The guide to starting your own business

Transcription

1 Ltd Chartered Certified Accountants & Registered Auditors The guide to starting your own business Written By: Roger Poulter FCCA

2 Table of contents 1. The Overview 2. How to trade 3. Keep the Tax people Happy 4. Keep the VAT people Happy 5. Keep Companies House Happy 6. Accounting Records 7. Keep Everybody Else Happy Appendix A Appendix B Checklists Glossary of terms used.

3 The Overview The Guide to Starting Your Own Business Section 1 The Overview This pack contains the essential information you require for starting up your own business. It is my intention to guide you through the necessary forms, and provide you with information to help guide you in the right direction. Once you have followed the checklists you will have started in business, what you do then is up to you. Good Luck. The web address for Poulter Blackwell Limited is All the information contained in this pack is subject to copyright and should not be distributed or copied without the express permission of Poulter Blackwell Limited. This pack provides an overview of the regulations in force at 31 st May 2012 and before action is taken a review of the detailed legislation should be undertaken. If you are unsure of anything you should obtain advice from a qualified accountant. No responsibility for loss occasioned by any person acting or refraining from action as a result of material contained in this pack can be accepted by Poulter Blackwell Limited. Page 1

4 Section 2 How to Trade How to Trade There are several different ways to trade. The most common are as follows: - As a Sole Trader As a Partnership As a Limited Company Sole Trader This is a what you see is what you get business. A single person will own the business. In legal terms the business is not treated as a separate legal entity, this means that if things go wrong the person who owns the business is ultimately responsible. If the business has debts to pay, then the individual may have to sell their own assets to pay for them. This form of business is relatively easy to operate, as it has less rules and laws applying to it. The tax rates payable are the same as an individual would pay if employed. There are two forms of national insurance (NI) payable. The first is Class 2, which is a flat rate of 2.65 per week, unless the profits are below 5,595, in which case you can apply for deferment. Class 4 national insurance is charged at 9% of profits over 7,605, falling to 2% of profits over 42,475. Overall the NI limits are more favourable than being employed. Partnerships Partnerships are businesses owned by more than one person. Unless there is a partnership agreement in place the partners are assumed to own the business equally and are assumed to share the profits equally. For this reason it is important that if a partnership is being formed by unequal partners a partnership agreement is used. In respect of the debts of the business each partner is jointly and severally responsible. This means that one partner could become responsible for the whole of the partnership debts if the other partners have no personal assets, irrespective of profit share. Unlike a sole trader a partnership is recognised as a legal entity under law. This means that it can sign contracts, borrow money, and obtain trade credit as the partnership. The partnership is required to file it s own tax return, the details from which are copied onto the individual partners personal tax returns. Page 2

5 Section 2 How to Trade The tax and national insurance rates payable by the partners on their profit share are the same as those of a sole trader. There is a new form of partnership which is the Limited Liability Partnership which is like a partnership, but each partner s liability is limited to an amount shown in the formation document. This operates very much like a normal partnership, but returns have to be made to Companies House detailing the partners details and partnership details. If you would like more details on this form of partnership then please poulterblackwell@me.com. Limited Company A limited company is a legal entity that is governed by the Companies Act To operate a limited company you need to form it first. The best way of doing this is to get a formation agent to do this on your behalf. Poulter Blackwell Limited would be more than happy to undertake this for you, and our fee for a basic limited company is 200 if you would like further information please contact us. On formation a company has to file a document known as the memorandum and articles of association, and is issued a certificate of incorporation by Companies House. The memorandum of association is a description of what the company is, what it is going to do, and what it is allowed to do. The Articles of association are the rulebook covering the shareholders and directors of the company. The minimum number of people in a limited company is one. You can have a sole shareholder, who is also the sole director, and they no longer require to have a company secretary. Having one person involved in a limited company is not something I would recommend as if the sole director died, or became incapacitated then an application would need to be made to a court to appoint a new director and this would be expensive. Until this happened any assets within the company would be locked in the company and the company would not be able to trade as it would not be able to operate it s bank account. The company will also be required to keep statutory books. These are made up of the following registers: - Register of share allotments Register of share transfers Register of directors Register of secretaries Register of members Register of Mortgages and charges Minutes of shareholders meetings Page 3

