It is very tempting, when starting a new business, to think only about the day to day trading, and opt for the cheapest method of starting-up by opting for free-banking and avoiding the “perceived” expense of solicitors and accountants. A lot of people still rely on “pub talk”, but the financial and legal world is changing and you could well save hundreds or thousands of pounds by taking proper start up planning advice from specialists, which often costs far less than you would imagine!
Business Legal Structure
• Sole trader, partnership or private limited company?
Most small businesses, hoping to make enough profit to live on, will save tax by being private limited companies. Unless profits are very low or losses are made, the tax/NIC savings should easily outweigh the extra administrative costs of operating a limited company.
Business Year End
• Your “financial year end” doesn’t have to be the anniversary of starting the business, nor does it have to coincide with the tax year end (5 April).
Careful choice of year end may reduce tax payable, delay its payment or enable a repayment of tax to be claimed.
• Tax repayments can be obtained if the business makes a loss in its first few months.
If you expect to make a loss in the early months, due to low initial sales, seasonality of trade, or high start-up costs, you need to consider whether loss relief can be claimed to obtain a repayment of tax paid on other taxable income.
Registration With Taxation Authorities
• You may have to register for VAT or you may benefit from VAT registration.
• You are legally required to notify HM Revenue & Customs when you start in business.
• If you employ anyone, you will probably have to register as an employer with HM Revenue & Customs.
Getting the timing right for notification to HM Revenue & Customs for starting to trade, for breaching the VAT registration threshold or for paying wages is vitally important, otherwise you will face hefty fixed penalties for failing to notify and make the right payments to HMRC who are very unforgiving even for innocent mistakes and delays!
Spouses and Family Members
• Should you “employ” your spouse, family or friends, enter into partnership with them, or make them a co-director and joint shareholder of your limited company?
In many new business start-ups, spouses and other family members are often heavily involved. Paying them a wage may reduce your tax bill, but they may not be taxed on it and could benefit from enhanced state benefits.
Proper record-keeping of all business transactions is essential to help you control your business finances. It is also a legal requirement and HM Revenue & Customs have the power to charge a huge penalty where a business has not kept adequate records. If your record keeping is poor, annual accounts and tax returns will be harder to prepare and you risk paying more tax than you need to.
Right from the first day, you should have a proper book-keeping and administration system in place, and it must be kept fully up to date at all times. If you don’t think that you will have the time to do this or may have problems doing it yourself, you should consider engaging a book-keeper.
Contact us if you were thinking of starting a business – most people will benefit from start up planning before they take the plunge.