If you are starting a business, it is important to ensure that you choose the right tax structure.
Your business entity can be the most valuable player on your team. It’s critical to wisely choose the entity that's best for your business, make changes when necessary, and take advantage of the benefits of your business structure.
1. Tax Structure: Sole Trader vs. Limited Company vs. Partnership
If you are starting a business, it is important to ensure that you choose the right tax structure. There are advantages & disadvantages to each of the different tax structures, and it is therefore important that you obtain advice from an accountant as to the most suitable structure for your current circumstances, business plan and future goals.
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2. Registering for VAT
If you're a business and the goods or services you provide count as what's known as 'taxable supplies' you'll have to register for VAT if either your turnover for the previous 12 months has gone over a specific limit - called the 'VAT threshold' (at time of print: £77,000) or if you think your turnover will soon reach this limit. However you can voluntarily register for VAT if you would like to. There are different VAT schemes, annual VAT [which means you only need to submit a VAT return once a year], normal VAT on an accrual basis [returns are submitted quarterly, based on invoice date], normal VAT on a cash basis [returns will be submitted quarterly, based on when you have received/paid the money], the Flat Rate VAT scheme [a set percentage of your gross turnover depending on your industry is payable (ranging between 8 – 14%]. It is important to ensure you register for the best VAT scheme suitable to your circumstance, so ensure to obtain advice regarding this from your accountant.
3. Filing Responsibilities of a Limited Company
If you set-up a limited company, you will be responsible to submit a set of abbreviated financial accounts to Companies House 9 months after your accounting period end date and a full set of financial accounts together with your corporation tax return to HMRC 12 months after your accounting period end date. You are also required to complete an annual return to Companies House (annual shuttle return) each year. This can be completed online or via a paper return, and is normally due 12 months after incorporation. Please also see filing obligations relating to VAT and PAYE under the relevant sections.
4. Personal Tax Returns & Deadlines
If you are self-employed, a director of a limited company, if you have rental income, if you owe HMRC tax on any other source of income, or if HMRC sends you a tax return to complete then you are required to complete a personal tax return for the financial year (6 April – 5 April). Your tax return will be due for submission by the 31st of October if you are filing a paper return, or by the 31st of January of the following year if you are submitting it online. Your tax payment for the year will be payable by the 31st of January, together with a 50% payment on account towards your next year’s tax liability with the other 50% payable on the 31st of July of the following year.
5. Claimable Expenses
All expenses incurred wholly, exclusively and necessarily for business purposes can be claimed through the company or deducted from your self-employed income. Please ensure to keep all receipts/invoices for any expenses incurred. Please note that certain expenses can be paid through the business, however are not tax deductible, i.e. Entertainment, and will therefore be added back when calculating Corporation Tax or Income Tax.
6. Employing Staff
If you are considering employing staff, you will be required to set-up and administer a PAYE scheme with HMRC – which you can outsource. You will have to calculate PAYE/NI on all payments that an employee receives, and you will need to make these payments to HMRC by the 19th of the following month. You will also be required to provide all employees employed at the 5th of April with a P60 by the 31 May following the end of the tax year or a P45 when an employee leaves your employment. You will also be required to file monthly payroll returns to HMRC declaring the salaries and taxes due for the month before the employees are paid.
7. Credit Control
In any successful business CASH IS KING, and therefore it is imperative that credit control is exercised frequently. Work together with your accounting function (in-house or outsourced) to set these controls and procedures in place and prepare a monthly cash flow statement to ensure you will be able to meet your short-term and long-term liabilities.
8. Paperwork & Filing
You are required to keep a paper trail of all invoices, expenses, bank statements, credit cards etc. for a minimum of 6 years. Ensure that your filing is kept up to date and we recommend filing all invoices in sequential order and all supplier invoices per supplier in date order which will make it easier to obtain paperwork in future. It is also advisable to write on the paperwork to which account it has been posted to and the date is was entered and paid.
9. Accounting Packages
It is advisable to enter your accounting records and transactions into an accounting package from day one, as it will assist you in obtaining useful management information efficiently and effectively and it will reduce your accountant’s fee for preparing your statutory accounts at year end. QuickBooks, SAGE and Xero are widely used among small to medium-sized companies; however it is advised to obtain advice from an accountant as to the most beneficial accounting package to suit your particular circumstances, type of business and your long-term goals.
10. Accounting Function: In-house or Outsourced
There are advantages and disadvantages of both, however, outsourcing the accounting function for small to medium sized businesses can be very beneficial, providing the following benefits among others: expert services at a fraction of the price, no recruitment/management fees, no office expenses, continuity is provided with no need for re-hiring or re-training and many more. It is important to review both options and choose the most optimum solution for your business.
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