Open Learn Works. Small business responsibilities. Copyright 2015 The Open University

Transcription

1 Open Learn Works Sma business responsibiities Copyright 2015 The Open University

2 Contents Introduction 3 Learning Outcomes 4 1 A business owner s responsibiities 5 2 Financia terms Vaue added tax (VAT) Fat rate VAT a simpified arrangement for UK sma businesses 8 3 An exampe of business accounts 9 4 Taking money out of a business 13 5 Running the business: some choices Choices to be made 16 6 Your business 19 7 Persona refection 21 8 What you have earned in this section 21 Section 3 quiz 22 References 22 Acknowedgements 23 Gossary 23 2 of 23 Thursday 1 September 2016

3 Introduction Introduction Figure 1 Justice statue in Frankfurt Wecome to the Starting your sma business course where you wi ook at the responsibiities of sma business owners. This section wi take approximatey three hours to compete. Once competed you wi have the opportunity to obtain the Sma business responsibiities badge. In this section, you wi: ook at the ega responsibiities of running a sma business in the UK ook at the essentias of business finance expore some of the options in resourcing a sma business appy these ideas to rea ife situations estabish the responsibiities and resourcing options for your business idea. To hep you aong the way, there are a number of activities which wi hep you refect on and understand what you have been earning within this section, and how you can appy these new skis and knowedge for yoursef. 3 of 23 Thursday 1 September 2016

4 Learning Outcomes By competing this section and the associated quiz, you wi be abe to: understand the key responsibiities of a sma business owner understand the ways in which a sma business owner can make money from a business.

5 1 A business owner s responsibiities 1 A business owner s responsibiities Figure 2 Know your responsibiities As a sma business owner you wi have certain ega responsibiities. The responsibiities vary depending on the sort of business structure the business has. Try this activity to see if you can identify the key responsibiities for the soe trader and the director of a imited company. Activity 1 Aow about 10 minutes The activity has 15 statements, seven are true for the soe trader and eeven are true for the director of a imited company. See if you can get them a correct, if not you can review the answers to see the correct ones. Interactive content is not avaiabe in this format. Comment Some key points from the tabe The soe trader is responsibe for a the business costs and expenses, just as if they were their persona costs and expenses. The director is not personay responsibe for the business expenses. You wi notice that neither the soe trader nor the director are required to retain an accountant. It may we be a good idea, but it is not a ega requirement. 5 of 23 Thursday 1 September 2016

6 2 Financia terms Both the soe trader and the director must register for and submit sef-assessment tax returns (an accountant can aso do this for them). Both the soe trader and the director must register for, and charge VAT if the business turnover reaches the threshod. The soe trader woud normay pay Cass 2 and Cass 4 nationa insurance; this is not necessariy the case for the director or those past retirement age. The director has responsibiities to the other sharehoders (if there are any) and must run the business in a specific way as set out in the artices of association. These are instructions on how meetings shoud be run and how decisions shoud be made in the business. Here we have ooked at just two of the responsibiities of particuar traders. More detai on these responsibiities and the responsibiities of other business owners can be found on the government website. 2 Financia terms Figure 3 Understanding finance When running a sma business it is essentia to understand key accounting and finance terms. We wi start by seeing what you know aready. 6 of 23 Thursday 1 September 2016

7 2 Financia terms Activity 2 Aow about 10 minutes Try this short activity with two questions. In the first question we ask you to match finance terms with the definition. In the second question we ask you to compete the statements about VAT by seecting the most appropriate options from the drop-down ists. Don t worry if you get these wrong, you can see the correct answers by reviewing the quiz at the end and we do expore these ideas further ater. Interactive content is not avaiabe in this format. Comment Did you notice the differences between gross profit, net profit and turnover? These terms are often confused but they are important when making decisions moving forward, we wi expore these further when we ook at our case studies. Was there anything about VAT that surprised you? Did you know that the fat rate scheme existed and that it coud be used by any business with a turnover ess than 150,000 (figure accurate at time of writing, the HMRC website wi give the most up to date figures for this). 2.1 Vaue added tax (VAT) VAT is very compicated and rather than try to expain it in detai here we wanted to make you aware that it is something to consider. You may we fee it is worth obtaining professiona advice in this area to avoid mistakes. There is a ot of guidance avaiabe at the HMRC website. 7 of 23 Thursday 1 September 2016

