NewBusinessGuide

Start Up

FINANCIAL, TAX & ACCOUNTING INFO FOR STARTING A NEW BUSINESS

accounts • tax • systems • support

Visi t www.mbcaccountants.co.uk for more informat ion

Visi t www.mbcaccountants.co.uk for more informat ion

contents

3

Think carefully about ceasing to be someone else’s employee. Certainty of income, both in terms of quantity and regularity, disappears, whilst fixed outgoings, such as mortgage repayments, remain. Similarly, other benefits of employment may be lost, such as life assurance cover, a company pension, medical insurance, a company car, regular hours and holidays.

Success in business depends on many factors; most important is the need to critically review all aspects of the business proposition before progressing too far. This guide highlights many of the practical points that require consideration before trading begins. It cannot cater for every possibility and decisions should be supported by appropriate professional advice.

FOR INFORMATION OF USERS This guide is published for information only. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this guide can be accepted by MBC accountants. n

Before starting upIt is the ambition of many people to run their own business. In recent years this dream has become a reality for some made redundant, whilst others may decide to start up in business to be more independent and to obtain the full financial reward for their efforts

Before Starting Up 3

Planning Your Business 4

Selecting a Legal Entity 4 for your Business

Choice of Year End 6

Accounting and Book Keeping 7

Value Added Tax 9

Payroll Taxes 12

Tax Returns and Deadlines 13

About MBC accountants 14

Look for someone who has professional accounting qualifications. Qualified accountants usually have the words ‘chartered’ or ‘certified’ attached to their title. They usually belong to one of accountancy’s professional associations. Also ask your family, friends and other colleagues to give you a recommendation. Then simply pick up the phone for a chat. Is the accountant approachable and easy to talk to? Request a free initial meeting and ask as many questions as you need to. Why not try us for a 1 hour free consultation?

10 things to ask your chosen accountant...

n What qualifications do they have?

n How can they help you?

n Are they experienced in dealing with businesses of a similar size and at a similar stage of growth to yours?

n Do they understand your business sector and its needs?

n Who will look after your business from day-to-day?

n What are their estimated response times?

n Will the service you receive be proactive? eg will they remind you when you need to submit accounts, or send you updates on changes in tax law

n Do they offer any additional services – eg book-keeping, payroll, consultancy work?

n Can they visit you at your premises?

n What are their charges and what do they cover? Find out if a fixed fee can be arranged and can you pay by instalments?

How to choose an accountant

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion4 5

Planning your business

Market research is vital. You think an idea is a good one but will other people want your product/service? Write a business plan. This is such a key step and is so often bypassed by those not required to do one by lending institutes. A business plan is an invaluable tool and forces you to get on paper all the ideas and thoughts that have been bubbling around, often for years, and will then consolidate all the strengths and potential weaknesses of your plan. Who will be your customers, your suppliers, your competitors? What do your customers want, what can you and your suppliers provide – is there a gap? If so can it be filled? What do your competitors offer? What makes you better? What do you want to achieve and

by when? And don’t forget to do financial forecasts both of profit and loss and cash flow. There is lots of help on this topic on the business link website www.businesslink.gov.uk. It is a lack of cash that forces most businesses to fold, not the lack of profits. n

Don’t shortcut the planning and research of your business. It is easy to get carried away with getting started but time and energy spent at this stage will save costly mistakes later on

One of the first major decisions you will have to make as you start your new business is the form of legal entity it will take and this decision can have a significant impact on the way you are protected under the law and the way you are affected by taxation rules and regulations

Selecting a legal entity for your business

USEFUL WEBSITESHM Revenue & Customs

www.hmrc.gov.ukCompanies House

www.companieshouse.gov.uk

SOLE TRADER/SELF EMPLOYMENTA sole trade is a business owned and operated by one individual. The profit or loss of a sole trade is combined with the other income of an individual for income tax purposes. A sole trade is perhaps the easiest form of business to own and operate

because it does not require any specific legal organisation, except the normal requirements such as licenses or permits.

PARTNERSHIPIn a partnership, two or more individuals join together to run the business. The rights,

responsibilities and obligations of partners are typically detailed in a partnership agreement. It is a good idea to have such an agreement for any partnership.A partnership is a distinct legal entity and it is required to submit a tax return in its own right although it does not normallypay income tax. The information from the tax return is shown on the individual’s returns instead.

