Starting a new business

You have been thinking about starting a new business, you take the next move and carry out your research, prepare a business plan and consider how you will manage your finances while your business gets off the ground.

You are good to go, so whats next?

Choose your business name

This is a very important decision, this name will be associated with your business, your brand therefore you must like the name and the name must be suitable.

It is wise to ensure that there are not too many businesses out there with the same name and careful you do not offend anyone.

Choose your business structure

The most common structures are:

Sole trader/Partnership or

Limited company

You can refer to the advantages and disadvantages of sole traders and limited companies here Advantages and disadvantages of sole traders and limited companies

Register your business.

Sole trader

· Choose a business name.

· Register with HMRC as self-employed and the HMRC will issue you with a UTR number – your UTR number will be the number the HMRC will identify you with

· File an annual self-assessment return

Please note

· Trading allowance - You are only required to register for self-assessment when your income exceeds £1,000

· Personal allowance is £12,570 tax free for 2021/22 – pay tax at 20%/40/45% depending on income level.

· Do you have another job that utilises your personal allowance?

· Do you have rental income/interest income or other income to enter on your tax return?

· Student loan repayments once your annual income exceeds £27,000 or £28,800 depending on your plan, you repay 9% on income above the threshold.

Company

· Check your company name is available.

· Incorporate your company, decide on shareholders and director’s.

· Prepare memorandums and articles of association you can use companies house adopted articles.

· Register for self-assessment if you are a director or shareholder receiving a director’s salary or dividend that is not taxed at source.

· File confirmation statement and corporation tax return

· Make Corporation tax payment on time

Open a business bank account.

· This is not required by HMRC, however it is highly recommended especially for companies, as this is a separate legal entity.

· It helps with your account’s preparation and tax return, when using a personal account there is a mixture of personal and business transactions, this can be confusing when it comes to claiming expenses.

· Using a business account means there is a clear record, and it is accurate

· More professional

· Helps to build credit rating.

· Especially useful when you are using cloud/online accounting software, as the bank feed feature can save processing time.

Cloud accounting

There are many benefits of cloud accounting.

· Bank feeds as mentioned above, gives an up-to-date picture of your cashflow, and also saves in processing time.

· Multiuser access, accountant as real time view, no need for backups and restore operations.

· Data backed up automatically.

· Ability to scan copies of receipts, no need for paperwork at home.

· Record mileage

· Send invoices from your phone.

· Excellent security

· It is MTD compliant

Claiming Expenses

Every business is different, here is a guide to expenses you can claim Claiming expenses

Key deadlines

Sole traders

· The tax year runs from 6th April to 5th April

· Filing a paper tax return 31 October following the year end

· Online filing of self-assessment and payment of income tax, class 2 NIC and class 4 NIC - 31 January following the tax year

· Payments on account when your tax liability is over £1,000 you pay your tax liability as a payment on account for the following tax year.

Limited company

· Company accounts to be filed with companies house 9 months after the year end – careful on your first filing dates!

· Corporation tax return to be filed 9 months and 1 day after the year end

· Confirmation statement to be filed on the anniversary of the date of company registration

· Directors and shareholders may have to file a self assessment return as explained above.

It is helpful to save for your tax bill and setting a certain % of your business profits aside for your tax bill, this will help you manage your cash flow.

· Points to consider

· Items that have dual purpose, can become complicated when deciding on what is allowable as an expense, so where possible try and keep your business premises, equipment, mobile phones, and internet for sole use.

· Know your worth, pricing can be difficult especially at the beginning but many who have been there before will tell you that charging a lower price does not pay off.

· Get into a good routine from the outset of keeping a record of your income and expenses.

· If you are taking on the bookkeeping role in your business, do it little and often and avoid the overwhelming load of invoices and receipts that need analysed.

· Go for cloud accounting, if possible, it is the way forward and really helps you keep on top of your business.

· Keep a cash book for money received in and paid out.

· If you have friends and family or colleagues offering support…take the help,

· Remember the entrepreneur, the manager and the technician are all you and that can be tough and it can become overwhelming, it is important to step back and evaluate if you need help.

· Outsourcing your bookkeeping can be beneficial, you are leaving it to the professionals, while you get on with your business and could you save you money in the long run.

· Keeping records – 5 years for a sole trader and 6 years for a Limited company, all information that is used for the preparation of your tax return.

