Whether you have just started your own small businesses, or you are a budding entrepreneur with big aspirations, there has never been a better time to work for yourself.
With the economy going from strength to strength, and Chancellor George Osbourne’s promise of an annual investment allowance to £200,000 per year, it is pretty clear why 2016 is looking to be a great year for new beginnings in business.
Before beginning your journey there are a number of things you will need to consider, with the most important being finance.
A good financial plan is key to the setup of any business, and an essential part of making your business dreams a reality. As this is the case, here at MyAccountant we have put together this financial toolkit which highlights the main areas that you’ll need to keep in mind when setting up your new business, or maintaining the growth of a current one.
Back To Basics
Choosing the right vehicle Sole TradersThe most straight-forward way to start a business in the UK is to become a ‘sole trader’. When working as a sole trader you can chose to work alone or, alternatively, employ others to work for you. Only you will own the business and will be considered as self-employed.
How to do it:
You will need to obtain your National Insurance number
Register for a Self-Assessment Tax Return with HM Revenue and Customs (HMRC)
Choose a trade name for your business (you can also trade under your own name)
The pros and cons:
• Registering as a sole trader is the easiest option • You keep all the profits after tax
• You bear all legal and financial responsibility
Limited Companies
Rather than setting up as a sole trader, you can set up as a privately held limited company and run your business in the UK. You must appoint people to run the company, called ‘directors’, and incorporate the business with companies house.
How to do it
• You will need to choose a business name and address for the company • Register your business with Companies House
• You will need at least one company director • Have at least one shareholder in the company
• The company will need to be registered for Corporation Tax, the director(s) of the company will also need to register for Self-Assessment
The pros and cons:
• A limited company is a separate legal entity to its directors
• You are paid as an employee and can choose to take dividends which can allow significant tax planning advantages
Business Partnerships
In a nutshell, this is a partnership that has very similar characteristics as a limited company. Limited liability partnerships (LLPs) tend to be used by professional service firms, such as solicitors and architects.
The partners in an LLP aren’t personally liable if the business can’t pay their debts - their liability is limited to the amount of money they invest in the business.
What to consider
When deciding which option is best for you, it is also important to consider your place in the market and what clients you will be approaching. We would advise looking at the environments you are likely to be working in, the risks involved, are you supplying specialist services for clients or are you looking to trade a product? Analysing your positioning and what model your clients would be more willing to engage with will benefit you in the long run.
Choosing the right accountant
Finding the right accountant is one of the most important decisions a small business can make. A good accountant can provide you with valuable guidance and help your business grow; a bad one could cost you and your business a lot of time and money.
So with so many options available, how do you choose the right accountant for you? Here are some questions you should be asking.
Why should they be my accountant?
• Do they have the skills and background to prove they can support your small business?
• What qualifications do they have?
• Are they a member of a professional body?
When choosing an accountant it is good to look for a firm or individual who has the attitude and attributes you would look for in a business partner. You need to trust their judgment, feel secure with their
professional education, and for the security of your business, know a professional organisation has given their practices the green light.
Will they tell me what I want to hear, or what I need to know?
• Are they realistic?
• Are they compliant with the latest legislation?
It is something we are all familiar with: the people pleaser. Whether it’s on a personal level or within business, we have all experienced someone telling us what we have wanted to hear rather than what we needed to; this is a personality trait best to avoid, especially when finances are involved.
Honest information and guidance is essential to running a successful business, it is clear then why it is also essential to find these qualities in your accountant.
Are you a good match?
• Do they have a pro-active approach?
• Do they ask you questions?
• Do they keep you updated?
A healthy business relationship is defined through good communication; the same goes for working with your accountant.
They should have a keen interest in your business, calling at least every 3 months to discuss how the business is progressing and if you have anything you would like to discuss. They will also keep you updated on all the latest legislation and key updates which may affect your business
How can MyAccountant help?
• Over 10 years’ experience
• Personal, bespoke service
• No hidden additional fees
At MyAccountant, we understand the importance of an efficient and knowledgeable service which you can trust; this is why each of our clients is provided with their own personal ACCA qualified accountant. As a member of the FCSA, we can provide assurance to our clients and associates that they are dealing with a firm that is highly professional and compliant in the work we undertake.
Incorporation
So you have your company name and you have chosen your accountant, what now? The next step to make your business official would be to incorporate your company.
To set up a private limited company you need to register with Companies House. This is known as ‘incorporation’.
Once your company is registered you’ll get a ‘Certificate of Incorporation’. This will confirm the company now legally exists and shows the company number and date of formation.
Some accountants, including MyAccountant, will incorporate your company on your behalf free of change.
Insurances
As a small business, it is essential to obtain the correct level of cover to protect yourself and your company.