LIMITED COMPANYA limited company is a seperate legal entity that exists under the authority granted by statute. A limited company has substantially all of the legal rights and obligations of an individual. It is often easiest to think of it as a seperate person - i.e. it needs its own bank account, is party to contracts and agreements and must file its own corporation tax return. Typically, the owners

or shareholders of a limited company are protected from the liabilities of the business. However, when a limited company is small, creditors often require personal guarantees of the principal owners before extending credit. The legal protection afforded to the owners of a limited company can beuseful. A limited company must obtain approval from Companies House to use its proposed name. A limited company must also adopt and file a Memorandum and Articles of Association, which govern its rights and obligations to its shareholders, directors and officers. Once profits reacha certain level then there can be tax advantages of choosing the limited route.

REGISTERING WITH THE TAX AUTHORITIESWhichever form you choose you will need to ensure that you are properly registered with the relevant tax authorities. There are penalties for failing to register on time. You also need to consider registering for PAYE (if you will have employees); CIS if youwill be, or will use subcontractors in the construction industry; and VAT registrationif applicable. VAT and PAYE considerations are in more detail further on. n

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion6 7

WHICH ACCOUNTING YEAR SHOULD I CHOOSE? The simplest date is the 31st March so that it is the same as the financial year. There are times when alternative dates are advantageous but for small businesses then simplicity can be the over-riding factor.

If you expect profits to rise steadily year by year, in the case of sole traders/ partnerships, an accounting date early in the tax year, for instance 30 April, might be best in the short term, because this will defer the payment of tax on your profit. However, it is important to consider what will happen when you retire. Any accounting date other than 31 March will cause a bunching of your tax liabilities because all your profit that has not been assessed prior to your retirement will be assessed for your final year.

On the other hand if you expect to make losses in your early years, an accounting

Choose an accounting date that suits you and your business

Choice of year end

Accounting and bookkeepingMost operators of a new and growing business have a flair for theenvironment in which the business operates. They may be a greatsalesperson, an outstanding mechanic, carpenter, solicitor, or inventor. Unfortunately, most people don’t like to keep the books

KEEPING RECORDS The rule of thumb is to keep everything. Start a file, an envelope, a box, whatever works for you, but keep receipts for all expenditure related to your new business activities. They won’t all be allowable expenditure and the rules are complex but your accountant can sort this out and claim for everything possible. If you are using your car or van for trips for your business then keep a simple mileage log:- date, where you went, why and the number of miles. A claim can be made for this expense based on the number of miles done.

BOOK KEEPING Your company’s books and financial statements represent a score sheet which tells how you are progressing, as well as an early warning system which lets you know when and why the business may be going amiss. These records will provide the basis for many decisions made by outsiders such as banks, landlords, potential investors, and trade creditors as well as taxing authorities and other governing bodies. The necessity for good, well-organised financial records cannot be over-emphasised. Quality financial information does not necessarily translate into complicated book-keeping or accounting systems. An accounting or book-keeping system is like any tool used

date late in the tax year, for instance, 31 March, will ensure that you get tax relief for those losses as quickly as possible. You would then not be faced with the bunching problem on retirement referred to above.

If your business is seasonal then you would not want your year end to be right in the middle of your busy period, purely for practical reasons. It may be best to prepare your first year end just short of your peak time to avoid paying tax twice on this period. These considerations are less important for limited companies where the rules are different.

As ever, it is important not to overlook commercial considerations. Your bankers might want to see as healthy a profit as you can manage and this desire could conflict with tax planning. A solution would be to choose a tax efficient accounting date, and keep the bank happy with quarterly management accounts. n

in your business; it needs to be sophisticated enough to provide the information you need yet simple enough for you to run it (or supervise the book- keeper). Questions you should ask in developing an accounting and financial reporting system are:

1. Who will be the users of the financial information? 2. What questions do I need answered to manage the business? 3. What questions should be answered for HM Revenue & Customs?

For small businesses then a manual cashbook or a spreadsheet is often sufficient, just make sure that you are recording all your expenses and that you can tell who owes you money and who you owe money to. As your business grows, you should work closely with your accountant to ensure that your accounting system is providing you with appropriate information. They may well provide a book-keeping service, so they will be able to keep your books on your behalf.

CHART OF ACCOUNTS For those who decide to use accounting software then this is the chart (list of codes) that helps establish the information that will be captured by your accounting system, and t

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion8 9

business must answer is “Who will keep the books of the business?” Will you do it yourself, will the receptionist or a secretary double as a part-time bookkeeper, will you have a bookkeeper that comes in periodically, will the volume of activity be such that a full-time bookkeeper will be required or will you ask your accountant to do them?

