Starting or running a small business
Listed below are some of the common questions which arise when starting or growing a business. Select a question to see the answer.
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Setting up and running a small business
Not at all. Before you set up your new business, you will need to decide what format it should be - will you operate as a sole trader, a partnership or a limited company? Each choice will have implications for legal contracts, the amount of credit your suppliers will allow your business and the potential tax and NIC liabilities.
Having decided on your format, you will also need to know what records you are legally bound to keep. This is important for the tax return you will be required to file with HM Revenue & Customs (HMRC). If you don't get this right, you may face hefty penalties. Additionally, if you decide to employ staff you will need to know how to administer a payroll including applying PAYE, national insurance rules and basic information such as maternity and paternity pay.
A chartered accountant will be able to advise you on all these issues and help you to set up your business correctly and effectively. Having helped you right from the start it will be much easier for your chartered accountant to prepare things like your year-end accounts and cash flow projections when the time comes.
Read more about planning for business.
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It can pay off in the long run to computerise your records. But there are some steps to take to make the transition as smooth as possible. Make sure everyone who will be working on the records is comfortable with the decision. Talk to your accountants to ensure they can work with the selected software.
When you’re thinking about buying accounting software consider what you will want the system to do. Most systems will record bank account transactions and sales and purchases on credit. Do you want a payroll programme that analyses costs by departments? Do you want to integrate purchases and sales with stock records? What support is on offer? Can you upgrade this level of support? What training is available?
There are a number of effective accounting software programmes to choose from, with an increasing number available to rent over the internet. Do not underestimate the training required. Many chartered accountants will help clients with the installation and training as well as helping them to understand the output and implement controls. A number of chartered accountants can run the system for you, giving you access to enter transactions and review information over the internet. You can buy software over the internet, which will often work out cheaper and easier than going elsewhere.
You should always consult your bank on your finance requirements. But for impartial advice speak to your chartered accountant.
Finance providers will want to see a robust business plan. Consider raising equity finance (sharing the risk and rewards by selling shares in the business), but you must be prepared to grant outside shareholders a stake in the business.
You should also consider the alternatives to seeking additional finance. Ask the following questions:
- Do you have assets against which finance could be raised such as factoring debtors?
- Could you manage the stocks and debtors better to free up cash?
- Do you have any under-performing assets that will realise cash or reduce costs?
- Can you improve the profitability of your products or services thereby generating more cash?
Speaking to your chartered accountant is a good starting point to discuss your financing requirements and how best to meet them.
Read more about additional funding for growth.
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The total tax and National Insurance (NI) cost borne by a small limited company is likely to be lower than a comparable unincorporated business when the taxable profits exceed the rate at which income tax is levied at the higher rates (40% or more). A further advantage is that company profits do not attract NI.
Salaries of directors of companies are subject to income tax and NI, but dividends paid out of company profits do not attract NI, although they may be subject to higher rates of income tax.
There may be good tax and NI reasons to incorporate your business. However, there are other factors to consider such as having to file accounts at the Registrar of Companies and an increase in paperwork. There may be capital gains tax implications when transferring assets (particularly goodwill) from an unincorporated business to a limited company. Talk to your chartered accountant about whether incorporation is the right thing for your business.
Businesses must first register for VAT if, at the end of any month, the taxable turnover of all business activities in the previous year has exceeded £73,000. You must notify HM Revenue & Customs (HMRC) within 30 days. All businesses now registering for VAT must notify HMRC online and submit returns online. However, although HMRC prefer businesses to register for VAT online, it is still possible for this to be done using a hard copy application form.
Taxable persons are required to charge VAT on sales (called output tax). Most sales will be chargeable at the standard rate (currently 20%) but there is also a Zero Rate and a Reduced Rate (currently 5%). Businesses will suffer VAT charged on goods and services purchased (called input tax) which is normally recoverable by way of set-off against any output tax due (and may be refunded where it exceeds any output tax).
You need to complete a form and you will be notified of your unique VAT registration number, which you must quote on all sales invoices. Similarly all claims of input VAT must include the supplier's VAT number.
As a general rule you must complete a VAT return every quarter and submit it by the end of the following month. The return requires you to state the total output tax, to deduct the total input tax and pay the balance over to HMRC. If input tax exceeds output tax, HMRC pays you a refund.
Businesses which have taxable supplies of less than £1,350,000 can apply to make one return a year with regular quarterly or monthly interim payments (Annual Accounting Scheme).
There is also a Flat Rate Scheme which allows small businesses to calculate their VAT liability as a percentage of their total turnover, rather than having to calculate the liability based on individual sales and purchase invoices.
HMRC has powers to issue assessments of the amount of VAT considered to be due. There are severe penalties for late, incorrect or incomplete returns. HMRC officials will periodically visit your business premises and inspect your records to ensure you are correctly complying with the VAT regulations.
HMRC has publications and a helpline (+44 (0) 845 010 9000). Chartered accountants handle numerous VAT registered businesses and are an excellent source of friendly advice and guidance.
