Starting and running a business is a daunting prospect for a large number of people. Often it is usually due to loss of employment or a change in personal circumstances. Most people see it as a leap into the unknown, but nothing can be far from the truth. There are some things you can do upfront to load the dice in your favour. This article will discuss ten things you need to consider before opening your doors and starting trading.
Deciding on the structure of your business is a very important decision. Are you going to operate as a sole trader, a limited company or in a partnership? Each company structure has its statutory reporting requirements and different levels of liabilities. If your projections indicate your annual profits are under say £20,000 and your operations do not require significant borrowing then a sole trader could be ideal. On the other hand, you are accepting liability for any business debts which could put your family home and personal assets at risk. Your accountant will be able to provide guidance on choosing the right structure for you, based on your plans for future expansion and personal risk appetite.
One of the vital keys to your business’ survival is cash flow. Keeping the money coming in from your customers is the reason you are in business. How do you track who owes you what and when they need to pay? You use invoices. Invoicing allows you to keep track of payments received and the ability to identify any outstanding payments. Implementing a payment policy along with invoicing will ensure all your clients know:
Invoices must contain business information including name, address, unique invoice number, name and address of the customer, breakdown of costs, total amount being charged and VAT amount if applicable.
Opening a business bank account is not a requirement when you are operating as a sole trader. However, separating your business and personal finances is highly recommended. Having a clear separation of business cash from your personal finances means you can determine exactly how much cash your business is generating. Also, it makes keeping records for business transactions and for bookkeeping purposes that little bit easier. Open a separate current account that you will use only for receiving payment and making your business purchases.
If you have registered as a limited company, then it is a legal requirement to apply for a bank account in the business name. Since your business is a legal entity in its right, and there is limited ability to what the “business” owns, there is a requirement to have a separate bank account.
Bookkeeping is a way of keeping track of your sales and expenses. When you do some work or make a sale, and you issue an invoice, you write it down. Your chosen bookkeeping method be in a book, using a spreadsheet or specialised bookkeeping software, they all do the same. The goal is to have a record of all business transactions, expenses, sales and a way to add up incomings and outgoings. The main goal is to start as soon as you start trading otherwise trying to figure it all out in retrospect can prove quite a challenge. A good accountant will sit down with you and explain the available systems and what’s best for your type of business. Deborah and her team often help clients set up bookkeeping systems that make producing annual accounts a bit less challenging.
According to the laws of the land, profits from any business transaction, require tax to be paid. If you are starting out as a sole trader, you have to notify the HMRC of your activities and obtain a unique tax reference. In effect, you are self-employed and, therefore, responsible for paying your tax. You will now be required to complete a Self-Assessment Tax Returns every year. Your records from your business activities will help immensely in getting done. You may also register for VAT voluntarily if you think your trading will take you over the threshold, currently £82,000 per year. Failure to notify the HMRC and paying appropriate tax may lead to fines.
Tax and expenses are probably one the most difficult subjects to understand for small business owners. Whether you are running a limited company or setting up as a sole trader developing a deep understanding of tax deductible expenses can save you a lot of money. Your accountant will guide you through the process and advice on what you can or cannot claim as an expense. Below are a few examples of the expenses you can claim tax relief against:
It is worth seeking the advice of an accountant because some elements have to be expenses incurred “wholly” during business and not partially.
Accounting, Bookkeeping and Taxation are evidence based activities. Keeping books and having balancing accounts will not mean anything in the event of a tax investigation when you cannot produce the receipts to prove the numbers in your records. Ensure you keep all your receipts either physically or scanned/photographed and saved in digital format.
Receiving itemised receipts whenever you make business related purchases cannot be stressed enough. Other relevant records to keep include:
From the day you open your doors and start trading there is one guarantee you have, you are going to need to pay tax at some point. When you are an employee your employer sorts out your tax liabilities, and you never have to worry about it, unless when you pay too much and you want some back.
When you are self-employed or running a business then paying tax becomes your sole responsibility. Start saving for tax from the very first month you begin trading. Setting aside 20% of your earnings to go towards the tax bill is a very sure way of making sure you can afford the tax bill when it arrives. Not saving for tax a very common mistake more businesses make, do not be caught out.
You can use a personal ISA to save the money and put it to work while it waits to be collected by the taxman.
You are probably wondering what you have got yourself into by making the bold decision to start a business. It may sound daunting all the things you need to think about, but you don’t have to face it all alone. Your business needs your full attention at this infancy stage without the distraction about taxes and accounting. The friendly team at Deborah O’Donnell Chartered Accountants can help you navigate the taxation minefield and keep you in compliance. Give us a call to talk about your business, we would love to talk to you.
Posted on August 4, 2015