Whilst this list is not exhaustive, it provides a guide to matters that need to be considered before you start out in business.
Factors to consider are commercial risk, expected profitability, financing, use of cars for business purposes, and of course Tax and VAT implications.
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
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:
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:
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:
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……
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:
Unfortunately ignorance is not bliss – make a late payment or forget to send off a particular return and you will be penalised.
If you provide employees with benefits, for example company cars and health insurance; be sure to watch out for the following:
Employers – other points of interest
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:
The key to maintaining a correct code number is to make sure that changes are notified to the tax office quickly.
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?
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.
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.
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……..
WHAT DOES THIS MEAN FOR MY BUSINESS?
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.
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:
If you are a sub-contractor we can:
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.
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