INTERNAL CONTROL Internal control is the system of checks and balances within a business enterprise that helps to ensure that the financial information produced is accurate and reliable.

When your company grows to the size where you must delegate some of the functions, it becomes more difficult to ensure that all the transactions are being accounted for properly. No matter what the size of your business, you should always be able to answer ‘YES’ to the following questions:

what information will subsequently be readily retrievable by the system. This needs to be dynamic and should grow as the size and needs of your business change. To help establish a good working chart of accounts you need to answer some questions, in conjunction with your accountant, as to how your business will operate and what is important to you. Some of these considerations might be:

1. Will your business have stock to account for? If so, will it be purchased in finished form or will there be production costs? 2. Are fixed assets a significant portion of your business? 3. Will you sell only one product or service or will there be several types of business? 4. Will you have money receivable from customers, which you will have to track? 5. Are you going to sell in only one location or will you do business in several places? 6. Are the products you sell subject to value added tax? 7. Do you need to track costs by department or location? 8. What type of government controls or regulatory reporting are you subject to?

Each answer to these questions will have an impact on how your chart of accounts is structured.

Another question that the owner of a

1. When my company provides goods or services to our customers am I sure that the sale is recorded and the debt is collected? 2. When cash is expended by my company am I sure we received goods or services? The method used to ensure that these two questions can be answered affirmatively will be widely varied. They are essential stepping-stones to maintaining good

control in your business. The solution may be as simple as numbering the sales invoices and being sure all invoices are accounted for or reviewing all invoices and timecards before authorising payments or signing cheques. These are fundamentals in a well-run business. As the company grows you will need to consider concepts such as segregation but these are hard to implement when you first start. n

A complex tax that creates headaches for many businesses but it is a compulsory burden for many

Value Added Tax

VAT is a tax on consumer expenditure and is ultimately paid by the final customer. Most business transactions involve the supply of goods or services and VAT is payable if they are made: a) in the United Kingdom; b) by a taxable person; c) in the course or furtherance of business and are not specifically exempted or zero-rated. VAT is collected by HM Revenue & Customs and is usually payable quarterly.

REGISTRATION There are two different types of registration - compulsory and voluntary: A. Compulsory – A person who makes taxable supplies becomes liable to be registered if: i) At the end of any month, the value of their taxable supplies in the

period of one year then ending has exceeded the registration limit. Ask your accountant for the current level. ii) At any time, there are reasonable grounds for believing that the value of their taxable supplies in the next 30 days will exceed the registration limit. iii) A business carried on by a taxable person is transferred as a going concern.

In the most common situation, i.e. (i) above, the person must notify HM Revenue & Customs of the liability within 30 days of the end of the month in which the value of the taxable supplies first exceeded the threshold. B. Voluntary In certain circumstances, it is possible to register on a voluntary basis for VAT even though the value of taxable supplies may never exceed the registration limit. This is normally only beneficial where t

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion10 11

the majority of supplies are being made to customers who are themselves VAT registered.

The other situation in which a voluntary registration might be beneficial is where the supplies are all zero-rated and no VAT is charged on the transaction. All VAT suffered by the trader on expenses can be reclaimed from HM Revenue & Customs. In summary, the advantages and disadvantages of a voluntary registration are as follows:

Advantages • enables input VAT suffered to be reclaimed; • a VAT number can give the impression that a business is larger than it actually is which sometimes can increase the possibility of obtaining work.

Disadvantages • you must charge VAT on your services which may make you uncompetitive if your customers cannot reclaim the VAT • the requirement to prepare VAT returns on a quarterly basis and to submit them within one month of the quarter end. • HM Revenue & Customs may visit the business about every five years to ensure that VAT is being properly accounted for

TAXABLE PERSONS AND SUPPLIES a) Taxable Persons – It should always be remembered that, for a sole trader, it is the

person that is registered for VAT and not the business. If a person has two separate different businesses, then the sum of the two businesses should be used to determine whether VAT registration is compulsory.

b) Taxable Supplies – Taxable supplies are all supplies made by a business either to a third party or to the trader themselves (goods for own use), which are not exempt supplies. Taxable supplies therefore include zero-rated supplies.