· Networking - get involved in business groups, it is so refreshing listening to those who have been in your shoes and who can offer support

· Consider policies and procedures that you need to put in place such as refund policies

· If employing staff, ensure you are registered as an employer, comply with employment law, consider holiday pay and staff contracts (contact us for help with this)

· Get insurance - public liability, professional indemnity etc

It can be good to speak to an accountant to ensure you are complying with HMRC and Company law and they will guide you on areas to consider.

Advantages and disadvantages of sole traders and limited companies

Advantages of sole trader

· Easy to set up

· You keep all the profits.

· Start-up costs are low

· Lower professional costs

· Easy to close down and change structure to a limited company.

Disadvantages of sole trader

· Personally, liable for all debt - your assets such as your home

· All day-to-day decision making is yours, no staff to delegate to

· Difficult to raise finance.

· Higher profits tax rate higher than corporation tax rate

Advantage of limited company

· Limited liability- business is separate entity you are not personally liable for business debts unless you sign a personal guarantee.

· Professional

· Name protection – no one else can register the same name.

· Potential tax savings -

· Salary v dividends – dividends can save you tax with basic rate taxpayers paying tax at 7.5% (£2,000 tax free every year for all individuals)

· Can avoid paying national insurance for employee and employer by efficient tax planning.

· Pension contributions can reduce tax bill and also help you build your pension.

· Succession

Disadvantages of limited company

· More accounting requirements/ additional costs

· Annual accounts to file with companies’ house.

· Annual corporation tax return to file and pay.

· Annual confirmation statement to be filed with companies’ house.

· If you have employees or receiving a directors’ salary you must register as an employer and comply as an employer, including making timely submissions to HMRC.

· Director details and business financials are available for public viewing, own home address is visible.

· Self-assessment is mandatory if their income is over £2,000 of dividends and they have untaxed income.

Claiming expenses

When claiming business expenses, expenses must be wholly and exclusively for the purpose of trade.

It is important to get it right, as you do not want the HMRC to disallow your expenses and in turn this will mean you will pay more tax.

Also, it is important to consider business and industries vary, therefore what may be allowable for one business may not be for another. Different aspects to consider for your business: -

· Premises

Whether you have premises that are wholly used for business, or work from home, you can claim for the cost of running your business.

The main difference is that with commercial premises, you can claim for 100% of the rent, property insurance, rates, utility bills, security, and other related costs,

However, if working from home, you can only claim for proportion of the total and some bills are excluded. The HMRC also have simplified amounts that you can claim as expenses from working at home, where they will not require justification (£6 per week)

· Cost of sales

You can claim for any goods that you have purchased to sell through your business, or any raw materials that you have used to produce goods to sell.

You can also claim tax relief on fixed assets (fixtures, fittings and equipment) for example office furnishings and equipment.

· Admin expenses

There are lots of things you can claim for in the day to day running of your business, including stationery, postage costs, advertising, marketing, and computer consumables.

Subscriptions and membership fees are generally allowed but is best to check which professional bodies are acceptable under HMRC’s rules.

· Financial expenses

Bank charges, loan interest and leasing costs are all allowable

· Professional expenses

Consultancy, accountancy and legal expenses are allowed if wholly for the business.

· Motor expenses and travel

Generally, there are two ways of calculating allowable vehicle expenses: you can claim for the mileage attributable to business journeys (travelling between client appointments or to a temporary workplace, but not from home to a permanent workplace), or you can claim for the actual cost’s methods, such as vehicle insurance, servicing repairs and fuel.

If using the actual cost method, you would need to adjust for personal usage.

Worth considering both calculations, to ensure you claim the one that gives you the most tax relief.

A mileage log should be kept for business journeys.

You can claim for bus, rail, taxi, flights, and boat tickets if wholly for business.

You can also claim for parking and tolls, although parking fines are not allowed and frequent taxis for noticeably short distances can also be challenged by HMRC.

Accommodation can be claimed if you are staying at a temporary location solely for work and the costs are not excessive.

The rules on claiming food and drink expenses can be complicated and advice should be sought before claiming these.

· People

Businesses can deduct the cost of wages and salaries, pensions (sole traders can claim relief for a pension scheme but not their own pension), benefits, bonuses, and employer’s national insurance contributions.

· Workwear

You can only claim for workwear that is wholly for business such as high vis jackets, protective clothing, helmets, overalls, work costumes, unfortunately you can not claim for a fancy suit.

· Training and CPD

If the training is relevant to the business activities, these expenses are allowed. Training expenses for a new business activity or field are not allowed.

· Entertainment

Employers can entertain their staff up to £150 per annum without a taxable benefits issue.

Entertaining clients on the other hand is generally not allowable.

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