8 2 Financia terms Figure 4 Vaue added tax cacuator 2.2 Fat rate VAT a simpified arrangement for UK sma businesses The fat rate scheme assumes a certain percentage of a UK business turnover shoud be caimed back since VAT registered businesses do not pay VAT on certain purchases, so rather than keeping compicated VAT receipts a sma business keeps back a portion of the VAT paid by customers instead of caiming VAT back. The percentage that is retained depends on the industry the business operates in. These comments are ony appicabe in the UK. If you are not studying this course in the UK we suggest you research the rues on VAT in your host country. The fat rate scheme figure is set depending on the type of product or service being provided. For exampe, our case study Turn-it-round is VAT registered. At the time of writing, the fat rate scheme figure for business services is 12%. So if a customer were to be charged 100 for a session, they woud pay % VAT which is 120. Turn-it-round woud work out the VAT (based on the tota paid) 120 x 12% = which is then paid to the HMRC in the quartery return. So Turn-it-round woud get 5.60 to baance out the VAT that woud have been paid. This means Turn-it-round woud not need to keep VAT receipts for a the goods and services purchased. The tabe with current scheme vaues can be found at: 8 of 23 Thursday 1 September 2016

9 3 An exampe of business accounts 3 An exampe of business accounts We wi now continue the Bike-a-ot exampe, this is not intended to be an accountancy esson, rather we are using basic figures to make some simpe points. Figure 5 Piggy bank safe We wi ook at Bike-a-ot s s finances to demonstrate turnover, gross profit and net-profit. (To open the case study in a new tab on a PC, hod down the Ctr key when cicking.) Last year Bike-a-ot sod training and tests for 80,000. The fue costs for the bikes came to The certificate and exam fees came to Other expenses, oan for the bikes, rent on premises, insurance and advertising came to 10,000. Bike-a-ot is not VAT registered. So the cacuations are shown in Tabe 1. Tabe 1 A summary of Bike-a-ot s finances Turnover Gross profit The tota saes revenue not incuding any VAT. This is the amount of money received from customers. The tota saes revenue taking off the cost of saes, which in this case is the cost of the fue for the essons and the certificates and tests that are paid for: 80, ,000 70,000 9 of 23 Thursday 1 September 2016

10 3 An exampe of business accounts Net profit This is the amount of money eft after everything has been paid. So this is the gross profit minus the expenses and other costs. 70,000 10,000. This is the amount of money the two trainers can spit. It must be entered on their individua tax returns. 60,000 Bike-a-ot has a turnover of 80,000, this is just beow the VAT threshod of 82,000 (correct at time of writing) so Bike-a-ot does not have to be VAT registered. What do you think woud happen if the saes revenue increased by 2000 and put it into the category for mandatory VAT registration? Bike-a-ot and VAT Bike-a-ot operates in quite a competitive market. A typica compusory basic training course (CBT), the first step to riding, costs around 100. If the turnover for Bike-a-ot increased to put it over the VAT threshod, then they woud have to charge VAT at 20% (correct at time of writing). So the cost of the CBT woud have to increase to around 120 for Bike-a-ot to make the same gross profit. For a private customer this is a reativey high increase in cost for no extra service and coud resut in a different training schoo being chosen. So the VAT question pays a big part when the sma business serves oca customers. Woud you suggest they stop working once the turnover reaches 81,999? Figure 6 Reviewing financia performance charts 10 of 23 Thursday 1 September 2016

11 3 An exampe of business accounts Now it is your turn, have a ook at the finances for case study 5, Turn-it-round. (To open the case study in a new tab on a PC, hod down the Ctr key when cicking.) Activity 3 Aow about 20 minutes Use the simpified accounts figures to work out the turnover, gross profit and net profit for Turn-it-round. Last year Turn-it-round received funding totaing 147,000 to support 300 prisoners. The transport costs for the sessions came to The cost of renting venues for training and seminars came to 12,000. Other expenses, staff costs, insurance, genera trave and hote expenses for staff and vounteers, came to 120,000. Turn-it-round is registered for VAT on the fat rate scheme paying 12% VAT. Compete the tabe and comment on the VAT situation. Measure Expanation Amount Turnover Gross profit Net profit* VAT comment * Remember that money from the fat rate scheme is part of the net profit. Comment Here are our thoughts. Measure Expanation Amount Turnover Gross profit The tota amount of funding received is 147,000 before VAT, so this is the turnover. The cost of running the sessions is the transport costs of 8000 and the venue hire of 12,000. The specific activity expenses are not broken down so the gross profit is 147,000 20, , , of 23 Thursday 1 September 2016

