Starting in Business – taxes and other details
This is our third and final blog in the starting a new business series. This blog covers an overview of the taxes that are relevant once you have made a decision to start your own business, as well as a few ad-hoc issues to consider.
The first in this series of blogs “Am I sure?” aimed to ensure that you are aware of what starting up in business can entail. The second covered some of the issues you will need to consider once you have made a decision to start your own business, including the choice of a business structure to operate your business.
What taxes are relevant?
Tax on profits
Your taxable profit will normally differ from the profit shown in your business accounts. This is because the tax rules mean that some business expenses are not allowed to be deducted for tax purposes and there are some tax allowances that affect more than one year.
The type of tax you will pay will depend on the business structure you have chosen.
Sole traders and the partners in partnerships are subject to Income Tax on their business profits. Limited companies pay Corporation Tax on their profits.
Corporation Tax rates are generally lower than Income Tax rates. This does not always mean that less tax is payable if you operate through a company. You will normally also be subject to Income Tax on the monies paid out to you by the company.
Tax relief for losses
If your business does not make a profit initially you may be able to claim tax relief and get a refund of Income Tax from HMRC. A limited company can only claim back Corporation Tax that has already been paid. This means that new companies cannot claim any tax relief for losses until after they have made profits and paid tax on them; whereas a sole trader or partner could claim loss relief against previous years’ income.
National Insurance (NI)
The rates of NI contributions you pay are generally lower for a sole trader or partnership than if you run your business as a company. However, your NI contributions also have an impact on the benefits you can claim when you’re not working and your future state pension.
Value added tax (VAT)
You will need to register for VAT and add VAT to your prices if your turnover (sales) is likely to be more than the annual registration limit (£83,000 as at 1 April 2016). This should not cause your customers and clients a problem if they are also VAT registered. In such cases you may actually benefit from registering for VAT even if your turnover is well below the registration limit, particularly if you will incur substantial set up costs; whereas, if your customers are typically members of public then it can be beneficial to delay registering for VAT until you are legally required to.
Correctly accounting for VAT is an essential part of any VAT registered business. Many people describe the system as obliging them to be unpaid tax collectors. Even so, if you fail to comply with your legal obligations you can become liable to penalties and investigations by HMRC.
You can choose from a number of VAT schemes that HMRC offers businesses that register for VAT. When the time comes, we can advise you as to the suitability of the available schemes.
If you pay people to work for you may need to operate a PAYE scheme (more unpaid tax collecting). You will also need to do this if you are a director of your own limited company.
A PAYE scheme means that you deduct Income Tax and NI from the wages/salaries that you pay your employees. The taxman tells you what deductions to make and you then have to pay these over to HMRC. You also have to pay employers’ NI on top of the wages and salary payments that you make. So this is an additional cost of having employees, although there is an employment allowance available and lower rates of NI for certain categories of employees.
In addition, you will have to comply with Auto-Enrolment pension rules, which might involve providing and contributing to a pension scheme for your employees. Please see our blogs on Auto-Enrolment for further information on this topic.
As with all other business payments you must keep good records of the payments to your employees and the amounts due to HMRC. They can charge penalties if you do not do this correctly.
Some people who work for you may claim to be self-employed. PAYE will not be due if they are genuinely self-employed or if you are paying a limited company. However, there are strict rules that determine whether someone is or is not your employee. And if you get this wrong it can be very expensive when HMRC seeks additional taxes from you. This happens when HMRC decides that PAYE tax was payable after you have paid people in full.
We can help you with these rules and ensure that you only become an employer when you really need to do so. We can also run your payroll for you if this becomes necessary.
By starting a business, you may hope that your income will be higher than the limits that apply for claiming tax credits. However, it may still be worth registering to claim tax credits even if you initially receive a ‘nil’ award from HMRC. This is what happens if your income forecasts are too high. However, if, in the event, your profits are lower than you had hoped or you make a loss, you can tell HMRC. If you now qualify for tax credits you will then receive a backdated tax credits award.
What else is there to consider?
You may plan to work initially form home, or you may need an office or a place where you can sell to the public.
Whichever option you want to take there are a number of factors to consider including:
cost – at the outset and each year (including rent, rates and services)
suitability for purpose
compliance with legal regulations
physical restrictions such as access.
If your business is based at your home, you will normally be able to offset certain costs against your taxable profits. This will depend on a number of factors including the size of your home, how many rooms you use for business purposes and the amount of time you spend working at home.
Cars and vans
If you will need a vehicle to run your business, you may want to arrange this in a tax efficient way. The rules operate very differently dependent on whether or not you have a limited company. If you do have a company, you also need to decide whether you or the company will own the car/van.
Certain vehicles qualify for special tax reliefs. There are also different ways to account for the costs of running a car that is used partly for business and partly for private purposes.
You will be legally obliged to arrange comprehensive insurance for business motor vehicles and employer’s liability insurance. You may also want to consider public liability insurance, consequential loss insurance, and cover for your business assets – even if these are kept at home. Other insurances that may be worth considering are Keyman and bad debts cover.
Putting money into a pension scheme can be a way of saving for retirement because of the favourable tax rules. Many businesses have to provide access for their employees to a stakeholder pension.
How we can help?
Whilst business success can never be guaranteed, professional advice can help to avoid some of the problems which befall new businesses.
We would welcome the opportunity to assist you in setting up your business. We can also help you establish a suitable strategy to build your business. And we can provide you with key services such as bookkeeping, management accounts, VAT returns, payroll, annual accounts and tax returns.
Essex Abel’s team have many years of advising people in starting up in business and offer a FREE consultation to discuss your plans and the issues involved in starting a business, if you would like to take advantage of this offer, please contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Neither Essex Abel Ltd nor the author accept any responsibility whatsoever for any action taken based upon the information included in this article.