The major categories of exempt supplies are: • Land (but not buildings) • Insurance • Postal services through Royal Mail • Betting, gaming and lotteries • Finance • Education • Health and welfare

The four main areas of zero-rated goods are: • Food and agriculture (but excluding pet food and most catering); • Printed matter, including books and newspaper; • Young children’s clothing and footwear; • Passenger transport (but excluding hire cars, taxis and parking).

It is important that at the outset of a business, a trader establishes the VAT status of any supplies being made to avoid mistakes, e.g. the services of a physiotherapist are exempt, whilst the services of an acupuncturist are standard rated.

OUTPUT VAT Any VAT charged by the business is known as output VAT and the total charged or collected in the VAT quarter is payable to HM Revenue & Customs.

INPUT VAT Input VAT is the VAT that you are charged on your business purchases and expenses. The total input VAT suffered in the quarter is deducted from the output VAT charged or collected and the difference is either the amount of VAT due to HM Revenue & Customs or the amount repayable by HM Revenue & Customs. The majority of input VAT is recoverable but there are special rules for:

• cars • petrol supplied for private usage • business entertaining • goods sold under a VAT second-hand scheme

To reclaim VAT you have been charged as input VAT, you must hold valid evidence that you have received a taxable supply, which normally means a valid VAT invoice from a

registered trader showing their VAT number and the amount of VAT charged.

SPECIAL EVENTS VAT was originally described as a simple tax but has gradually become more and more complicated over the last twenty years with changes to the operation of VAT every year. Professional advice needs to be taken, especially in the following situations:

• Importing and Exporting - either within or outside the European Union • Partial Exemption, i.e. where a business makes some exempt supplies, all the input VAT incurred is not necessarily recoverable • Retail Schemes, i.e. where both zero rated and standard rated supplies are made which cannot be separately identified at the point of sale • Land and Property • Cash Accounting • Second-hand schemes for motor cars, used boats, antiques, horses and ponies and others. n

Jargon BUSTEROUTPUT VAT/INPUT VAT – WHICH IS WHICH?VAT on your sales invoices that you send out is called Output VAT. VAT on purchase invoicing that you receive in is Input VAT

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion12 13

Payroll taxesIrrespective of the form of business in which you operate, if you are going to have employees then you will have to contend with payroll taxes. The brief summary that follows will give you some guidance

THE OPERATION OF A PAYE SCHEME Once you take on your first employee (earning over the minimum threshold), then you will need to register with HMRC as an employer. HMRC will email you details of their online payroll system. This will help you calculate the PAYE, National Insurance (both employee deduction and employers contribution) plus any statutory payments. The tax and national insurance should be paid to HM Revenue & Customs by the 19th of the month following that in which the salaries were paid.

In some businesses, the directors, and some employees, have benefits that are not immediately taxed through the PAYE system, the most usual being the provision of a car and possibly fuel. Class 1A national insurance contributions are due on the taxable value of these benefits in kind and are due on the 19 July following the fiscal year in which the benefits are made available. A form P11D must be completed which details these additional benefits.

DO YOU HAVE EMPLOYEES Don’t get caught out, whether an individual is an employee or not in a particular situation is a question of fact depending on the terms on which they work. It is a crucial distinction for the business ‘employing’ him or her, as that business has to comply with the

reporting requirements and will be liable for any PAYE and national insurance due.

HM Revenue & Customs has issued leaflet IR56 entitled ‘Tax: employed or self employed’. This booklet sets out the questions that should be answered to determine the problem.

Many businesses decide to outsource their payroll administration to a specialist payroll bureau. Ask your accountant for estimates of costs to provide such a service. n

This chapter does not cover all the tax ramifications of a new business, nor does it detail all the expenses you can claim for, nor does it give details of allowances available on the purchase of some capital assets. A Chartered Accountant should be consulted when you are dealing with the taxation affairs of the business. The payment of taxation has a direct impact on your cash flow.

SOLE TRADERS/PARTNERSHIPS Sole traders and partnerships are charged income tax at the rate applicable during the fiscal years (6 April - 5 April).

There will also be a liability to Class 2 and Class 4 National Insurance Contributions, depending on the level of profit in each fiscal year. Class 2 contributions are at a weekly rate generally paid quarterly.

A self assessment tax return must be submitted by the 31 January following your year to 5th April (this date is earlier if not filing electronically).

