme you agree an annual liability, based on the previous years’ figures, and pay this over on an instalment basis.  At the end of each year a final return is submitted and any balance due is paid or overpayment refunded.


  • Special Schemes for Retailers – Ordinarily registered traders are required to keep detailed records of every transaction.  For retailers this could prove to be a time consuming chore. To avoid this, eligible businesses can use one of the schemes available to retailers.

Are you paying too much tax?

At TaxSmart Accounting, we will always advise our clients to pay the tax they are legally obliged to, and no more!


The tax legislation contains many allowances and reliefs that will help minimise your tax liabilities. This is the case whether the tax arises on earnings, profits of trade, or gains when you sell chargeable assets.


HMRC are not able to advise you on how to organise your affairs to minimise the amount of tax you pay. If you are looking to make savings and do not want to study the entire tax legislation, you need to seek professional advice from TaxSmart Accounting..


There are too many tax saving strategies to list, but here are a few examples……

  • Employing your spouse in your business – if you are self employed and your spouse helps out with general administration, or any other role, it is quite legitimate to pay your spouse a salary. Sole traders with higher rate tax liabilities will benefit significantly from paying a market rate for number of hours worked.
  • What about the garden Shed? – Are you selling that second or third home and want to reduce any capital gains tax that you may need to pay? The garden shed and other fixtures and fittings are treated as wasting chattels for Capital Gains Tax, i.e when you sell them there is no tax to pay.
  • Low interest loans provided by employers – providing you are not a director, it may be possible for a company to lend an employee up to £5000 with no tax complications.
  • Capital Gains – Using home as your office – if you claim tax relief for the use of a room as an office, you can avoid any possibility of CGT on a sale of your home if you make sure that the room is not used exclusively for business.
  • Valuing stock to save tax – if your tax bill for the year is looking decidedly on the high side, take a fresh look at your stock valuation at the end of the year. Stock should have been valued at cost, but can be valued at net realisable value if this is a lower figure. In simple terms, this means the stock is valued at what you sell it for in an open market sale. Lowering the value of closing stock will pound for pound reduce taxable profits.
  • Recover VAT on invoices – that you have paid or received before you register for VAT by including the input VAT on your first return. Make sure you have the VAT invoice and keep a schedule of the adjustments you have made. There are some conditions attached to reclaiming VAT on items of material and services prior to registration.


Many years ago the government realised that the most cost effective way to collect taxes due was to legislate and oblige employers to do the job for them – Pay As You Earn (PAYE) was born!


PAYE has an impact for both employers and employees, and we cover some of the pitfalls to avoid below.



If you employ staff, you have obligations to HMRC. If you ignore these obligations, penalties and interest will soon be added to your employment costs!

Most penalties arise if you either:

  • miss certain statutory deadlines for remitting tax and national insurance you have deducted from your employees, or
  • are late submitting returns to HMRC.

Unfortunately ignorance is not bliss – make a late payment or forget to send off a particular return and you will be penalised.


Employee Benefits

If you provide employees with benefits, for example company cars and health insurance; be sure to watch out for the following:

  • Identification is difficult – sometimes seemingly unrelated expenditure can be classified as a benefit, for example excessive staff entertaining.
  • Benefits attract their own national insurance charge which has to be paid by employers in July each year.
  • Benefits have to be declared to HMRC on specific returns which must be submitted on time to avoid penalties.


Employers – other points of interest

  • Small businesses are able to pay their deductions quarterly rather than monthly – this can help with cash flow especially for new ventures.
  • Employers have to make their own national insurance contributions based on salary levels. This is added to tax and employees national insurance deductions when paid to HMRC each month/quarter.

Employees – make sure you only pay what you owe!

The tax deducted from your salary is calculated by taking away a proportion of your annual tax free allowance from your salary and applying the appropriate tax rate to the difference.  Most payroll systems are quite adept at calculating the tax due, but they rely on the tax office to issue a correct code number to quantify your annual tax free allowance – this is the area where mistakes can be made and your tax bill increased unnecessarily.

Basically the higher your tax code the less tax you will pay, and vice versa.  A few common errors are:

  • Employers are sometimes slow in sending in details to the tax office when new employees start.  This can delay the issue of a correct code number resulting in excessive tax deductions.
  •  Employees who change their company cars for lower taxed models, or indeed stop using a company car will continue to be taxed based on last tax years information, unless the tax office is informed. 
  • The tax office will sometimes seek to recover unpaid tax in earlier years by reducing your tax code in the current year.  This deduction should always be checked to make sure the arrangement does not duplicate other payments that you may have made directly to HMRC. 

