You may have read that the ICAEW Business Advice Service (BAS) is teaming up with Enterprise Nation, the club for small businesses, to promote BAS to its 76,000 members. As 70% of its members work from home, many Enterprise Nation members are likely to seek advice initially over the telephone.
Many issues affecting start-up businesses are inter-related and should be discussed in an open way in a face-to-face meeting. So if you are an accountant it is advisable to be ready for the telephone calls and to respond to the questions whilst acknowledging that the caller needs to have a meeting with you to fully understand the implications of the telephone discussion.
So what are these six questions and why have they been selected?
1. What structure is best for my enterprise - sole trader, partnership or limited company?
• Dependent upon the start-ups circumstances and projected profitability, there can be potential savings of Tax and National Insurance Contributions (NICs) in a limited company format
• Having limited liability can minimise the risk of personal loss if something goes seriously wrong
• Limited liability allows shares in the business to be transferred to new owners relatively simply .
The alternatives to limited liability are
• Sole trader - trading as an individual
• Partnership – sharing management of the business and profits (or losses) with others
• Limited liability partnership.- where some partners have limited liability
There can be drawbacks to limited companies such as issues of control and the additional administrative burdens.To fully understand the implications of each format requires a meeting to discuss the issues further including getting a full understanding of the business owner’s circumstances , the nature of the business and its prospects.
2. What records do I need to keep – for HMRC, and VAT purposes?
The records kept by a business are to meet a number of requirements:
• Financial management of the business – for example keeping track of the business’ profitability and cashflow.
• For statutory purposes, such as filing accounts of a limited company with the Registrar of Companies or, if called upon, to complete returns for government statistical purposes
• For assessment and payment of taxes – income tax, NIC or corporation tax and if HMRC requires, to inspect the records
• If the business is registered for VAT, to enable it to make returns on time and if HMRC requires, to inspect the records.
• Payroll records for payment of employees, making returns to HMRC, paying over taxes and making payments for deductions such as pensions
• Payment of suppliers and collecting payment from customers
• To provide financial reports to the business’ owners and to finance providers.
At a meeting there would be a discussion how the start-up could meet these various requirements, how much should the business owner do themselves and how much it sub-contracts or employs people to do. This discussion would include the extent to which the business uses computer software to facilitate record-keeping. It should also cover safe storage of records as well as how long records must be kept
3. Who do I need to notify about my new business, and when?
The main body to notify on commencement of trading will be HMRC whether for taxes, NIC or VAT. Sole traders and partnerships must notify HMRC of commencement. This must be done before the 5 October following the end of the tax year in which the business started. When a limited company is formed Companies House will routinely notif y HMRC. HMRC will send the newly formed company a form that must be completed and returned within three months of issue
On commencement you may choose to register for VAT. In any event you have to register once you reach the threshold for compulsory VAT registration (this threshold is revised every tax year, and is currently £79,000 in the previous 12 months.)
Depending upon the nature of your business and whether you are operating from your home or a business premises, there may be others you should notify, such as your local authority. .
If working from home you may have to notify:
• The local council to be assessed whether you are required to pay business rates
• Your mortgage company (or at least check your mortgage allows a business to operate from the mortgaged premises)
• Your house and contents insurance companies (or check whether they offer any cover for the business assets)
If the business has any doubt about who to notify, at a meeting the adviser can clarify the business’ obligations and help it to prepare the necessary paperwork.
4. What expenses can I claim against tax if I’m working from home?
What are allowable expenses?
The general rule is that costs you pay with the sole purpose of earning business profits are allowable expenses. You cannot deduct costs:
• for non-business or personal purposes
• for buying or improving fixed assets or capital items which last for several years for which a deduction called “Capital Allowances” is available .
VAT can affect the amount you include in your allowable expenses.