6 Section 2 How to Trade The company will also be required to have a registered office. This is the address where the statutory books are normally kept and where official documents can be served on the company. The address can be anywhere in England or Wales and is not required to be the same as your trading address. Unlike sole traders and partnerships the owners of a limited company are not personally responsible for the debts of the company and their responsibility is limited to the nominal value of the shares they hold, under normal circumstances. If they invest 500 into the company and it becomes insolvent they only loose the 500 and nothing more. This is provided they have not signed any personal guarantees in respect of the company debts. The limit of liability is a very large plus in respect of operating the business, because in todays world there is a higher risk of litigation. If somebody takes a personal injury claim against the company that it cannot afford to pay the shareholders liability is limited. Unlike sole traders and partnerships cars owned by the company and driven by the directors/shareholders are treated as benefits in kind on the individuals who drive them. The money contained within the company belongs to the company and can only be drawn in the form of remuneration, or dividends. If money is taken out other than in remuneration/dividends this is known as a directors loan and is strictly speaking illegal. If money is taken this way it may lead to a tax charge of 25% of the money taken, which can be refunded if the money is returned. The company is also required to do the following: - Pay corporation tax to the HMRC on it s profits nine months after it s year end. File annual accounts at companies house ten months after it s year end. Submit a CT600 corporation tax return within one year of it s accounts year end to the HMRC. File an annual return at companies house every year. In respect of the HMRC items if the deadlines are exceeded there are penalties and interest. In respect of companies house there are penalties and possible criminal procedures. The company letterhead has to contain the following information: - The country of incorporation. The registered number. The location of the registered office. Page 4

7 Section 3 Keep the Tax People Happy Keep the Tax People Happy! Notifying HM Revenue & Customs (HMRC) If you have started to trade you need to inform the HMRC within three months of starting to trade. If you are a sole trader or partner you will need to either complete the form CWF1 Becoming Self-Employed and registering for National Insurance contributions or Tax or by telephoning The penalty for failing to notify is 100. If you are expecting your profits to be below 5,595 you can apply for a deferment of class 2 NI contributions by completing form CF10. If you are a Limited Company you should complete form CT41G Corporation Tax New Company Details. The penalty for failing to notify is 100. If you are a subcontractor to receive payments for construction work subcontractors must be registered with the HMRC. You can do this by contacting the subcontractor help line If you work in the construction industry and want to pay a subcontractor you are required to register as a contractor with the HMRC and operate your payments to subcontractors under the CIS scheme. To do this you need to phone The tax return A sole trader, partner, and usually directors have to file a self assessment tax return. The self assessment tax return (SA100) covers the tax year, for example the 2011/2012 self assessment tax return covers the tax year 6 th April 2011 to 5 th April The 2011/2012 tax return is due for submission on 31 st October 2012, if filed on paper and 31 st January 2013, if filed electronically. The initial penalty for being late is 100. Self assessment can be confusing. If you started in business on 1 st November 2011 and, traded for one year to 31 st October 2012, the first tax return you would be required to complete would be the 2011/2012 tax return as that is the tax year in which your start date falls. The profits taxable would be from 1 st November 2011 to 5 th April The next tax return would be the 2012/2013 on which the profits taxable would be from 1 st November 2011 to 31 st October As you can see the profits taxed on the 2011/2012 tax return have been taxed again on the 2012/2013 tax return. This is known as overlap profit and is a value carried forward until you either change your year end, or cease to trade and at that point you get relief for this amount of profit that has been double taxed. Losses are treated a little bit differently in that you do not get overlap losses. Page 5

8 Section 3 Keep the Tax People Happy Staying with the current example if you make profits then the first tax payable will be for the 2011/2012 tax year and will be payable on 31 st January At the same time you will also be required to make a payment on account for the 2012/2013 tax year which will be half of the first payment you make. A second payment on account will be required on 31 st July If the tax due on your profits for the first tax period is 6000 your tax payments would be as follows:- Balancing payment re 2011/2012 6,000 1 st Payment on account 2012/2013 3,000 Total payable 31 st January ,000 2 nd Payment on account due 31 st July ,000 In the future the each payment on account will be based on half the previous years tax due, unless you apply for a reduction using form SA303. Limited companies have to file a CT600 corporation tax return. This has to be filed twelve months after the year end. Using a year ended 31 st October 2012 as an example the CT600 would be required by 31 st October The corporation tax (CT) due is payable nine months and one day following the end of the accounting year. In the case of a year end of 31 st October 2012 this would be 1 st August As you will note the tax payable is due before the tax return. This is the basis of corporation tax self assessment in that the HMRC expect you to know how much tax you owe. If you want them to calculate the CT due it would be best to submit the CT600 return three months before the tax is due. Employing somebody If you want to employ somebody apply for a PAYE scheme by phoning Under the PAYE scheme rules you would have to calculate the tax (PAYE) and national insurance (NI) to deduct from the individual, along with the employers national insurance, then pay the net pay to the individual with an accompanying payslip. The PAYE and NI insurance is payable to the HMRC. If you payments of PAYE & NI is less than 1,500 per month then you can apply to pay them quarterly, otherwise they fall payable on the 19 th of the month following the month of deduction. At the end of the year submit a P35 return to the HMRC and give a P60 to your employees. The P35 return is due on the 19 th May following the end of the tax year. If you are late the penalty is 100. The end of year P35 returns are required to be filed electronically. Operating a PAYE scheme can be complex with having to calculate PAYE, NI student loan deductions, SSP, SMP, SPP and other payroll deductions. It is usually a Page 6