Although some industries require specific insurances, the typical requirements are as follows: • Employers’ liability insurance
• Public liability insurance
• Professional indemnity insurance
There are many insurance providers available, online and offline, however we would always suggest doing your research and liaising with your accountant directly for guidance.
VAT
As a business, you are obliged to register for VAT if your gross turnover exceeds the threshold of £82,000 (as at 1 April 2015) over a rolling 12 month period. However you can choose to register below this threshold, voluntarily.
The advantages of registering for VAT are that you can reclaim the VAT on any VAT-able business expenses incurred. The disadvantages are that you would have to charge VAT on your sales invoices and pay this over to HMRC.
VAT registration usually takes around 1 week and again can be organised by your accountant at any point.
How much should you pay yourself?
So your business is up and running and you are finally making money doing something you love,
however what do you pay yourself? If you set your salary at too little you may struggle to get by, too high and you may put the business you have worked so hard to establish at risk. So what would be the right balance?
If you are a new business owner do not make the common mistake of confusing company revenue for profit. Before setting yourself a salary, it is vital to be aware of costings including tax, overheads, fixed costs and expenses. As discussed earlier on in this toolkit, this is another reason having a pro-active, experienced accountant comes in extremely useful.
Once you have the numbers, you can decide a reasonable amount to pay yourself. There are no fixed rules about this, however whatever you decide always remember to pay yourself regularly and avoid withdrawing large lump sums; this may raise eyebrows at the tax office or lead to an audit of your company.
How do I draw money from my business?
while remaining as tax efficient as possible?
The most tax efficient and compliant option would be to set yourself a lower salary which covers your monthly outgoings and draw dividends every quarter.
Every individual’s circumstances are different, so again the best option would be to liaise with your accountant using their expertise.
What are dividends?
A dividend is a distribution of company profits to its shareholders, in this instance yourself. National insurance is not charged on dividends, which is one reason why they can be a very tax efficient method of remuneration. It is important to remember that money should always be set aside to meet your tax liabilities before drawing a dividend.
At MyAccountant we produce management accounts for our business directors showing how much profit is available for possible dividend distribution.
What about expenses and other benefits?
Putting wages and dividends to one side for a moment, there are many other financial benefits to running your own business; medical insurance is just one scheme you could consider.
The rule for claiming business expenses is that they should be incurred “wholly and exclusively for business purposes”. This means that the expense must relate solely to your Limited Company and its trading.
Here are a few examples of expenses that can be offset against the tax your company pays: • Car expenses (business mileage of your car)
• Business telephone and broadband
• Capital equipment expenditure (such as new computers) • Accountancy fees
For a full list of legitimate business expenses you can claim when running your own business, please visit our website for your free guide:
Personal Tax
Income Tax is exactly what it says on the tin – a tax on income. Not all income is taxable and you are only taxed on ‘'taxable income’' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill – and in some cases mean you have no tax to pay at all. Taxable income includes:
• Earnings from employment (PAYE) • Earnings from self-employment
• Most pensions income (State, company and personal pensions) • Interest on most savings and investments
• Income from shares (dividends) • Rental income
• Income paid to you from a trust
Rates
Everyone in the UK has is entitled to have a portion of their income exempt from income tax. Currently (2015/16) this amount is £10,600 and is intended to increase year on year in line with inflation. Income above this is then taxed at varying rates depending on your level of income.
Who needs to file a tax return?
You will need to file a tax return if you meet any of the following conditions: • You are a director of a limited company
• You are a Sole Trader/Self Employed
• You are claiming business expenses exceeding £2,500 • You total income exceeds £100,000 during the tax year
• Yours or your partners income exceeds £50,000 and you or your partner receive Child Benefit • You have income from UK property or land
• You have untaxed income of over £2,500
• You have income from savings and investments (including dividends) over £10,000
• You have disposed of an asset (shares, property, etc) and expect to pay Capital Gains Tax
Deadlines & Penalties
The 2015/16 tax return is due to HMRC by 31st January 2017. This return would report all income received during the period 6th April 2015 to 5th April 2016. Any additional income tax you owe is also due to HMRC by the 31st January filing deadline.
results in an immediate £100 penalty. This applies regardless if you actually owe any additional tax. HMRC can then apply daily penalties of £10 per day up to a maximum of £900. This is in addition to further percentage based penalties based on the tax owed when your return is finally submitted.
How MyAccountant can help
MyAccountant.co.uk’s experienced Personal Tax team are here to assist you in preparing your Self-Assessment Tax Return. Our service includes:
• Registering with HMRC to liaise directly with them on your behalf • Registering you for Self-Assessment itself and online filing
• Preparation of your tax return and tax computations – clearly outlining what tax is due and when, and providing further tax guidance
• Calculation of additional taxes due such as Capital Gains Tax
• Online submission and correspondence with HMRC to recover refunds • A tiered pricing structure rewarding clients who provide information early
