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Tax Accountants and Business Advisors
01226 701017
Dean & Company
Setting up a new business
1) Introduction
5) Starting as a Limited Company
6) Should you work from home or separate office?
7) An overview of Value Added Tax (VAT)
8) What taxes will I have to pay?
9) Directors Salary & Dividends
10) External Links to Rates and Allowances
11) Top tips for choosing an accountant
Starting up a small business can be a complicated thought provoking process. But you are not alone. Presently there are more than four million businesses currently in operation in the UK, more than 99% have less than 50 employees.
Even though funds are likely to be low in the beginning, it is not recommended to try to do everything yourself. Think hard about yourself and write down a business plan. If marketing isn’t your strong point, call for outside help. If you’ve decided that starting a business is for you, you’ll need to think about the trading structure you will be using – are you going to be a sole trader, a limited company or a partnership?
Sole Trader - operating as a sole trader means you are self-employed. Personal income is taxed alongside your business income. This makes accounting easier than other business structures. This is quite a common way of trading for business startups. When you have many things to worry about in your business the sole trader route has less accounting responsibilities.
The biggest disadvantage is that should you run into financial difficulties, you are legally responsible for sorting it out. People you owe money to can claim your personal property.
Limited Company - This means that your personal money is separate from the the company’s finances, unlike with “sole trader”. If everything goes wrong, the only money you can lose is what you have put in and you cannot lose your personal assets and money. However, as a director of a limited company you may be a guarantor for loans in your company.
To receive money from the company, you must become an employee of the company such as a director and be paid by a combination of salary and dividends (profit). Limited Companies can appear more professional and usually, has less risk if you need to buy expensive machinery, equipment and/or property. Some companies to insist that you have Limited Company status before you can trade with them.
Partnership - This is yet another trading structure for people who want to go into business with a partner. This just a easy way of joining two or more people together in a business structure without the complexities of a Limited Company.
LLP - A Limited Liability Partnership (LLP) is similar to a normal partnership but with each partner having limited risk for debts. This structure does involve more paperwork than a normal partnership and is usually the preferred choice for solicitors and accountants.
It is advisable to discuss all the available options with your accountant before proceeding. This depends on your type of business and estimated turnover.
Your chosen business name will probably be the first thing people will notice. Also, you may have to use this on stationery and signs which can be costly so it is better to have some in-depth thinking beforehand. Forming a Limited Company involves registering your name with Companies House. This is to ensure that not only is your name suitable but no other company uses anything similar.
Also, you may wish to trademark your name to give it further protection. However, this can be quite expensive so maybe not an option for smaller companies. As most companies these days do have a company website it would be a good idea to check to see if your company name is available for your website.
First of all you need to register with the HMRC for Self assessment. You must do this as soon as possible after commencing trading or you could receive a penalty.
Even though you are a sole trader it is important to keep your business’s accounts separate from your personal accounts. So open a business bank account. You can do this with an personal bank, or pick another bank that has a business account. Your new account should have the name of the business, for example cheques should have your trading name. This will look more professional.
Some people reduce the risk in their business with relevant business insurance. Even as a self-employed person working on your own you should look at professional indemnity and public liability insurance. There are also, some compulsory insurances you might have to get such as employers liability.
Completing an annual tax return is a legal requirement so that you can work out how much income tax and class 4 National Insurance you have to pay. If you keep all your financial records up to date on a regular basis filling in your tax return should be quite straightforward. Keep all your bank statements, proof of business income and expenses. If you are also working as an employee, you will need a P60 form, a P11D for expenses and a P45.
If you have registered with the HMRC you should receive a paper tax return. You can fill this in and post it back or you can file online. We recommend that you choose the filing online option as it minimises mistakes by yourself and the HMRC. Using an accountant for this can usually save you more than the accountant fees by ensuring you are being tax efficient.
The important deadlines are:
October 31st: last date for sending a paper return and have HMRC calculate tax. Also, if you owe less than £2000 and you want it collecting through your PAYE instead of paying a lump sum. Your tax is then calculated by HMRC, and should send you the tax bill by the January 31 deadline.
January 31: final date for filing tax return and paying all tax owed, or you could get a £100 fine.
Remember, if your file your tax return early will not mean you have to pay tax any earlier. If you like to be organised then you should file your return in the summer.
5) Starting as a Limited Company
Many small businesses set up as limited companies. The company’s finances are separate from the personal finances of employees, directors and shareholders. Shareholders in limited companies are not responsible for the company debts. Although, some directors may be required to guarantee loans to the company.