9 Section 3 Keep the Tax People Happy lot simpler to get somebody to do this for you, such as an accountant, or payroll bureau. Poulter Blackwell Limited would be happy to operate the payroll on your behalf, please ask for a quote. If you provide benefits in kind to your employees submit a P11D for each employee along with the form P11D(b). Examples of benefits in kind are : - Company cars. Private use of Vans. Health insurance. Expense payments that are not covered by a dispensation. Private telephone. The P11D and P11D(b) forms are due for submission before 6 th July following the end of the tax year. The penalty for being late is 100 per month for each month the returns are late. Poulter Blackwell Limited can help you with these. If you employ subcontractors the current system requires completion of monthly returns which are due by the 19 th of the following month. The penalty for being one day late will be 100. Issuing Shares in a Limited Company If you issue shares to an employee of the company then you will be required to fill out form 42. The form is required by 6 th July following the end of the tax year during which the issue of shares has occurred. The penalty for being late is 300. Page 7

10 Section 4 Keep the VAT People Happy Keep the VAT People Happy The following decision tree will help you decide if you need initially talk to the VAT people. If your turnover has exceeded 77,000 in the last twelve months (this applies if you have taken over another business as a going concern.) or your turnover is going to exceed 77,000 in the next month then you have to register for VAT. Page 8

11 Section 4 Keep the VAT People Happy Even if your turnover is below the 77,000 limit you may still want to be VAT registered : - If all your customers are VAT registered they are not going to mind you being registered as they will be able to reclaim your VAT. This means that you will be able to reclaim the VAT you pay (input VAT), meaning you can maximise your profit. If the items you sell are zero rated then you will not be charging VAT to your customers. This means that you will be able to reclaim the VAT you pay (input VAT), meaning you can maximise your profit. If you want to give the impression that your business is larger than what it is then become VAT registered as this can suggest that your turnover is in excess of 70,000. Registering for VAT You are now required to register for VAT online If you are taking over a business from somebody else and you want to retain the VAT number complete form VAT68 Request for transfer of registration number. NB if you request for the transfer of registration number you also transfer any unpaid VAT liabilities, including errors discovered during future VAT visits. When you are registered for VAT Complete a VAT return either quarterly or annually and make routine payments for VAT. If you do not complete a return on time, or are late paying your VAT liability, then you may be charged penalties and interest. Page 9

12 Section 4 Keep the VAT People Happy Normally the VAT returns are prepared quarterly with the return due, and the VAT payment due, by the end of the month following the quarter end. E.g the VAT return, and payment, for quarter ended 31 st March 2012 will be due on the 30 th April There is an annual accounting scheme available for small businesses. Initially if your turnover is below 150,000 you can apply for this system. The way the scheme works is that you make regualer monthly or quarterly payments and at the end of the VAT year you prepare an annual VAT return and pay the balance of the VAT due. New VAT registrations are now required to be done online, the returns submitted online, and the payments made online. Accounting for VAT The main ways to account for VAT are : - 1. Invoice accounting. 2. Cash Accounting. 3. Flat rate accounting. There are also other considerations if your business has exempt sales, or you import and export and if you believe you are in one of these categories then please poulterblackwell@me.com for more information. Invoice accounting This is the most common way of accounting for VAT. You account for VAT at the invoice date. This means that as soon as you raise a sales invoice the VAT becomes accountable during that VAT quarter. If you receive a purchase invoice you can reclaim the VAT during that VAT quarter. Cash Accounting This method of accounting is available for businesses where the turnover is below 1.35m and allows them to account for VAT at the time sales are received and payments are made. This means that you only have to pay over the VAT on your sales when you have physically received the money from your customers, however you can only reclaim VAT on your purchases when you pay them. Flat Rate Accounting This is available for businesses where the turnover is below 150,000. Your VAT is calculated as a flat rate percentage of your sales. The percentages are decided according to the trade sector your business is in. You do not have to calculate the VAT you can reclaim as this is already included in the Flat Rate. Page 10

