Start-up Sunday: Week 5 - Self Assesment, PAYE & VAT

Good Morning and welcome to Week 5 of our Start Up Sunday series.

Today we are going to touch on the subject that you have all told us scares the living daylights out of you. We are limited for space and taxes is such a wide ranging subject that I will touch on the most common problems or fears. If I do not cover anything you need to know, just leave a comment and we will pick it up at the end of the series. We all like to know how we are doing, so please leave us a comment and tell us what you like or would like to see being featured.

Self Assessment:
When you actually start your business, if you are a sole trader you automatically become regarded as self employed. You therefore have to register your self employed status with HMRC. You can do this online, or via telephone or post. I personally recommend registering by phone. You can find more about the 3 methods or registering on the HMRC website here. 

You also become liable for Class 2 National Insurance contributions. If you expect your self employed earnings to be small, less than £5,075 for the tax year 2010-11, then you can apply for an earnings exception.  However, please consider your position carefully - Class 2 National Insurance contributions are counted when calculation your entitlement to a basic state pension, incapacity benefit or ESA, bereavement allowances and maternity allowance. If you are over state pension age, you are automatically exempt from Class 2 National Insurance contributions no matter what your projected income may be.

HMRC has several advice teams all over the UK and they run free courses on a wide variety of subjects. I strongly recommend that, whenever possible, you attend the newly self employed course they run. It covers everything from registering as self employed to Class 2 contributions to basic recordkeeping and where to go for further help. I also feel it helps you see HMRC as just another organisation that is human and not something to fear.

So now you are all registered as self employed, its time to keep records.

Record keeping is quite simple; however, it is easy to muddy the waters which is why I recommend you attend the HMRC start up course so you can ask questions and get answers right away. Your records should comprise of 3 or 4 different books, you can keep records electronically and there is a wide variety of software availible for you to do so. 

I personally find computers to be unreliable and, as records have to be kept for a minimum of 6 years, I prefer to use paper. You wil need a cash book, a sales ledger and a purchase ledger as wel; as a wages book if you have employees. You can make these out of regular A4 note pads with a ruler to seperate colums but you can buy pre made books from Staples, Amazon and all good stationers. Books can be bought in A6, A5 or A4 size - I personally prefer A4 size as I find the smaller books difficult if you need to write a lot.

So now you have your three or four (if you have employees) books. What do you record in each one?

The cashbook is the final record of what comes in and what goes out of your business, it is often referred to as the cash flow,  To help complete your cash book, you need to keep cheque book stubs, cancelled cheques, paying in books, bank statements, copies of your own invoices, receipts and delivery notes, your suppliers invoices, receipts for all your cash purchases, remmittence advice slips from customers, copies of payments made or received using online banking systems.

The sales ledger records sales your company has made, the amount of money received for goods or services and the amount of money owed at the end of each month. It is recommended that you number your invoices and record each number against the entry in your sales ledger, you can then file your invoices in numerical order for ease of finding in the future. It will also help you fill our your VAT return if applicable. More about VAT later.

A purchase ledger records all purchases made by the business, it helps you monitor your business outgoings and how much money you owe at any one time. This also helps you complete your VAT return. It is a good idea to number each bill as you receive it then record the number against the entry in your purchase ledger. You can then file the bills in neumerical order for ease of finding in the future.

A wages book is only required if you have employees - you can use P11's as the basis for your wages book. If you have employees, you should seek professional advise from either HMRC or an accountancy firm/payroll provider and either be taught how to keep wages records or turn that area of you record keeping over to the professionals.

So now we have registered you as self employed and you have kept full and complete records for a full accounting year. It is now time to complete your tax return.

Despite what I have said about my mistrust of computers when keeping records electronically, I always file my tax return online. Firstly, I feel its better for the enviroment - a tax return has quite a number of pages, many not applicable to you yet (on paper, it comes as a booklet and you just ignore the irrelevent bits). Secondly, when filing online, as you complete the sections of the form you can check double check and amend things before submitting which you cannot do with a paper form.

PAYE:
As we touched on briefly earlier, if you have employees you have to operate a PAYE scheme. If you decide to have employees, you will need to register with HMRC as an employer - you can do so here.

I cannot stress too much the importance of attending the HMRC new employer course that shows you how to keep PAYE records as well as covering statutory sick pay, maternity pay and student loan deductions. If you opt to be sent a new employer pack it will contain everything you need to set up electronic records for your employees. PAYE records should be kept electronically for submission to HMRC but this will all be explained both at the new employers course and in your new employers help pack.

VAT:
If you supply good or services within the UK and your turnover of taxable goods or services within the UK was more that 70k in the last 12 monthsm then you will need to register for VAT.

There are all sorts of other reasons you may need to register for VAT, even if you do not live in the UK but do supply goods or services to the UK. There is more about this on the HMRC website here. VAT is an incredibly diverse and sometimes complicated subject. If you feel anything less than 100% confident in dealing with it, I suggest you employ a prefessional to deal with your VAT returns on your behalf.