The main legal requirements for a limited company:
> Company must be register at Companies House
> Accounts must be filed at Companies House every year. Must file dormant accounts if not trading.
> Annual Return must be completed each year to update Companies House with basic details relating to the company (£15 online £30 for paper)
> Company must complete an annual HMRC corporation tax return (CT600) and pay the due taxes within nine months of the company year end each year.
> Company must file employer and employee returns if above PAYE threshold and starter and leaver information.
> Anyone employed by the company must pay income tax and national insurance on their income and may have to be registered for self assessment.
Before a business can set up as a limited company it must be registered with Companies House.
The following documents must be completed by you or a company formation house (recommended if you are not experienced) and delivered to companies house:
> Memorandum of Association – Includes Company Name, Location and Type of Business, liability of its members is limited and details of the share capital
> Articles of Association – Directors’ powers, shareholder rights and the rules for the running of the company's affairs
> Form IN01 - Contains details of the Company's registered office, the details of the consenting Secretary and Director(s), details of statutory declaration and legal requirements.
These documents are often prepared by private sector formation house’s or your accountant.
Many Dean & Co’s clients have set up companies over the past 5 years - the service is fast and simple, and help is on hand if you require it.
6) Should you work from home or separate office?
This should be one of your initial decisions. Where is the best place for your office? Before jumping into signing a rented office agreement please consider carefully the following:
Your type of business largely determines this. If you’re operating as a sole trader you can easily do this from home. But of course a retail shop or manufacturing company needs some premises. Working from home is undoubtedly the cheapest option. But because there’s no travelling to and from work does save some travelling expenses. But, be aware that people who work from home tend to work more hours. But, if you are comfortable with this it shouldn’t be a problem.
If you use your residential telephone line for business, you could be receiving calls well after your official working hours and at weekends. A seperate telephone line maybe beneficial and you can claim the entire cost as a business expense if it is used solely for business.
You can only use utility bills for your house or any property as business expense if they are directly related to your business according to how much of your house is being used for business. For example, if your house has five rooms of approximately equal size and one of them is used as a home office, then you can claim 20% for Heat and Light, Insurance, Rent or mortgage interest, Water if you can show some business use for water apart from tea and coffee
As well as working out the percentage of your house that you’ve dedicated to business, you may also need to time apportion some expenses. For example, if a room is used for business four hours per day, you can claim 33% of the utility cost relating to that room because it is effectively used for business 33% of the day.
7) An overview of Value Added Tax (VAT)
Any business will pay VAT on all purchases (input tax) and will charge VAT on sales it makes (output tax). You have to pay the difference of output tax minus the input tax at least once a quarter. If the input tax is more than the output tax then HMRC will refund the difference.
You must register for VAT if the value of your taxable turnover has exceeded the VAT registration threshold (currently £70,000 from 1st April 2010). That means keeping a close watch on your sales; always looking back over the last 12 months to see if that figure has been exceeded. Similarly, if you are already registered for VAT and you turnover goes under the deregistration threshold (currently £68,000) you may deregister from VAT if this is in your interests.
The threshold is measured on turnover and not the profit of your business. You can apply to become VAT registered even if your turnover is below this threshold. There are sometimes benefits for doing this, especially if you have to buy a lot of supplies early on. You will be able to offset that VAT against the VAT you charge and potentially get some VAT back every quarter. To find out if this is a benefit to you contact your accountant for advice.
HMRC does not take kindly to businesses that are late with their quarterly VAT returns. So doing the bookkeeping on a regular basis is quite important.
There some of different VAT schemes that have been introduced to reduce burden of paperwork on small companies. One option is the Flat Rate VAT Scheme. Whether you would be better off joining the scheme or not depends on your finances and the sector you work in (get advice from your accountant). You can apply if your annual taxable turnover (exclusive of VAT) is £150,000 or under. You may leave the scheme at any time.
The normal way of paying VAT is by paying HMRC the total VAT charges on invoices, minus any VAT you are allowed to reclaim. The Flat Rate system avoids all this confusion by setting a fixed percentage of turnover which you pay annually. The percentage agreed depends on your business type. For example, a travel agency may pay 9 per cent, whereas an IT consultancy would pay 13 per cent.
If you are in your first year of business, you may qualify for a further reduction.
It is recommended you seek advice from an accountant before you decide whether or not this scheme is of benefit for you.
8) What taxes will I have to pay?
Probably the most tedious part of any business is handing over a share of your hard-earned cash to the HMRC but it is the law.
Depending on whether you are a sole trader or run a limited company the taxes you will be liable to pay will vary - as will the allowances you can claim.