12 3 An exampe of business accounts Net profit VAT comment Because the staff are paid saaries, business owner, Charie, gets money this way, the saaries are expenses. So the net profit is 127, ,000 = You aso add in the money retained from the VAT fat rate scheme , The fat rate scheme assumes a certain percentage of a business turnover shoud be caimed back as tax. If the fat rate scheme rate is 12%: The funding woud be 147, % = 147, ,400 The VAT bi woud be 176,400 12% = 21,168 Leaving 8232 contribution to the business. NB as you can see the VAT figures are arge and many businesses get into troube because the customer did not reaise that VAT was payabe. Imagine if the funding was incusive of VAT but business owner Charie had not reaised this. Turn-it-round woud have to pay HMRC 147,000 12% = 21,168. There woud not be enough money to pay this out of the 7000 profit, it woud resut in a 15,000 oss. Don t worry if this is sti confusing, we are not trying to get you to cacuate your own VAT. In the comments we suggested what woud happen if Turn-it-round had a simpe misunderstanding over VAT, a 7000 profit turned into a 15,000 oss. The message is: be cear on what VAT commitments there are and make sure the customer knows if they need to pay VAT. This is a particuar issue when quoting services for cients. This is one area where expert hep coud be reay beneficia. 12 of 23 Thursday 1 September 2016

13 4 Taking money out of a business 4 Taking money out of a business Figure 7 A pie of 50 notes The main, but not ony, reason an individua starts a sma business is to provide income of some sort. We wi now ook at the different ways money can move out of a business to the owner. We wi use the case study exampes of soe trader, partnership and the director of a imited company, as exampes. (To open the case study in a new tab on a PC, hod down the Ctr key when cicking.) Soe trader: Mucky Pets As a soe trader, Aex can make drawings from the business. This is because there is no distinction between Aex and the business for tax purposes. Aex submits a sefassessment tax return which incudes a section in the tax return for soe trader income. It makes sense for Aex to have a separate bank account for the business and a persona one, so that it is easy to see where the income and expenses for the business sit. With just one bank account, Aex woud need to separate the figures manuay. Aex pays tax on the profits made in the business. Aex must remember to pay nationa insurance contributions as a sef-empoyed person and remember that a taxabe profit from the soe trader business makes must be 13 of 23 Thursday 1 September 2016

14 4 Taking money out of a business incuded in the sef-assessment tax return as taxabe income, even if Aex does not withdraw the entire profit amount into a persona bank account. Partnership: Bike-a-ot If Bike-a-ot is structured as a partnership, Nicky and partner pay themseves in a simiar way to that of a soe trader. They must discuss this and ensure that the way the funds are drawn are in ine with the rights specified in their partnership agreement (as each partner has a right to the funds). A separate tax return is submitted for the partnership but the partnership does not pay any tax. The tax is paid in the persona tax returns for the partners each pay tax in their persona tax return on the share of the partnership profit that each receive. Limited company: JJ Components Now it gets a itte trickier. JJ Components is treated as a separate entity to JJ, even though JJ is the ony sharehoder. The company submits a separate tax return and pays any tax due. JJ submits a sef-assessment tax return. JJ cannot just take money out of the company. JJ coud set up as an empoyee of the company and get paid a wage. JJ wi need to pay the correct income tax and nationa insurance contributions. JJ wi aso need to be paid a work pace pension in the near future. This is just the same as if JJ worked for any other company. In addition, as a sharehoder of the company JJ is abe to take money out of the company through payment of a dividend. When it comes to paying a dividend, it is simpy a distribution of profits and tax is paid through the sef-assessment tax return. An accountant woud te JJ the most beneficia spit between saary and dividends. Some key points for the imited company Saary Any saary paid wi attract nationa insurance contributions and income tax payments. To pay a saary, the company must be set up as an empoyer. Saaries are deducted from the company profits and so reduces the amount of corporation tax paid. In the near future a empoyers must provide a work pace pension, even if they ony empoy one empoyee. Dividends Can ony be paid out of company profits after corporation tax is paid. Do not attract nationa insurance contributions. Are taxed through the individua s sef-assessment tax return. 14 of 23 Thursday 1 September 2016

15 5 Running the business: some choices 5 Running the business: some choices Figure 8 Business decisions We wi now ook at some of the options and choices businesses face in how they operate. In this activity formuate your first thoughts, you can then see if your views change after reading the rest of the section. Activity 4 Aow about 15 minutes Consider these three options and how they might appy to a sma business, what are the benefits and concerns of: do it yoursef (in-house) 15 of 23 Thursday 1 September 2016