So there we have it, a brief overview of self assesment, PAYE and VAT. Unfortunately, with everyones circumstance being different, it's impossible to go into specifics using a particular person or business - however, if you feel there is something that we did not cover,  then please leave a comment or drop us an email.

If you do have a specific queary about anything specific related to taxes, PAYE or VAT and your liability for any of these, please do contact your local HMRC Office.

Don't forget to drop back next week when we'll be discussing our Week 6 topic - Legislation and Insurance.

Start Up Sunday Week 2 - Company Structures: What's the difference & what option is best for you?

Welcome to the second instalment of our Start Up Sunday series. Before we start, I would like to stress that the information we provide is designed to be a guide to help support you and your business, it is not to be taken as professional or legal advice.  We are drawing on our collective knowledge of the UK system. If you live outside of the UK, please consult a local business advisor.

Today we will talk about your company structure. Each company entity has its own advantages and disadvantages. You need to consider these carefully as, unfortunately, there is no "one size fits all"l solution. You will probably find this to be one of the first hurdles in your quest to have a thriving and profitable business.

Firstly we have Sole Trader; you may more commonly hear this referred to as self employment.  This is a business owned by one person. Legally, the person and the business are one and the same. All financial risks are taken by that person and all that person's assets are included in that risk. You are obliged to keep careful and accurate business records detailing your income and expenses. If you work from home, you have to divide your utility bills accurately to account for what is business usage. Working from home may also have implications for your home insurance policy.

When you first set up as self employed, you have to register with HMRC.  We will cover this in more depth in Week 5. As a sole trader, you are totally and personally responsible for any debt or legal compensation your business becomes liable for so please check you are adequately and totally insured as you could, quite literally, lose everything you have worked for.

To recap, Sole trader:

Pros:

• Your business is your own
• You can make all business decisions (presuming they are within the law) yourself and without interference
• Admin costs are relatively low and you have to keep records for HMRC only

Con:

• You are solely responsible for the companies finances, if it all goes wrong personal bankruptcy can occur

The next business type we will look at is the Partnership.

A partnership is a business run by two or more people together. There should be a written agreement detailing this arrangement. Profits are usually shared between partners according to the agreement. Although profits may be shared unequally, liabilities which may arise are shared jointly. This is something that everyone involved should be very clear about. Even if you only own 1% of the business, you will still be responsible for 100% of the liability. You have the same record keeping obligations and liabilities as a sole trader.

Pros:

• More money can be initially raised on start up
• Records need kept for HMRC and you can share the workload. 

Cons:

• The same as a sole trader, personal assets are at risk if the business fails, bankruptcy is a possibility.

This moves us on to a Limited Liability Partnership. A LLP give the benefits of a partnership while limiting your liability, protecting your personal assets. You have to register it with companies house using a process similar to registering a limited company. The LLP will be a separate legal entity and, while the LLP itself will be liable for the full extent of its assets, the liability of the members will be limited. Under certain circumstances, however, claims for economic loss could be made against individual members who have been negligent. The business itself is controlled by the 'designated members' and the Members. Designated members have responsibilities similar to that of company directors. You can find out more by visiting the companies house website here.

Pros:

• An LLP is a alternative corporate business vehicle (being introduced April 6th 2001) that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. 

Cons:

• LLP have much more complex requirements for record keeping and returns. Yearly account must be filed with companies house as well as members and designated members completing their own personal returns.

Finally we come to Limited Companies. Unlike a Sole Trader or a Partnership, the Limited company is legally a separate entity in its own right. The directors and shareholders have limited liability. When a limited company is created it will have an Authorised Shareholding which specifies the limit of a shareholders liability. This means your personal assets are safe. A limited company needs to be registered with Companies House, you must also hold an AGM with all the shareholders within 18 months of formation and no longer than every 15 months after that. These meetings must receive, and approve, Annual Reports from directors and auditors. These reports must include summaries of the accounts, names of the directors, details about the shareholders, and other information. At these meetings, the shareholders must also elect directors and auditors. You must submit annual company returns to Companies House for inclusion in the Annual Reports. These are available for public inspection.

A limited company will always have staff as the Director of the company is considered to be an employee and a limited company must have at least one director and a company secretary. This means you would have to operate a PAYE scheme. We will briefly touch on this in Week 5. A limited company will have to pay corporation tax on all profits.

Pros:

• A limited company can protect a director, who act within the law, from legal actions brought against them. 

Cons:

• There is significantly more paperwork involved in running a limited company than any other option. You cannot keep your business affairs private and there is a small charge yearly for submitting your annual accounts to companies house.

In conclusion, from a record keeping, tax and NI perspective, you are usually better off being a sole trader or partnership - however, very few partnerships outlast a business. Indeed, many very good friends who have a long standing and stable friendship often turnout to be shockingly bad business partners.

We hope you've have enjoyed Week 2 of our Start Up Sunday series - please make sure to check back with us on Sunday 20 June for Week 3.