Do You Have What It Takes to Start a Business?
Whilst there are approximately half a million people who start up a new business each year, there are a similar number of businesses that for a wide variety of reasons, cease in the same period. Whilst some of these are for unavoidable reasons it is a sad fact than many new businesses do not survive for more than a year or so. Planning and an honest self-appraisal of both the business and one’s talents are therefore essential.
Why Self-Discipline Is Essential for New Business Owners
You must be prepared to spend a lot of time on your own, working in solitude and often outside normal working hours. As the business progresses, you will work in the company of others and have the responsibility of being the one to whom they will look for guidance and motivation.
Why Determination Drives Business Success
You will almost certainly encounter some difficulties that cannot possibly be predicted and will therefore need plenty of determination to get the business off the ground and perhaps more importantly to keep it running successfully. These occasions will bring their own problems and personal determination and the willpower to succeed are invaluable.
Understanding Your Responsibility as a Business Owner
The well known saying “the buck stops here” is true for the proprietor of any business, particularly a new one. Such responsibility must be realised rather than feared, and the support of one’s family will be extremely important. If the business is started with others such responsibility will of course be shared but this brings the added necessity of being able to work together as a team.
How Imagination Helps You Outperform Your Competitors
The reason why you are contemplating starting in business should be thoroughly examined. It is most unlikely that yours will be a business without competitors and therefore imagination will be necessary at the outset to consider the possible gaps in the market that could be filled by your business. Continued imagination will therefore be necessary to ensure that you stay ahead of most, if not all, of the competition. This may be achieved by trying to put yourself in the shoes of your potential customers, trying to anticipate what they are looking for and then to plan how best to deliver the services or goods you offer.
Do You Have the Skills and Ability to Run a Business?
Do not automatically assume that you have the necessary skills to make your business a success. There are many skills needed to run a successful business, including marketing, selling and financial control. Whilst much can be learned from quality books, courses etc., it is essential from the outset that you, the proprietor, know your own strengths and weaknesses and are prepared to make every effort to continually improve. Before making any irrevocable decision to start a business it will be necessary to draw up a business plan.
Sole Trader, Partnership or Limited Company: Which Is Right?
The alternatives when you start in business, or need to consider a change in how you operate, are to become Sole Proprietor, to form a Partnership with others or to form a Limited Liability Company. A Sole Trader or Partner is liable for the debts of the business to the full extent of his personal assets and can in the extreme be made bankrupt. A company shareholder’s liability is normally limited to the amount already paid as a share capital and any unpaid sums still due on his shares. Protection of private assets is usually one of the main reasons for trading through a company. However, lenders, landlords and sometimes suppliers can require directors to give a personal guarantee in respect of the company’s obligations, which reduces significantly the benefit of limited liability.
There are also major compliance requirements for a company under the Companies Act, including the need to prepare and publish possibly audited accounts which must be sent promptly to Companies House. The accounts of a company whose annual turnover is £6,500 or less need not be audited.
As a Sole Trader or Partner you will pay Income Tax at 40% on all income (after personal allowances and other tax reliefs) in excess of £50,270, whether you leave the profits in the business or withdraw them. This threshold is available to both a husband and wife and this is one of the criteria to be kept in mind in considering whether a partnership between husband and wife could be attractive. But if you are a controlling Director-Shareholder you can decide how much profit to take in the form of remuneration or dividends and on this you will suffer Income Tax: and on how much to leave within the company to be taxed at Corporation Tax rates on profits is only 20%.
How to Register Your New Business with HMRC
It’s necessary to inform the Inland Revenue and the Department of Social Security of the commencement of a new business, and the completed form is sent to the DSS at Newcastle (CWF1). This particular form however only applies to those who are self-employed, including partners, and a separate form (GT41G) is necessary for newly incorporated limited companies.
It’s important to inform the DSS and Inland Revenue of the commencement of a new business relatively soon after it has started. Under self-assessment to Income Tax there are penalties for notification beyond 30th September of the tax year after that in which the business started. If you have employees you will need to deduct appropriate Income Tax and National Insurance Contributions and will therefore need in place a PAYE Scheme. Application will need to be made to the Inland Revenue to effect such a scheme.