16 5 Running the business: some choices buy the service from someone ese (outsource) empoy staff part or fu time use externa peope such as associates or sub-contractors buy equipment outright ease equipment. Now for each of these six options give your immediate reaction to the benefits and concerns. Option Benefits Concerns Do it yoursef Outsource Empoy staff Use externa peope Buy equipment Lease equipment We wi not give our comments here, rather we wi discuss some of the decisions that coud be made by our five businesses and then et you see if your views have changed. 5.1 Choices to be made Read through these additiona points for our five case studies, note how they approach the six options you have just reviewed. Bike-a-ot The partners at Bike-a-ot are expert trainers and computer iterate, and whist they coud create a website, the time it woud take woud be excessive. Aso since the website is the main point for booking and payment then the extra confidence of using an IT expert is we worth the money. The partners at Bike-a-ot considered easing the motorcyces for the training but the high mieage they expected to cover and the additiona insurance premiums meant 16 of 23 Thursday 1 September 2016

17 5 Running the business: some choices that the monthy cost of a business oan was significanty ower than the easing costs. Bike-a-ot do not empoy staff but have a number of associates who can be used at times of high voume or to cover hoidays or sickness. The partners do ease the storage and training faciity. They have a sma unit on an industria estate. The cost of buying a training faciity was prohibitive and woud take more than ten years to recoup the extra costs over easing. JJ Components JJ did not have a choice over easing the manufacturing equipment. With it being speciaised equipment, made to order, therefore purchasing was the ony option. JJ eases an industria unit just outside the town. The easing is a great option as this aows for the business to expand and move more easiy than property that is purchased. JJ empoys two assemby technicians. In a business where quaity is paramount, there is a need for a consistent and skied workforce. JJ uses an accountant to dea with his payro and a reporting. The cost of the accountant is ony 100 per month and frees JJ to concentrate on the main tasks of the business. Mucky Pets The equipment Aex uses is fairy ow cost, the argest expense was the workshop in the garden which was purchased outright. In the future Aex is considering going mobie and easing a van for this purpose, this woud be a good option. Aex does not currenty empoy anyone but as the business grows then Aex is considering taking on an apprentice to train and support through the grooming quaifications. Red Bush Brewery At Red Bush Brewery, Sam is fairy reiant on the master brewer. The one fu time empoyee. Whist Sam is happy to earn the business and support the brewer, gaining the skis and experience to run the brewery aone is not feasibe in the short term. Sam is fortunate to have the farm buidings provided free of charge and bought the second hand equipment at a ow price. Because Sam has farm duties in addition to supporting the brewer, it makes sense to outsource the marketing and website for the brewery. A oca admin firm is used and they aso arrange for casua abour to cover farmer s markets, if Sam is not avaiabe. Sam uses the farm accountants to ook after the payro, getting a reay good rate as part of the famiy farm. 17 of 23 Thursday 1 September 2016

18 5 Running the business: some choices Turn-it-round Charie uses Turn-it-round as a way of empoying ex-prisoners. The turnover of staff is quite high, with staff typicay staying with the business for between nine and tweve months, but this suits Charie we. The staff are recruited on their reease from prison and encouraged to deveop skis and buid reationships. Charie sees it as a success when staff are head hunted by firms they work with. Turn-it-round does not have significant assets and hires venues and vehices as required. The computers have been eased from a oca IT company. The IT company maintains the computers and ensures the security is up to date. This was a requirement of the funding Charie receives. Activity 5 Aow about 10 minutes Go back and review the tabe you produced in Activity 4 earier. Are there any items you woud change, perhaps emphasise or remove in ight of the case studies? If so, what is it that has caused the change? Comment What we hope you got out of this activity is a sense that there is no one right approach. The decisions on how you approach and resource your business wi depend on your circumstances. You wi need to ook at your skis, situation, objectives, resources, finances and ambitions before making a decision. 18 of 23 Thursday 1 September 2016

19 6 Your business 6 Your business Figure 9 Appying your earning You may now ike to take the ideas discussed so far and ink them to your own business idea. You can do this through two activities. Activity 6: Create your own business case study in a simiar format to the exampe case studies. Activity 7: Answer the questions for the case study you created. 19 of 23 Thursday 1 September 2016

20 6 Your business Activity 6 Aow about 10 minutes Creating your own persona case study Compete the case study information for a business you have recenty started, are thinking of starting or have knowedge of through friends or famiy. Name of business Brief description of business and its objectives Staffing of business Business assets Essentia skis Mandatory icences or insurance arrangements Expected turnover for year 1, year 2 and year 3 To get the most out of this course we encourage you to keep notes on the ideas you have and the activities you compete. These notes coud be very usefu as you move your business idea. This particuar activity is aso used in the other sections of this course and may have aready been competed. It is suggested that you use the same ideas for each section, though you may wish to change or deveop your ideas as you go through the different sections. Activity 7 Aow about 20 minutes Use the persona case study you have deveoped to answer the questions and suggest how you might arrange the finances and resources for the business. Key question Answers Impications What are the owner responsibiities for the business? Is the business ikey to have empoyees? Shoud the business retain an accountant? 20 of 23 Thursday 1 September 2016