There are a number of excellent accounting packages on the market. Any business owner should do as much of the record-keeping as possible in order to minimise the accountant’s bill. However, a chartered accountant is still absolutely necessary to:
- help with the record-keeping, including difficulties with the record-keeping software
- sort out the tax and VAT queries and returns including helping to deal with inspections by HMRC
- help deal with payroll / employment law issues such as annual returns, P11Ds, National Minimum Wage, etc
- deal with returns to HMRC and ensure the correct amounts are paid on time so that you avoid penalties and interest
- help the business owner understand what the financial records are telling them about their business performance
- assist with negotiations with finance providers
- be a source of general business advice and support and to be a good listener.
When first employed the accountant should send you an Engagement Letter which sets out the terms of business, including fees.
One advantage of choosing chartered accountants is that they must have professional indemnity insurance and procedures to deal with any complaints you may have. Chartered accountants are backed by a rigorous disciplinary regime, which means that clients can complain to ICAEW if they are not satisfied with the accountant’s response. ICAEW will look into the complaint, and if it is upheld, will discipline the member according to ICAEW rules.
Tax issues
The 31 October deadline refers to the date when you must file a paper copy of your tax return if you have income which is not taxed at source (such as self employment or income from land and buildings). If you file by the 31 October deadline you can ask HMRC to calculate your liability for you.
You can still file your return after 31 October, but you have to file your return electronically. The ultimate deadline for completing and filing an electronic tax return is the following 31 January. After that date you will have to pay penalties for not having filed your return on time.
If you have a single source of income such as employment it is not too difficult. Ask HM Revenue & Customs (HMRC) for a calculation at the end of each tax year. There are many publications that cover tax allowances, tax rates and bands or use software for checking tax liabilities. If you have any queries you should contact the tax office identified on your P60 provided by employers, your local tax office or the HMRC helpline (+44 (0)845 0109 000).
Unfortunately, the tax system soon becomes more complicated. If you own a business or have a number of sources of income you will probably need help. A chartered accountant can help you with your tax affairs and give advice on a wide range of situations.
To be an allowable deduction against tax liabilities, expenses must be wholly and exclusively for the purposes of the trade or business. There are however some ‘grey areas’, such as claiming the cost of a home telephone used for business calls, when a percentage cost would be allowed.
It is therefore important that you can justify any claim in tax returns for expenses charged against profits. You should keep receipts and paperwork in case there is an enquiry by HMRC.
Reimbursable expenses should be made in accordance with the internal regulations of the business. Payment of some expenses may result in a tax or National Insurance charge on the director or employee if considered a ‘benefit’ by HMRC.
Chartered accountants regularly deal with HMRC and are experienced in the rules on expenses.
Income Tax (and class 4 National Insurance) is normally collected in two half-yearly payments on account, on 31 January in the relevant tax year and the following 31 July. These payments are normally based on the previous year’s agreed liabilities. So there will be a balance owing to HM Revenue & Customs (HMRC) which is collected in the payment on the following 31 January (along with the first payment on account for the following year).
For example:
In respect of 2009-10 Income Tax Liability
Paid on account (based on previous year, 2008-09) 31 January 2010 - £2,000
Paid on account (based on previous year, 2008-09) 31 July 2010 - £2,000
Balance (following agreement of 2009-10 liability) payable 31 January 2011 - £1,200
Total Payable re 2009-10 is £5,200
Payable re 2010-11 (based on previous year 2009-10)
On 31 January 2011 - £2,600 (Being half £5,200)
On 31 July 2011 - £2,600
So the total payable on 31 January 2011 is £2,600 + (balance of 2009-10) £1,200 = £3,800
When a business has increasing profits there is a time lag between the period when the profits are made and the time when the tax is collected. However when profits have reduced the taxpayer can amend the payment on account, although this should only be after discussing the situation with your accountant.
Selling/handing on your business
Confidentiality is absolutely vital when selling a business, if you wish to retain value in the business and prevent the possible loss of key staff. It pays to use an intermediary as much as possible. There are specialists. Your chartered accountant may recommend a specialist or be able to help directly with some tasks.
Some general guidance:
- Start a minimum of 18/24 months beforehand to tidy up the business and to prepare the paperwork for potential buyers such as business plans and financial history
- Businesses usually sell for a multiple of profits or turnover. Is there is a standard multiple for your industry?
- Find out what similar businesses sell for. What deals have been done? Monitor trade publications
- Develop an expectation of the likely asking price
- Will the management buy the business?
- Decide where best to advertise
You should regularly talk to your chartered accountant about steps to extract value from your business and financial planning for retirement.
Apart from an outright sale, one option financially may be to groom the existing management to carry on the business. It might be viable to employ a person to run the business, initially under your supervision, but increasingly under their own initiative, provided there are controls in place to protect your interests (talk to your chartered accountant about this). Think carefully about the incentives that you need to offer to attract and keep the right person.
Chartered accountants provide advice on tax, VAT, financial reporting and financial management to a wide range of different sizes and types of businesses.