If you are VAT registered – use the net amount (expense less VAT) to reduce your turnover, but you can only do this if the VAT on that expense is recoverable. You should also show turnover net of VAT. Alternatively, receipts and allowable expenses can be shown gross (including VAT) with the net payment to HMRC classified as an expense.
If you aren’t VAT registered – use the total amount spent on the expense (including VAT).
For example of allowable and disallowable expenses see HMRC Expenses and Allowances or the self-employed – what you need to know .
5. When will I pay my first tax bill?
This is totally dependent on:
• The business format chosen
• The accounting date of the business
• The profitability of the business
• Any capital expenditure (such as office equipment) purchased.
Basically the self-employed (sole trader and partnerships) declared their business revenue, expenses, profits and capital expenditure on their self assessment tax return each year. Income tax and NIC are payable on the profits on 31st July and 31st January. Payments will include payments on account for the following income tax year.
For companies, a corporation tax return is competed and annual accounts submitted to HMRC. For small companies corporation tax is paid nine months after the year end.
Whether a sole trader or limited liability company format is chosen, it is advisable to prepare accounts as soon as possible after the end of the financial year so that any liability for taxation can be calculated. The amount and timing of the tax payment can be factored into the business‘cashflow and a decision taken if finance is required to meet the payment on the due date..
Firms will send their clients a letter outlining the tax position of the business after preparation of the annual accounts specifying payment dates and amounts to be paid..
A fuller understanding of the tax position is possible in a meeting.
6. When do I need to involve an accountant? And how much will they charge to prepare accounts and file a tax return?
Most businesses retain adviser to undertake preparation of a set of financial accounts and the relevant tax returns. Their charge is dependent upon the accuracy of the records kept by the business and the time taken to do the work.
At a meeting an accountant will explain the basis of its charges and how it expects clients to pay - whether monthly, quarterly or annually. The firm may offer a fixed fee for first year or quote illustrative fees charged to existing clients in similar businesses.
It is only possible to give very general answers in a telephone call. A meeting is usually required to go into more detail. Decisions such as the most appropriate business format or whether to adopt cash accounting can be discussed and full account taken of the start-up business owner’s circumstances and future trading requirements.
If the start-up has specific concerns on any of these issues or is seeking other services such as help raising finance or tax planning, a meeting is strongly to be advised.
If you are not a BAS adviser and would like to join the scheme go to businessadviceservice.com
The following two issues are not included in the Enterprise Nation Six Questions but should be part of any meeting with an adviser.
If you are registered for VAT, at the end of each VAT period - usually every three months - you must complete a VAT Return online. A return tells HMRC:
• how much VAT you charged to your customers, and how much you owe to HMRC on other supplies you've made
• how much VAT you are entitled to claim back
• the amount of VAT you must pay to HMRC or the amount of VAT you can get repaid by HMRC
• the total amount of sales and purchases you have made
• the total amount of goods sold to customers or purchased from suppliers in other European Union (EU) countries
If your VAT taxable turnover is less than £150,000, you could simplify your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. Although you cannot reclaim VAT on purchases - it is taken into account in calculating the flat rate percentage - the Flat Rate Scheme can reduce the time that you need to spend on accounting for and working out your VAT. Even though you still need to show a VAT amount on each sales invoice, you don't need to record how much VAT you charge on every sale in your accounts. Nor do you need to record the VAT you pay on every purchase.
From April 2013 the self-employed with a turnover below the VAT threshold have the option of adopting a cash basis of accounting. This can considerably simplify the record-keeping although there are some limitations on cash expenditure. These are:
• Fixed allowances for business mileage
• Flat rate expenses for business use of home; and
• A three tier adjustment for private use of business premises
In addition special rules are included for dealing with certain types of receipts..There are rules for dealing with the transition from accruals based accounting to cash accounting to ensure receipts are only taxed once and deductions are only allowed once.
The advantages of cash accounting for businesses within the scope can be considerable but the adviser and its clients should review the basis of accounting each year.
Clive Lewis is head of enterprise at ICAEW