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Free Guides for new and growing businesses from HRBS - fixed fee accountants and business advisors

Thinking of starting a business?

hrbs.biz guide to starting a business Thinking of starting a business?If you are turning a hobby into a business or starting a whole new venture, here are some tips to help you get up and running without falling foul of the (UK) tax authorities.

Bear in mind that your self employment income will be added on to your income from all other sources when calculating your tax bill.

However, if you make losses you can offset those against your other income for the tax year, thereby potentially getting a tax refund.


Registering with Inland Revenue (now HMRC)

You will need to register with HMRC as a new business by 5 October following the end of the tax year you need to send a tax return for. If you started your business in the tax year ended 5 April 2014 (the 2013/14 tax year) you need to register by 5 October 2014 and submit your self assessment tax return by 31 January 2015. Registration is quite simple and can be done online here or over the phone on 08459 15 45 15. You will need to register for class 2 NIC at the same time.

HMRC will send you a 10 digit Unique Tax Reference (UTR) which should be used on all correspondence with them. As soon as you get your UTR, we recommend that you register for Self Assessment Online at https://online.hmrc.gov.uk/registration. You will be able to submit your tax return and check your tax bill and payments online.

National Insurance (NIC)

You’ll need to pay Class 2 NIC and depending on your profit level, Class 4 NIC. However, if you have another job, you may be able to claim exemption from Class 2 if you earn more than the upper earnings level in the other job, but will still need to pay 2% Class 4. There is a HMRC guide here and the National Insurance rates and thresholds are here.

Tax Return

You will need to complete a tax return declaring all your income (employed, self employed, interest/dividends receivable etc). If turnover (ie sales) is less than £77,000 for the year, then only turnover and deductible expenses need to be shown on the tax return. Tax returns must be submitted online to HMRC by 31 January or paper returns by 31 October.

Tax returns can be completed and submitted online using HMRC’s own tax return software. It is straight forward to use and covers most circumstances. Alternatively, tax return software such as TaxCalc can be used. If you prefer, your accountant, can complete your tax return for you. To keep costs as low as possible make sure you give your accountant all the information they need and don’t leave it until too close to the deadline as your accountant will probably be very busy and will usually pass on costs of weekend and evening working to you in the form of a higher fee.

We have a useful checklist here on our website at http://hrbs.biz/taxreturnchecklist for you to use.

Expenses which can be claimed in the accounts are discussed in our article at http://hrbs.biz/tax-deductible-expenses .

Money taken for personal use is not tax deductible and your tax bill is dependent upon your profits and not how much you have withdrawn from the business. eg if you pay yourself a “salary/wage” of £1,000 per month, this is not tax deductible and is not shown as wages/salaries/staff costs in your tax return.

Tax payments

Tax is paid in 2 instalments, in January and July. The January payment represents the balance due for the previous tax year plus a payment on account of half the estimated amount for the current tax year. The July payment is the other half of the estimated liability. For established businesses the payment on account is usually based on the previous year’s tax bill. If your profits are decreasing, you can claim to reduce the payment on account. If you have reduced it too far, you will be charged interest.

We have a guide here on our website which explains how payments on account are calculated at http://hrbs.biz/poa.

Bank account

A separate business bank account is strongly recommended to keep your personal and business affairs separate. This makes accounting and identifying relevant expenditure/income much easier and cheaper in terms of time/money in the long run. It also keeps your personal affairs private as your accountant needs to identify and confirm all the transactions in the bank account. Using a separate account for your business keeps the questions purely focussed on business transactions.

Many online accounts applications can import the downloaded bank statement files from your online banking which saves time and potential errors through omitted and/or mis-typed transactions.

Book keeping/Accounts

You will need to keep books/accounting records for several reasons including helping you to run your business effectively and efficiently and to identify when you need to register for VAT.

Book keeping includes keeping track of sales, debtors (money owed to you), costs, creditors (money owed by you), cashflow [very important, many profitable businesses fail because they run out of funds], stock levels etc and most importantly, profitability. You will also use these records to prepare your accounts figures to include on your tax return.

Book keeping can be relatively straight forward and there are numerous desktop accounting packages for small businesses eg Quickbooks, Sage etc.

At HRBS we provide a choice of online book keeping via our partnerships with Clearbooks, Kashflow, and Liberty Accounts.

We recommend the use of accounting software if you are VAT registered due to it’s ease of use and the facility to file the VAT return online from within the software.

A spreadsheet can also be used for “cash based businesses” ie businesses who get paid upon issuing an invoice, so that they do not need to keep track of outstanding, unpaid sales. We do not recommend spreadsheets for VAT registered businesses due to the number of errors we see and the potential complexity of the VAT return if there are overseas sales and/or purchases.

Accounting records must be kept for 6 years.

VAT

As a brand new business you may not need to register for VAT straight away, as the threshold for registration is £79,000 (changes to £81,000 in April 2014). Read our articles at http://tips.hrbs.biz/vat/ for more information on VAT, registration, Adwords and Adsense, and the various schemes available as it does not always depend upon your level of sales, particularly if you buy and sell overseas.

Good luck with your new business!

Guide updated March 2014

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