The following is a brief guide on some of the factors which need to be considered, ideally before trading begins.
If you need finance, no bank manager will lend money without a sensible plan. Your plan should look at how the business will start up and develop. It should describe the business, product or service, market, how it will operate, capital requirements and projected financial results.
There are three common types of business structure:
- Sole trader
This is the simplest form of business as it can be set-up without legal formality. However, the business and the sole trader are one and the same.
A partnership is similar in nature to a sole trader, but because more people are involved it is always advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. The business and personal affairs of the partners are not legally separate. A further possibility is to use what is known as a Limited Liability Partnership (LLP).
The business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with. Once again, if you are going into business with another person, it is advisable to draw up a written agreement.
The appropriate structure will depend on several factors, including consideration of taxation implications, the legal entity, ownership and liability.
Books and records
All businesses need to keep records. They can be maintained by hand, but we recommend that they are computerised. They should contain details of payments, receipts, credit purchases and sales, assets and liabilities. If you are considering purchasing computer software to maintain your records, obtain professional advice.
The books and records are used to produce the accounts. If the records are well kept, it will be easier to put together the accounts. Accounts must be prepared for HM Revenue and Customs (HMRC) and if a limited company is formed there are strict legal requirements as to their layout. The accounts and company tax return must also be submitted electronically to HMRC in a specific format (iXBRL).
A company and an LLP will need to make the statutory accounts publicly available by filing them at Companies House within a strict time limit.
Taxation on profits
The type and rate of taxation will depend on the form of business structure. However, the taxable profit will usually differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances.
Payment of corporation tax must be made online within nine months and one day of a 12-month period of account. Sole traders must pay tax by 31st January following the end of the tax year and a further amount by 31st July if their tax liability is high enough.
National Insurance Contributions (NICs)
The rates of NICs are generally lower for a sole trader or partnership than for a director of a company, but the entitlements can also differ. In a company, it may be possible to avoid NICs by paying dividends and a small salary.
Value Added Tax (VAT)
VAT is one of the most complex taxes and it is essential to know when to register and how to calculate VAT correctly.
When starting a business, you should consider the need to register for VAT. If the value of your taxable sales or services exceeds the registration limit, you will be obliged to register. If you are VAT registered, you will also need to consider appropriate software to ensure that you comply with the Making Tax Digital requirements.
If not at the start of the business, at some point you may need to employ staff.
It is the employer’s responsibility to advise HMRC of the wages due to employees and to deduct income tax and national insurance and to account for student loan deductions under PAYE. The deductions must then be paid over to HMRC. Payroll records should be carefully maintained.
Under Real Time Information, an employer must advise HMRC of wages and deductions ‘on or before’ the time they are paid over to the employee. This has become very important during 2020 as the eligibility of employees to be able to be paid under the Coronavirus Job Retention Scheme has relied on the date HMRC were informed the employees were on the payroll.
Employers are also required to automatically enrol all eligible employees in a pension scheme and to make contributions to that scheme on their behalf. Enrolment may be either into an occupational pension scheme or the National Employment Savings Trust (NEST).
You will also need to be familiar with employment law.
Comprehensive insurance for business motor vehicles and employer’s liability insurance are a legal requirement. Other types of insurance, such as public liability, consequential loss, business assets, Keyman and bad debts, should be considered.
Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules.
How we can help
When starting up a business, it is necessary to take into account your circumstances and aspirations. Professional advice can help you make an informed decision as to which type of business structure you should use and the tax implications of doing so. Most new businesses where the owner has only ever been an employee before often have no idea of the reporting, tax payment and other legal requirements involved.
We would welcome the opportunity to assist you in your decision making and we can also discuss how we can also provide key services such as bookkeeping, management accounts, VAT return and payroll preparation at an early stage.
Last updated: 17.11.2020
Whilst the information in this document is correct; you should always obtain individual advice from a qualified accountant.