Thinking of Starting a Business? 

If you are turning a hobby into a business or starting a whole new venture, here are some tips to help you get up and running without falling foul of the (UK) tax authorities. 

If you make losses you can offset those against your other income for the tax year, thereby potentially getting a tax refund. 

Registering with HM Revenue & Customs 

You will need to register with HMRC as a new business within 3 months of starting to trade. Otherwise you will be fined £100 (or more if they find out about you before you register). Registration is quite simple and can be done over the phone on 08459 15 45 15 (HMRC leaflet is at http://www.hmrc.gov.uk/leaflets/se1.pdf ) . You will need to register for class 2 NI at the same time.  

National Insurance 

You’ll need to pay Class 2 NIC and depending on your profit level, Class 4 NIC. However, if you have another job, you may be able to claim exemption from Class 2 if you earn more than the upper earnings level in the other job, but will still need to pay 1% Class 4. There is a HMRC FAQ at http://www.hmrc.gov.uk/faqs/nicqse.htm  

Tax Return 

You will need to complete a tax return declaring all your income (employed, self employed, interest/dividends , rent receivable etc). Tax returns must be submitted to HMRC by 31 January, if you are calculating your tax liability yourself, or 30 September if you prefer HMRC to calculate your tax for you. 

Tax returns can be completed and submitted online using HMRC’s own tax return software. It is straight forward to use and covers most circumstances. If you prefer, your accountant, can complete your tax return for you. To keep costs as low as possible make sure you give your accountant all the information they need and do not leave it until too close to the deadline.  

At Lipton, we aim to submit all tax returns by the end of August, preferably the end of July, so that our clients can plan their tax payments and, for sole traders/partnerships, they are up to speed with how their business is performing. 

Tax payments 

Tax is paid in TWO instalments, by 31st January and 31st July. The January payment represents the balance due for the previous tax year plus a payment on account of half the estimated amount for the current tax year. The July payment is the other half of the estimated liability. For established businesses the payment on account is usually based on the previous year’s tax bill. If your profits are decreasing, you can claim to reduce the payment on account. If you have reduced it too far, you will be charged interest. 

Bank account 

A separate business bank account is strongly recommended to keep your personal and business affairs separate. This makes accounting and identifying relevant expenditure/income much easier and cheaper in terms of time/money in the long run. It also keeps your personal affairs private as your accountant needs to identify and confirm all the transactions in the bank account. Using a separate account for your business keeps the questions purely focussed on business transactions. 

Book keeping/Accounts 

You will need to keep books/accounting records for several reasons including helping you to run your business effectively and efficiently. You need to keep track of sales, debtors (money owed to you), costs, creditors (money owed by you), cashflow [very important, many profitable businesses fail because they run out of funds], stock levels etc and most importantly, profitability. You will also use these records to prepare your accounts figures to include on your tax return.  

Book keeping can be relatively straight forward and there are numerous accounting packages for small businesses eg VT, Sage etc. We recommend the use of accounting software if you are VAT registered because of the phasing out of paper VAT returns and the facility to file the VAT return online from within the software. 

A spread sheet can also be used for “cash based businesses” ie businesses who get paid upon issuing an invoice, so that they do not need to keep track of outstanding, unpaid sales. We provide a spread sheet to our clients, although do not recommend  spread sheets for VAT registered businesses.   

Accounting records must be kept for 6 years. 

VAT 

As a new business you may not need to register for VAT straight away, as the threshold for registration is £77,000. 

Finally, Good luck with your new business!