Any tax you owe from your first trading period will be payable on 31 January and then usually you are also asked to pay a further 50% of this amount as a payment on account towards the following years tax bill. A second 50% is then payable by the end of

Tax returns and deadlinesEventually you will have to deal with income or corporation taxes. The taxation legislation is extensive and can be confusing for an individual starting a business

July with the balance for your second year due by the following January. Make sure you build these payments on account into your cashflow else you can really get caught out especially in your first year.

TAX RETURNS – COMPANIES Companies are charged corporation tax at the rate applicable during the financial year (1 April - 31 March). Where a company’s accounts period spans two financial years the profits for the period are apportioned between the years. A company is required to make an estimate of its own liability to corporation tax and pay that liability by the normal due date, nine months after the end of the accounting period, without an assessment being raised.

The company is required to send its completed tax return (form CT600), accounts and tax computation to the Inspector by the filing date, which is 12 months after the end of its accounting period. Penalties will be charged if it is late. Once the company agrees its liability with the Inspector, there will be a settlement of any balance due or overpaid. Interest will be charged or paid from the normal due date on the balance. n

Telephone MBC accountants on 01837 55482 / 01392 590068 Visi t www.mbcaccountants.co.uk for more informat ion14 15

About MBC accountantsMBC accountants offer expert yet friendly Accountancy, Tax, Bookkeeping and other essential services for businesses. We offer our clients a first-class service which makes life easier for you, the business owner, allowing you to focus on your business

From MBC accountants you can expect • Fixed Fees • Six Week Turnaround • Office or Home Visits• Friendly and Approachable

SERVICES OFFERED Start up Support We can offer you the advice and support you need to get started and help your business grow in the initial stages answering all of those questions in a way that will offer maximum benefit to you and your business. We can help you prepare a business plan for your bank and with any funding applications (including detailed profit forecasts and cashflow projections). You do not need to feel alone, our team of professionals will offer friendly and accurate information to allow you to make informed and confident decisions. We understand that starting up in business is incredibly exciting but at the same time can be terrifying!

Tax returns and year end accounts We offer a full year end service for all types of business, preparing all necessary accounts for HMRC and Companies House. We will also complete your tax returns and advise you on how to maximise your profits after tax.

Day to day accountancy services We can look after all aspect of your finances, to ensure the smooth running of your business.

Book-keeping and VAT Returns Preparing all aspects of your book- keeping to include supplier invoices, sales invoices, cashbook, credit control and bank reconciliation. This means you will have accurate financial information at any time.

Management Accounts These can be prepared weekly, monthly or quarterly so you know where you are with accurate figures on which to base your decision making.

VAT Getting you registered, and then completing your VAT returns accurately and in accordance with HM Custom’s requirements.

Payroll If you employ people then calculating the monthly payroll and producing the pay slips can be a chore. MBC accountants will complete all the necessary calculations, prepare payslips and complete all submissions on your behalf.

Company Formations and Secretarial Services All very competitively priced. Same day incorporations also available.

Benchmarking and Efficiency Reviews We can facilitate a complete overview of your business to incorporate reviewing your management information and your processes.

Project Management If you require extra resources for the management of a particular project, then consider engaging us to provide the extra resources you need. Administration Services We can provide a full range of general administration services. This may be for ad hoc projects or to cover illness, holidays, or just a busy period. We can bring work in-house or provide support at your premises. Contact us for further details.

Software Training We can train you on Quickbooks or Xero to whatever level you need. We offer preferential rates on Xero software.

THROUGH OUR PARTNERS WE CAN ALSO OFFER Web Site Design We can purchase your domain names and get you up and running with a website where you can manage the content yourself through a simple to use control panel.

Corporate Identity, Logos, Stationery We can create the whole visual identity for your business, providing signage, window lettering, stationery, leaflets, brochures and can also take photographs for your website or printed material. Whatever you need to attract as many customers as possible, we can provide for you with a friendly and personal service. n

We are here to help you

MBC accountants The Generator Building,13 Dix’s Field

Exeter, Devon EX1 1QA

01392 590068fiona.rook@mbcaccountants.co.uk

accounts • tax • systems • support

www.mbcaccountants.co.uk

If you are interested to find out more about how we can work together, call us to arrange a FREE ONE HOUR CONSULTATION

or visit www.mbcaccountants.co.uk

Company Registration No 5072185 England and Wales

MBC accountants Jacob’s Pool House, 11 West Street

Okehampton, Devon EX20 1HQ

01837 55482claire.tucker@mbcaccountants.co.uk

MBC accountants is the trading name of My Business Centre Limited