The key to maintaining a correct code number is to make sure that changes are notified to the tax office quickly.

Limited Companies - Is it right for your business?

One trading option for business is to operate as a limited company.  This will provide access to a number of tax planning strategies, and limited liability status.  Although there is perceived prestige in operating as a limited company you will lose some of your privacy – directors and shareholders personal details and abbreviated accounts have to be filed, and are open to public scrutiny.


A limited company is a distinct legal entity that is able to enter into contracts in its own name.  This is important as it means that all the company’s liabilities are the responsibility of the company – not the directors and shareholders!  The only exception is if you, as director of the company, offer a bank or other creditor a personal guarantee to repay the company’s debt, if the company cannot.


So what are the pro’s and con’s of incorporating your business?


Significant advantages:


1. Limited liability status – as explained above this can protect your personal assets from business creditors if for any reason the company has to cease trading and is unable to clear all its debts.  This protection is especially useful if there are significant risks associated with your business activity.


2. Lower tax rates – companies pay their own tax, called corporation tax.  Currently the rate for small companies is substantially lower than the combined tax and National Insurance rates for individuals.


Significant disadvantages:


1. Possible double taxation – as the company pays its own tax on profits and gains, it can only distribute what is left, the retained profits, to directors and shareholders.  This can give rise to tax being paid both by the company and by the directors or shareholders when they withdraw the taxed profits from the company.


2. More cost – the professional costs in setting up, preparing accounts and tax returns for companies can be higher than those you may incur if you were say, self employed.  Additionally, there are a few costs in complying with Companies House formalities.


3. Audit requirement – if your company exceeds certain size limits, or is in a particular trade sector, it may require an audit, incurring further costs.  We can advise on this but generally, most small businesses will be exempt from audit.

IR35 Legislation

You may have noticed on the self assessment tax return that HMRC are now asking if you are operating as a serviced company.


HMRC take the view that some consultants, engineers, non-executive

Directors, and “one man band companies” who perform a role as if they were actually employees of the end client company, can be taxed as such……..




All contractors need to consider IR35 and should take action in order to protect themselves from it.


The legislation was introduced as a measure to counter tax avoidance which initially targeted contractors in the IT industry. However, it must also be borne in mind that all contractors who operate their own service companies have the potential to be caught by the legislation.


Therefore, if you only have one or two clients to whom you provide your services and trade as a limited company, then there is a risk that your services will be subject to the IR35 legislation. So it is important to remember each contract is considered individually by HMRC and as such the wording and terms of the arrangement are important factors when arriving at their decision to apply the IR35 legislation to the income received by the service company.


If HMRC determine that your contract of services falls within IR35, this will severely limit the expenses that you would normally be able to claim through your company, and also result in PAYE and National insurance being charged on your total income from these contracts. As a result, the option of receiving your earnings by taking a small salary topped up by dividends (on which you do not have to pay National Insurance) is closed to you.


TaxSmart Accounting can advise as to whether your contracts are likely to be caught by the legislation, and any potential changes that can be made to improve the chances of compliance.

CIS - The Construction Industry Scheme

The Construction Industry Scheme (CIS) is a series of regulations for contractors and sub-contractors within the construction industry.


Whether you are a contractor or subcontractor working in the construction industry, we can help you with your accounts and tax, and ensure that you maximise your tax deductions and allowances.


If you are a contractor we can: 

  • Register you with HMRC as a contractor
  • Verify your subcontractors with HMRC
  • Ensure you pay your subcontractors correctly within the scheme, making deductions if necessary
  • Supply deduction statements to the subcontractors
  • Keep your records in good order and supply HMRC with monthly returns
  • Ensure that you do not incur any penalties by failing to submit monthly returns to HMRC 

If you are a sub-contractor we can:

  • Advise on whether you fall into the sub-contractor or employee status (or both)
  • Verify with HMRC on behalf of your contractor (if needed)
  • Keep your records in good order

Any contractor that you work for must decide whether you are to be treated as an employee for each and every contract. If their decision is that you are an employee for the purpose of the contract, then the contractor will operate a PAYE scheme whereby tax and national insurance contributions will be deducted from the payments made to you.


If and when you are verified as self employed, the payments by the contractor can be claimed back against your annual tax liabilities.

Please contact us today to arrange a free initial consultation, or alternatively call into one of our local offices and speak with a member of staff.

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