Help Sheet for Businesses
Help Sheet for Businesses
Published: Aug 19, 2015
By: Tim Birkett
We have prepared these notes as an aide memoire for business owners to highlight some of the do’s and don’ts when running a business. These notes are not exhaustive and experience has taught us that every business is unique. You should always take proper advice if you think you may have a specific problem. As a general guide, however, I hope you will find these notes useful.
Types of Business
There are three basic formats when setting up in business:- - Sole-Trader (ie, self-employed); - Partnership (two or more individuals in business together); - Limited Company.
The Sole-Trader format is the most suitable model for individuals starting out in business who are not risking significant capital and who are not exposing themselves to large trade creditor accounts. Tax is payable on the profits earned by the business before the proprietor takes any wages or drawings. This is an important aspect to remember; the individual is taxed on profits earned, whether or not they are drawn from the business. A proprietor’s own wages do not count as a tax allowable cost of the business. In law the sole-trader business and the proprietor are as one entity; there is no legal separation.
Tax is payable on the 31 January annually. If the tax liability is more than £1,000 payments on accounts also have to be made on 31 January and 31 July. For example if, for the first year of trading ended 31 March 2014, a sole-trader had a tax liability of £3,500 the tax payments would be as follows:
- 31 January 2015 £ 3,500 - 31 January 2015 £ 1,750 - 31 July 2015 £ 1,750
If the total tax liability for the year ended 31 March 2015 was £4,000 the next tax payments would be: - 31 January 2016 £ 500 - 31 January 2016 £ 2,000 - 31 July 2016 £ 2,000
Confused!! That’s what we’re here for.
Accounts are prepared as for sole-traders, except that the profits are assessed on each partner according to the percentage of the business they own or the percentage split which any partnership agreement dictates. Partners, not the partnership, are responsible for their own tax liability.
A partnership does not have limited liability and the individual partners have equal and several liability for any debts of the business. That is to say any partner can be made to be personally liable for business debts run up by another partner. Partnerships therefore need careful consideration and appropriate legal advice should be sought before joining or establishing any partnership business.
The tax on a partnership share is calculated on the same basis as for sole-traders.
This is an ideal business vehicle for growing businesses, for those that carry financial risk, or for two or more people joining in business who wish to limit their personal liability.
A limited company is owned by the shareholders. Any number of shares can be issued by a company (subject to any restrictions by its Memorandum and Articles of Association). The shareholders can vote at meetings and appoint the directors; whose responsibility is to manage the company. With “small” family companies the director(s) are normally the shareholder(s), but they do not have to be. For example, an investor might create a company and own all the shares and appoint a director to manage the company for him. A shareholder/director has three options by which he may extract funds from his company:
By salary, subject to PAYE; By dividends, if there are sufficient identifiable after tax profits available; By repayment of any loans paid to the company by the director.
Directors should avoid overdrawing their loan accounts with the company as there are punitive tax charges on the company and the director for doing so.
Benefits (company cars, medical insurance, etc.) can also be provided by the company. Complex tax rules apply to remuneration and benefits and professional advice should always be sought before agreeing remuneration packages. For example, tax on company cars can be punitive (for the employer and employee) and there are other tax efficient alternatives to legitimately avoid these tax charges.
In simple terms, companies pay tax at 20% on profits up to £300,000 p.a. and 21% thereafter. All companies will only pay 20% corporation tax for accounting periods starting after 1 April 2015.
A business entity must register for VAT when its turnover (sales income) reaches £81,000 (with effect from 1 April 2014) within any moving 12 month period, which is not the same as the annual accounting period. With effect from 4 January 2010 the standard rate of VAT is 20%. Certain businesses have zero rated supplies (butchers, bakers, etc) but they can still recover “input” VAT on their costs (material purchases, stationery, telephone, motor expenses, etc.). VAT is one of the most complicated taxes with pitfalls for the unwary. We would always recommend you seek professional advice to determine when the need for VAT registration arises or, indeed, whether it is beneficial to voluntarily register for VAT if under the threshold. This is usually advisable of most of your customers are, themselves, VAT registered. As a general rule, if you supply the general public then you should defer registration until absolutely necessary.
Help and Advice
There is free and subsidised help available to new and growing businesses. Here are some pointers for you:
A valuable resource of information on taxes and benefits, clearly presented. Not like a lot of government websites!
Companies House www.companieshouse.gov.uk
A good place to look if you want to check if a company name is available or if you want to check up on your competitors. Birkett & Co are able to download the atest filed accounts, annual return and lists of shareholders and directors within minutes.
HR Advice www.jcv-consulting.co.uk
If you need help with personnel issues, either creating employee contracts (a legal requirement) or navigating the minefield of employment law, then give Joy Craddock a ring. She has a proven track record of helping employers deal with employment law problems and planning to avoid them in the first place.
After 20 years working in business and commerce and 20 years in practice, I have learnt that the most durable method of attracting business is personal networking. People don’t buy from businesses, they buy from other people. Just talk to people about what you do as much as you can, but don’t dominate the conversation! You don’t need to sell directly, just talk passionately about what you do. People remember this and, even if they don’t use your business, they might tell other people who will. It does take time, but a genuine desire to help other businesses, especially start-ups, will generate business over time.
Love what you do, give a good service, give value for money and don’t be afraid to ask for what you’re owed when it’s due.
If you would like a no obligation 30 minute discussion then please contact us.
comments powered by Disqus