Accounting and Bookkeeping Requirements for New Businesses
In the case of a Sole Proprietor, and or partnership, there are no specific statutory requirements determining the nature of the accounting records to be maintained, nor the date to which one should prepare annual accounts. Indeed, under self-assessment there is no longer a requirement to submit to the Inland Revenue a copy of one’s accounts as the appropriate detail must be entered on the official Tax Return Form issued each April.
PAYE and Tax Obligations When You Hire Employees
It is important to remember that if you have an employee there is a statutory obligation upon you the employer to operate a PAYE Scheme with the deduction of the appropriate PAYE and NI liabilities, and the total liabilities must be paid over to the Inland Revenue, usually on a monthly basis. This obligation and expense can be considered by some to be extremely onerous and is frequently sought to be avoided.
CIS Scheme: What You Need to Know as a Subcontractor
You may well need to work as a subcontractor for a firm in the construction industry. If so, you will need to get a CIS number. Your contractor will need to clear your CIS number with HMRC, and then deduct the relevant CIS deduction (normally 20%).
How Is Business Profit Taxed in the UK?
A set of accounts for a business will be prepared in order to try and show accurately the trading profit that has been achieved. Indeed this is the principal purpose of preparing accounts and these accounts are then useful in agreeing with the Inland Revenue the taxable profit. Certain items included within a business Profit & Loss Account will be treated differently for taxation purposes i.e Depreciation, Business Entertaining, Office Use of Home and Expenditure that is not “Wholly & Exclusively” Incurred for the Purpose of the Business.
VAT Registration and Returns: A Guide for New Businesses
VAT is charged on the supply of both goods and services in the UK and on import of goods and certain services into the UK. It applies where the supplies are taxable supplies made in the course of business by a taxable person.
A VAT registered business must complete a quarterly VAT Return Form. When the VAT registration certificate is issued it will show the quarterly VAT accounting cycle allocated by the Custom & Excise, although it is possible to request a particular quarterly cycle that perhaps coincides with an already chosen year end date.
All supplies of goods and services will fall into one of the following VAT categories:-
- Standard-Rated
- Zero-Rated
- Exempt
- Outside the scope of VAT
Any VAT incurred by a VAT registered business on expenditure related to the supplies of either standard or zero standard supplies can be recovered in full. However there are restrictions on the recoverability of input VAT by a business that has turnover that is either deemed to be exempt outside the scope of VAT.
UK Tax Implications for Overseas Business Owners
The liability to United Kingdom taxation is dependent upon one being classified as being within jurisdiction of our taxes. An individual’s liability to UK tax depends on where he is resident, ordinarily resident and domiciled. For a Limited Company ordinary residence and domicile are not normally significant and company’s tax liability depends, usually, only on its residence.
Residence is a question of fact and usually requires physical presence in a country. The residence of husband and wife are determined independently. It is possible for an individual to be resident in more than one country for tax purposes. Ordinary residence is broadly equivalent to habitual residence. You are regarded as remaining abroad unless the absence spans a complete tax year.
Pension Planning for Self-Employed Business Owners
State pensions are recognised as providing an inadequate income in old age, even though employee’s pensions can be boosted with SERPS. With an ever decreasing proportion of the population in the UK working and therefore funding the Social Security Benefits, including pension, of an ever increasing proportion of the population that is retired, the future for state provided pension benefits is not encouraging. The government therefore gives generous tax treatment to an Occupational Pension Scheme. The premiums paid into an approved pension scheme, subject to certain limitations, are allowable for Income Tax purposes in the hands of the payer and the investment fund in the hands of the pension company will grow completely free of all taxes.
For self-employed businessmen and employees of private companies (including directors) the normal method of pension provision is what is called a money purchase arrangement. Premiums are paid in accordance with the statutory limits and on the chosen retirement date the value of the pension fund is available to provide appropriate retirement benefits.
Selling or Passing On Your Business: Tax and CGT Explained
There will come a time in the development of any business when the Proprietors start to contemplate a possible disposal. This may be for a wide variety of reasons, and need not necessarily be associated with a potential retirement. If the business is conducted through the medium of a Limited Company a choice will need to be made regarding the possible sale of the shares in the company or whether the company itself should dispose of its business and associated assets.
Individuals who have reached age 50 at the point of sale are eligible for comparatively generous retirement exemptions from Capital Gains Tax. In effect the first £250,000 of taxable gain is completely free of CGT and one-half of the gains between £250,000 and £1,000,000 are similarly tax free.