21 7 Persona refection Shoud the business be registered for VAT? What services wi be outsourced? How wi the owner of the business get money from the business? Summary 7 Persona refection Having competed this first section we suggest you take a few minutes to refect on what you have earned so far. You may want to save your answers in this activity (and others in this section) in a separate document for use after the course. Activity 7 Aow about 10 minutes Note down your thoughts on the foowing questions: What do I now know about starting up a business that I did not know before starting this section? What things did I aready know but have been confirmed through this section? What wi I now do as a resut of studying this section? 8 What you have earned in this section Sma business owners have ega and financia responsibiities. 21 of 23 Thursday 1 September 2016

22 Section 3 quiz The responsibiities vary with the business structure used within the business. VAT is compicated and its appication depends on the turnover of the business. Getting professiona hep on VAT is worth considering. The way you get money out of a business is dependent on the business structure chosen. There are options on how a business shoud operate, the best options vary business to business. Section 3 quiz We done, you have now reached the end of Section 3 of Starting your sma business, and it is time to attempt the assessment questions. This is designed to be a fun activity to hep consoidate your earning. There are ony five questions, and if you get at east four correct answers you wi be abe to downoad your badge for the Sma business responsibiities section (pus you get more than one try!). I woud ike to try the Section 3 quiz to get my badge. If you are studying this course using one of the aternative formats, pease note that you wi need to go onine to take this quiz. I ve finished this section. What next? You can now choose to move on to Section 4, Succeeding in a sma business, or to one of the other sections, so you can continue coecting your badges. If you fee that you ve now got what you need from the course and don t wish to attempt the quiz or continue coecting your badges, pease visit the Taking my earning further section, where you can refect on what you have earned and find suggestions of further earning opportunities. We woud ove to know what you thought of the course and how you pan to use what you have earned. Your feedback is anonymous and wi hep us to improve our offer. Take our Open University end-of-course survey. References UK Government (2014) VAT Rates on Different Goods and Services [Onine]. Avaiabe at: (Accessed 3 Apri 2016). UK Government (2015) VAT Fat Rate Scheme [Onine] Avaiabe at: (Accessed 3 Apri 2016). 22 of 23 Thursday 1 September 2016

23 Acknowedgements UK Government (2016) Working for Yoursef [Onine]. Avaiabe at: (Accessed 3 Apri 2016). Acknowedgements Except for third party materias and otherwise stated in the acknowedgements section, this content is made avaiabe under a Creative Commons Attribution-NonCommercia-ShareAike 4.0 Licence. The materia acknowedged beow is Proprietary and used under icence (not subject to Creative Commons Licence). Gratefu acknowedgement is made to the foowing sources for permission to reproduce materia in this unit: Figures Figure 1: Querbeet/iStockphoto.com. Figure 2: vcha/istockphoto.com. Figure 3: cigdemhiza/istockphoto.com. Figures 4 9: courtesy Moore Effective Soutions Ltd. Every effort has been made to contact copyright owners. If any have been inadvertenty overooked, the pubishers wi be peased to make the necessary arrangements at the first opportunity. Gossary drawings If a business is a soe trader or partnership basicay the saary is in fact drawings which are taken out of the business. Tax is not paid on drawings but is assessed on the profits of the business. gross profit Profit made directy on saes. Gross profit = saes cost of goods. Does not incude business expenses etc. net profit The profit after a costs, are taken into account. Net profit = saes cost of goods operating expenses other expenses interest taxes. turnover VAT Turnover is the amount of money taken by a business in a specified period, usuay annuay. It is simpy a term that means the tota amount of money entering the business from saes. It incudes money spent on raw materias, hire equipment and subcontracting. For exampe, a kitchen fitter who fits a new kitchen for a cient has two choices: either the cient buys the kitchen for 5000 and the fitter charges 1000 to fit it (so the turnover for the fitter woud be 1000); or the fitter buys the kitchen for 5000 and fits it for 1000 (so the turnover woud be 6000). Even though the amount of money earned is the same, the turnover depends on who pays for the kitchen. Vaue added tax. Currenty a 20% tax appied to goods and services from VAT registered businesses. 23 of 23 Thursday 1 September 2016