- Choose your business structure
Your business structure is the legal entity that your business will operate under. It will determine how, when and potentially how much tax you pay. There are a number of options, but the three most common are sole trader, partnership or limited company.A sole trader is the simplest solution- under this structure there is no separation between you ‘the individual’ and ‘you the business’. There is no legal separation between the two entites. You pay income tax on your business’ profits, and the business’ debts are your debts.A partnership operates in a similar form- you are responsible for your %age of the partnership.A limited company is a separate legal entity to you ‘the individual’ – The company’s debts are the company’s debts, it must have a bank account in it’s own name and you ‘the individual’ run the company as a Director and own it as a shareholder.
- Know which tax returns you need to file and when
As a sole trader or partnership your financial year will end of the 5th of April. If you register part way through the year, it will still be the above date- E.G if you register from 1st October 2020 your first period will run 1st October 2020 to 5th April 2021.A sole trader will need to file a Self Assessment Tax Return by the 31st of January following the end of the year- E.G the return for period ended 5th April 2020 will be due by 31st January 2021.A partnership will need to file a Self Assessment return with the same deadlines. It’s important to note that not only will a return need to be filed for the partnership, each partner will also need to file an individual Self Assessment return.A limited company is slightly different. Ordinarily the financial year will end at the end of the month the following year – EG if you incorporate on 8th September 2020, your first financial year end will be 30th September 2021, and then the 30th of September in every following year. The company will need to file a corporation tax return no later than 12 months after the end of the financial year. The company will also need to file accounts with Companies House and complete a confirmation statement annually with Companies House. You are, however, able to change your year end date if you wish.
If you operate your business as a limited company you are likely to draw personal income from the company as dividends- if you do this, you are likely to also have to complete an individual self assessment return covering the same periods and deadlines as the sole trader and partnership.
There are other taxes to consider. If you employ people you will have to also file PAYE) returns weekly/monthly (depending on how often you pay them) If your company’s sales are over £85,000 you will have to register for VAT, charge VAT to your customers and file VAT returns quarterly.
- Keep Your Records
Make sure that you keep a record of your incomings and outgoings and retain business receipts and invoices. HMRC are able to request to see documentation going back 6 years. You can keep your records in a number of different ways- a simple spreadsheet. Cloud accounting/bookkeeping software such as Xero, FreeAgent or Quickbooks is also readily available and affordable – they tend to operate on a subscription basis.Good record keeping not only helps ensure everything is being captured accurately but really helps with the next point!
- Get to know your numbers
Review your profit or loss regularly as well as your cash flow. Good record keeping will help with this, and the ease that the online accounting packages integrate with your bank feed or other applications make it so much simpler than in days gone by.Reviewing your numbers will let you know a wide range of useful things- is your business profitable? If not why not? If not when will it be? How many units do you need to sell to break even? Do you have enough cash to cover the start up process? If your business is profitable then what does this mean for your tax bill? Are there any ways you can reduce your tax liability? Are you spending too much on something and is there an opportunity to change suppliers to get a better rate and increase profitability?You can calculate everything once the year has finished, and still meet return and payment deadlines but by then it will be too late to answer many of the questions above.
- Consider hiring an accountant
It’s easy to get overwhelmed, and whilst you don’t have to be a qualified accountant to be able to file accounts and tax returns, (unless your new business is accountancy) it’s unlikely you’ve started your business to do all of these accountancy tasks!
Hiring an accountant is one way to outsource a lot of things that you have to do, but don’t want to do. Working with an accountant will buy you time, make sure you’re compliant and offer you peace of mind and let you concentrate on what you do best- running your business.
Check with your business contacts for recommendations, shop around and find someone who fits with you. Don’t be intimidated, embarrassed by any perceived lack of knowledge or afraid to ask questions, we’ve heard them (mostly) all before.A big thank you to Lloyd at Llama Accounting for sharing this information with us.