13 Section 5 Keep Companies House Happy Keep Companies House Happy If you are a sole trader, or a normal partnership, then you do not to worry about companies house. If you are a limited company You will be required to notify companies house if you change anything about the company. Examples of changes are as follows: - Appointment of new company directors, or secretaries. Resignation of company directors or secretaries. Change in addresses, etc, of directors or secretaries. Change of accounts year end. Change of registered office address. You will also need to register any mortgages, or charges, taken over the assets of the company. The company is required to file certain documents on an annual basis. The annual return The annual return is the form that confirms the details of the company as follows: - The registered office The location of the registers The principal activity of the company. The name and address of the company secretary. The name and addresses of the company directors. The share in issue along with the name and addresses of the shareholders. The form is due annually from the date of incorporation. If it is late you will get warning letters. Companies house will normally try to strike companies off who are late with their annual return. The ultimate penalty will be a court appearance for the directors who are ultimately responsible for ensuring the details held at companies house are up to date, although this is extremely rare. The annual accounts All limited companies are required to file their accounts at companies house. Small companies can file abbreviated accounts, which is just the balance sheet and certain statutory notes. This means that a small company does not have to make it s profit and loss account a public record. A small company has turnover below 6.5m, less than 50 employees, and a balance sheet value below 3.26m. Page 11

14 Section 5 Keep Companies House Happy The annual accounts have to be submitted to companies house 9 months from the accounting period end. The following table shows the month end filing deadlines : - Year ended Filing date 31 st January st October th February th November st March st December th April st January st May th February th June st March st July th April st August st May th September th June st October st July th November st August st December th September 2013 If you are one day late there is a penalty of 150 which increases to 375 after one month late, 750 after three months late, 1500 after six months late. Page 12

15 Section 6 Accounting Records Accounting Records HMRC will normally expect you to keep sufficient records to support entries that are made on your tax return. For this purpose do the following: - Record your business income showing sales and other income. Record your business expenditure showing purchases and other expenses. Record the purchase of assets used by your business. Record all personal amounts paid into, and taken out of your business. Keep the core records such as sales invoices, purchase invoices, paying in books, chequebooks and bank statements. Most small businesses will normally keep a cashbook. On one side of the cashbook you would record receipts, on the other side you would record expenditure. Such a book should cover the first four items above. You may wish to use a piece of computer accounts software to keep your business records. A piece of software I would recommend is SAGE Instant Accounts. It is important that if you use a computer you should know how to operate the software. Poulter Blackwell Ltd can supply SAGE and provide training on most account packages. poulterblackwell@me.com. You are required to keep the accounting records for five years from the due date of your tax return. E.g. if your accounts year end is 31 st March 2011 this will be shown on your 2010/2011 tax return which is due for filing on the 31 st January 2012 and therefore should be kept until 31 st January Page 13

16 Section 7 Keeping Everybody Else Happy Keeping Everybody Else Happy Writing to people When writing a letter ensure: - Your trading address is clearly stated. The letter is dated. Sole traders state their own name, even if they are using a trading name. For partnerships display the name of the partners. For limited companies include the country of incorporation, the company number, and the registered office. When producing invoices ensure: - Make sure the customer is addressed properly. The invoice is numbered. The invoice is dated. If you are VAT registered display your VAT number, show the rate of VAT used, and show the split between net values and VAT. The terms for payment are shown. For limited companies the country of registration, the registered number and the registered office. Business Names If you have premises where the public will visit and do business with you have a sign on display showing the following: - The name of the business. For sole traders your name. The address correspondence can be sent. For limited companies the country of registration, the registered number and the registered office. Insurance There are many different insurance policies available to businesses, but hardly any insurance is required. If you employ anybody who is not a family member you will need Employee Liability Insurance. The only other insurance you ought to have is public liability insurance. For all your insurance needs it is best to seek advice from an insurance broker. Page 14