Due to business taxation rules and regulations, we would advise anyone starting out in business to seek advice from an accountant. You can then get advice on how you will be taxed according to the business choose and any other circumstances unique to your business.
Perhaps the single most important tip is to ensure you don’t get behind with your paperwork - it will save lot’s of stress.
If you have a limited company, you will be liable for Corporation Tax. It’s calculated on your profits, and determined at the end of your company’s financial year. You must then pay it to the Inland Revenue within twelve months.
VAT is the tax added to most goods and services within the UK, and is collected at every stage of production and distribution.
If you are a limited company director, or have employees, you will also need to be aware of the Pay As You Earn (PAYE) scheme. As the term suggests, the scheme ensures that tax is deducted from employee's pay each week or month rather than via self assessment (for sole traders).
One area in which your tax rates will vary according to your trading structure is with National Insurance. If you employ staff you will have to pay their National Insurance contributions as well.
Self-employed people or sole traders, pay Class 2 and Class 4 National Insurance Contributions (NICs), whereas directors of limited companies will pay Class 1 contributions on their salaries. This is the same as the NI you pay if you are currently an employee for someone else.
We highly recommend you read up regularly on developments and use an accountant to stay in touch.
9) Directors Salary & Dividends
Setting up a Limited Company has the tax advantages of paying salary and dividends. Since Dividends have no National Insurance liability this is usually seen a tax efficient way of paying out your earning from company.
It is beneficial to pay a salary from the company which uses your personal tax allowance. Your company will then need to be registered as an employer. It is recommended that advice is sought from an accountant on the best salary/dividend combination before commencing trading.
In cases where you are the sole director of a company the salary is usually fixed at a level before you incur any tax or NI (National Insurance).
Keeping the salary below the lower earnings limit (LEL - amount of earning before incurring NI) means that your company does not have to register as an employer. However, doing this will mean that you do not get NI credits for pension and benefit purposes.
A salary same as the earnings Limit (EL - amount of earnings before incurring NI) ensures no tax or NI is payable but you do get NI credits for pension and benefit purposes. Doing this means you have to register your company as an employer.
A salary above the earnings limit means you have to pay NI and the company has to register as an employer.
Your salary can be entered into the Company Accounts as an expense thereby, reducing the overall profit and taxation burden. This is usually paid together with a dividend as your total income. When dividends are paid a dividend voucher must be prepared at a board meeting. It is important to remember that the dividend paid must not exceed the total profit less expenses and corporation tax. Doing this could be considered unlawful.
10) External Links to Rates and Allowances
HMRC Income Tax rates and allowances
VAT rates, thresholds, fuel scale charges and exchange rates
Rates and thresholds for employers
Taxes, National Insurance and Stamp Taxes
11) Top tips for choosing an accountant
A good accountant is perhaps the most valuable business advisor to have. With good accounts and upto date, you are more free to deal with your business.
It is quite stressful feeling behind with work or not in a position of trust with your accountant, so here are some tips from Dean & Company on choosing an accountant for your small business:
1) Choose an appropriate accountant before you commence trading.
2) It is important that your accountant deals with small business’s. If your business generates a large number of transactions (such as eBay or other online shopping) make sure the accountant has experience with this type of thing.
3) What are your accountants fees? Do they charge annually/monthly/hourly? Compare several companies.
4) You should contact several accountants and find out which is most appropriate.
5) What range of services do the accountant have. Do they just do tax returns? Or do they provide advice or other information to help you be more tax efficient and grow your business?
6) Usually, the best accountants are small or medium size companies. They will be more understanding about running a small company. Some larger companies tend to focus on processing tax returns in bulk rather than good advice.
7) Should your present accountant be appropriate, for any reason, get a new one!
8) Should you decide to change your trading structure i.e.from Sole Trader to Limited Company or you wish to sell your business you will need a good accountant to sort out all the administration and legalities more than ever.
Changing Accountants is quite straightforward as follows :-
1. Give us your last accountant details.
2. You notify your old accountant of the the impending change and give them authority to release documents.
3. We send a letter to your previous accountant requesting all information and historic records.
4. Your records are received by us and our agent details are registered with HMRC etc.
As a business owner you are always searching for ways to improve your business. However, your accountant has stayed firmly fixed. Having a good and understanding accountant has major benefits. But what if your accountant is no longer value for money?
Getting a new accountant through recommendation is usually the best but, not having this knowledge can be an obstacle. However, if you feel unhappy you should consider changing as a good accountant is essential for your business.
If you are considering changing your accountant, contact Dean & Company without any obligation to discuss your requirements.
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