The questions a start up business need to ask
It can be a daunting thing going into business as a start up. You have the passion and the drive, but are you starting in the right direction?
Do you know what is the best structure for your business?
Here are some tips on what to ask your accountant to make sure you’re heading the right way to success!
1 – What structure is best for my business – sole trader, partnership or limited company?
This is the most asked question by start-up businesses. It has to be right from the start. Approximately 650,000 new limited liability companies formed in the year to 31 March 2017.
Why do so many businesses opt for this format? The reasons can include:
- Potential savings of tax and national insurance contributions (NICs) in a limited company format. Dependant on the setup of the business, and its projected profitability.
- It can minimise the risk of personal loss if something were to go wrong.
- Shares can be transferred to new owners.
The alternatives to limited liability are
- Sole trader – trading as an individual
- Partnership – sharing management of the business, and profits (or losses) with others
- Limited liability partnership.- where some partners have limited liability
There can be drawbacks to limited companies such as issues of control and the extra administrative burdens.
2 – What records do I need to keep for the HMRC?
The records kept by a business are to meet many requirements:
- Financial management of the business. For example keeping track of the business’ profitability and cashflow
- Statutory purposes. Such as filing accounts of a limited company or, if called upon, to complete returns for government statistical purposes
- For assessment and payment of taxes – income tax, national insurance or corporation tax and if HMRC requires, to inspect the records
- If the business is registered for VAT, to enable it to make returns on time and if HMRC requires, to inspect the records
- Payroll records. For payment of employees, making returns to HMRC, paying over taxes and making payments for deductions such as pensions
- Payment of suppliers and collecting payment from customers
- To provide financial reports to the business’ owners and to finance providers.
At a meeting, there would be a discussion how the start-up could meet these various requirements. How much should the business owner do themselves? How much it sub-contracts or employs people to do?
This would include the extent to which the business uses computer software to ease record-keeping. It should also cover safe storage of records as well as how long records are kept.
3 – Who do I need to notify about my new business, and when?
The main body to notify when you begin trading will be HMRC whether for taxes, national insurance or VAT.
Sole traders and partnerships must notify HMRC when they begin. This must be done before the 5 October following the end of the tax year in which the business started.
Failure to do so in the appropriate time-frame can lead to penalties and fines imposed by the HMRC.
When a limited company is formed Companies House will notify HMRC. HMRC will send the formed company a form that must be completed and returned within three months of issue.
On commencement you may choose to register for VAT.
In any event, you have to register once you reach the threshold for compulsory VAT registration. This threshold is revised every tax year, and is currently £85,000 in the previous 12 months.
Depending upon the nature of your business and where you are operating from, there may be others you should notify, such as your local authority.
If working from home you may have to notify:
- The local council – whether you are required to pay business rates
- Your mortgage company (or at least check your mortgage allows a business to operate from the mortgaged premises)
- Your house and contents insurance companies (or check whether they offer any cover for the business assets)
At a meeting with their adviser, a business can discuss their obligations if they are in doubt. The adviser can also help to prepare the necessary paperwork.
4 – When will I pay my first tax bill?
This is dependent on:
- The business format chosen
- The accounting date of the business
- The profitability of the business
- Any capital expenditure (such as office equipment) purchased.
On a tax return, the self-employed declare their income and expenditure each year. Income tax and national insurance contributions are payable on the profits on 31st July and 31st January. Payments will include estimates on account for the following income tax year.
Companies complete a corporation tax return and annual accounts, and submit to HMRC. Small companies pay corporation tax nine months after the year end.
It is advisable to prepare accounts as soon as possible. Whether a sole trader or limited liability company format is chosen. This is so that any liability for taxation can be calculated.
The amount and timing of the tax payment can be factored into the cashflow and a decision taken if finance is required to meet the payment on the due date.
Accounting firms will send their clients a letter outlining the tax position of the business. These amounts are specified after preparation of the annual accounts and will include payment dates.
A fuller understanding of the tax position is possible in a meeting.
5 – When do I need to involve an accountant? And how much will it cost?
Most businesses have an adviser to undertake preparation of a set of financial accounts and the relevant tax returns. Their charge is dependent upon the accuracy of the records kept by the business and the time taken to do the work.
At a meeting an accountant will explain the basis of its charges and how it expects clients to pay – whether monthly, quarterly or annually. The firm may offer a fixed fee for first year or quote illustrative fees charged to existing clients in similar businesses.