17 Appendix A The Checklists SELF EMPLOYED INITIAL CHECKLIST Description Register with HM Revenue & Customs. Apply for a PAYE Scheme Register for VAT Ensure the minimum accounting records are being kept. To be done by Within 3 months of start of trade As soon as you take on an employee. Within 30 days of reaching threshold, otherwise as required. As soon as you start trading. Date Complete Cash book Sales invoice file Purchase invoice file Paying in book Cheque book Bank statement file ANNUAL CHECKLIST Description First payment on account for tax year ended 5 th April Second payment on account for tax year ended 5 th April Balancing payment for the year ended 5 th April Tax return for the year ended 5 th April To be done by 31 st January 31 st July 31 st January 31 st October if you are submitting on paper. 31 st January if you, or your accountant is submitting online. Date Complete Page 15

18 PARTNERSHIPS The Guide to Starting Your Own Business Appendix A The Checklists INITIAL CHECKLIST Description Register with HM Revenue & Customs. Apply for a PAYE Scheme Register for VAT Ensure the minimum accounting records are being kept. To be done by Within 3 months of start of trade, all partners have to register individually. As soon as you take on an employee. Within 30 days of reaching threshold, otherwise as required. As soon as you start trading. Date Complete Cash book Sales invoice file Purchase invoice file Paying in book Cheque book Bank statement file ANNUAL CHECKLIST Description First payment on account for tax year ended 5 th April Second payment on account for tax year ended 5 th April Balancing payment on account for the year ended 5 th April Partnership tax return Individual Tax returns for each partner for the year ended 5 th April To be done by 31 st January 31 st July 31 st January 31 st October if you are submitting on paper. 31 st January if you, or your accountant is submitting online. Date Complete Page 16

19 LIMITED COMPANY INITIAL CHECKLIST The Guide to Starting Your Own Business Appendix A The Checklists Description Form the company To be done by This has to be done before you can trade. Date Complete Open a business bank account. Register with HM Revenue & Customs. Apply for a PAYE Scheme Register for VAT Ensure the minimum accounting records are being kept. If you would like Poulter Blackwell Ltd to do this for you please contact us. Just after the business is formed, but before you receive your first payments. Within 3 months of start of trade, all partners have to register individually. As soon as you take on an employee. Within 30 days of reaching threshold, otherwise as required. As soon as you start trading. Cash book Sales invoice file Purchase invoice file Paying in book Cheque book Bank statement file Page 17

20 Appendix A The Checklists LIMITED COMPANY ANNUAL CHECKLIST Description File your annual return Pay your corporation tax on your first period of accounts. File you accounts at companies house. Submit your corporation tax return. To be done by One year from incorporation. Companies house send you this form automatically. This can be submitted electronically and a fee is payable. Nine months from the period end date. Nine months from the period end date. One year from the period end return. If you have a long accounting period you will have two to file. The first will cover the first twelve months of your trading period, the second will cover the remaining months. Date Complete Page 18

21 Appendix A The Checklists VAT ANNUAL CHECKLIST Description VAT return for the 1 st Quarter of trading VAT return for the 2 nd Quarter of trading VAT return for the 3rd Quarter of trading VAT return for the 4th Quarter of trading To be done by The end of the month following the quarter end. The end of the month following the quarter end. The end of the month following the quarter end. The end of the month following the quarter end. Date Complete Page 19

22 Appendix A The Checklists PAYE ANNUAL CHECKLIST Description Payment of PAYE & NI Mth 1 ended 5 th May Payment of PAYE & NI Mth 2 ended 5 th June Payment of PAYE & NI Mth 3 ended 5 th July Payment of PAYE & NI Mth 4 ended 5 th August Payment of PAYE & NI Mth 5 ended 5 th September Payment of PAYE & NI Mth 6 ended 5 th October Payment of PAYE & NI Mth 7 ended 5 th November Payment of PAYE & NI Mth 8 ended 5 th December Payment of PAYE & NI Mth 9 ended 5 th January Payment of PAYE & NI Mth 10 ended 5 th February Payment of PAYE & NI Mth 11 ended 5 th March Payment of PAYE & NI Mth 4 ended 5 th April PAYE annual return for the year ended 5 th April Return of benefits in kind for the year ended 5 th April To be done by 19 th May 19 th June 19 th July 19 th August 19 th September 19 th October 19 th November 19 th December 19 th January 19 th February 19 th March 19 th April 19 th of May 6 th July Date Complete Page 20

23 Appendix B Glossary of Terms Used Glossary CIS CT FCCA HMRC NI PAYE SMP SPP SSP VAT Construction Industry Scheme Corporation tax Fellow of the Association of Chartered Certified Accountants HM Revenue & Customs National Insurance Pay as you earn Statutory Maternity Pay Statutory Paternity Pay Statutory Sic Pay Value added tax Page 21