Start up planning

It is very tempting, when starting a new business, to think only about the day to day trading, and opt for the cheapest method of starting-up by opting for free-banking and avoiding the “perceived” expense of solicitors and accountants. A lot of people still rely on “pub talk”, but the financial and legal world is changing and you could well save hundreds or thousands of pounds by taking proper start up planning advice from specialists, which often costs far less than you would imagine!

Business Legal Structure

• Sole trader, partnership or private limited company?

Most small businesses, hoping to make enough profit to live on, will save tax by being private limited companies. Unless profits are very low or losses are made, the tax/NIC savings should easily outweigh the extra administrative costs of operating a limited company.

Business Year End

• Your “financial year end” doesn’t have to be the anniversary of starting the business, nor does it have to coincide with the tax year end (5 April).

Careful choice of year end may reduce tax payable, delay its payment or enable a repayment of tax to be claimed.

However, HMRC are currently planning to rationalise all sole trader & partnership year ends to coincide with the tax year 5 April, so any benefit of having a different year end could soon end.

Losses

• Tax repayments can be obtained if the business makes a loss in its first few months and years.

If you expect to make a loss in the early months or years, due to low initial sales, seasonality of trade, or high start-up costs, you need to consider whether loss relief can be claimed to obtain a repayment of tax paid on other taxable income.

Registration With Taxation Authorities

• You may have to register for VAT or you may benefit from VAT registration voluntarily even if you don’t have to.
• You are legally required to notify HM Revenue & Customs when you start in business.
• If you employ anyone, you will probably have to register as an employer with HM Revenue & Customs.

Getting the timing right for notification to HM Revenue & Customs for starting to trade, for breaching the VAT registration threshold or for paying wages is vitally important, otherwise you will face hefty fixed penalties for failing to notify and make the right payments to HMRC who are very unforgiving even for innocent mistakes and delays!

Spouses and Family Members

• Should you “employ” your spouse, family or friends, enter into partnership with them, or make them a co-director and joint shareholder of your limited company?

In many new business start-ups, spouses and other family members are often heavily involved. Paying them a wage may reduce your tax bill, but they may not be taxed on it and could benefit from enhanced state benefits.

Book-Keeping

Proper record-keeping from day one is essential to be able to produce accurate accounts and tax returns when required. You may think you can remember what you’ve spent, and may think you’ll be able to find the receipts and invoices, but real life gets in the way, and you could soon find yourself out of your depth, with forgotten payments, lost paperwork, and several months to catch up on! Doing it properly, on a regular basis, with accounting software will save time and money in the long run.

Right from the first day, you should have a proper book-keeping and administration system in place, and it should be kept up to date. If you don’t think that you will have the time or inclination to do this yourself you should consider getting someone to do it for you – most accountants will do book-keeping and if the accountant does it “in house” it usually means lower fees for year end accounts preparation!

Proper bookkeeping is even more important with HMRC’s plans for rolling out “Making Tax Digital” (MTD) to sole traders and landlords with turnover/rental income over £10,000 per year, where, from April 2023, they’ll be requiring quarterly tax returns in addition to the usual annual self assessment return – it’ll be a tall order for small businesses without accurate and up to date book-keeping to comply with MTD!

Contact us if you were thinking of starting a business – most people will benefit from start up planning before they take the plunge.