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Key considerations when starting a new business

Business start-ups are on the rise. According to the national enterprise campaign, StartUp Britain, an unprecedented number of new businesses were launched last year, at a record pace of 80 an hour.

Figures published by StartUp Britain revealed 342,927 new businesses registered with Companies House between January and June, compared with 608,110 for the whole of 2015.

Interestingly, Bromsgrove was responsible for the majority of start-ups outside of London, where 29 people for every 1,000 residents branched out on their own between January and June.

Whether you’re starting a new business because you’ve been made redundant or the idea of being your own boss has always appealed to you, it’s important you don’t rush into anything. Make sure you do your research and take the time to consider key factors, such as these:

1. Business structure

Yes, it’s an obvious starting point, but it’s a really crucial starting point that will determine the type of business you run. Generally speaking, there are three common types of business structures:

  • Sole trader – sole traders are the sole owner of their business. They’re entitled to keep all profits after tax has been paid, but are liable for all losses.
  • Partnership – partnerships are similar in nature to sole traders, but because they involve more than just one person, it’s advisable for written agreements to be put in place and for all partners to be made fully aware of the terms of the partnership.
  • Partnerships can also exist as Limited Liability Partnerships (LLP) in which some or all partners have limited liabilities. For instance, one partner is not responsible for another partner’s misconduct or negligence.
  • Company – the owner(s) have limited liability. They keep their business affairs totally separate from their personal affairs and have to comply with legal regulations.

2. Business plan

Business plans vary from organisation-to-organisation. Ideally, they should thoroughly describe your business and cover key areas, such as your objectives, strategies, sales, marketing and financial forecasts.

The most effective plans help business owners to not just clarify their business idea and spot potential problems on the horizon but help them understand and plan precisely how they intend to generate money and make their business sustainable.

You can speak to us for help and advice on putting a business plan together.

3. Record-keeping

Regardless of whether you’re a sole trader, partnership or company, it’s essential that you keep an up-to-date record of your business activity.

It’s entirely up to you how you choose to keep your records. You may decide to keep hard copies of all of your business affairs or you may prefer to do everything electronically, including logging your expenses. The main thing is, that come year-end, you have a clear audit trail of all of your business activities for the previous 12 months.

If your records are organised and kept all up-to-date, then it will be much easier to put your year-end accounts together for HMRC. In addition to compiling their books, companies and LLPs need to make their accounts publicly available on Companies House within certain time frames. They may also be audited by HMRC at any time too.

4. Taxation

Another key area that needs to be considered when starting a new business, is taxation, which can be broken down into the following three elements:

Tax on profits

The type of tax that’s applied and the amount that’s taxed will be dictated by the type of business being operated. Taxable profits are usually based on the profits shown in your business accounts after they’ve been adjusted to comply with the tax rules.

National Insurance (NI)

Contributions can be paid at different rates for sole traders and partnerships compared to company directors on a salary. The entitlements can also differ. For instance, within a company, it may be possible to avoid NI by paying dividends rather than salary. Your accountant will be able to advise you on the options to take, based on your company set-up.

Value Added Tax (VAT)

Not all businesses are VAT registered. In fact, knowing whether or not to register for VAT is a question that’s often posed by many business owners, particularly when they’re first starting out.

If your turnover (total sales) in the previous 12 months exceeds the compulsory registration threshold (currently £85,000), then yes – you must register. Failure to do so can result in you being fined by HMRC.

If you haven’t exceeded the threshold for compulsory registration, you can still register voluntarily if it makes sense for you to do so. Again, your accountant should be able to advise you on the best course of action based upon your individual circumstances.

Starting a new business is undoubtedly an exciting venture. However, it is important that business owners’ visions don’t get clouded by excitement and that they do focus on factors, such as those listed above, that will help ensure they have the right foundations in place.

Are you planning to start a new business and feel you could benefit from some expert guidance and advice? Contact our team of specialists on 01905 777600 or hello@ormerodrutter.co.uk.

VAT: Flat Rate Scheme Changes

HMRC has announced that, as from the 1 April 2017, all businesses using the Flat Rate Scheme or intending to use the Scheme will have to consider (in addition to the existing conditions) whether or not their VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period; or
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum, or proportion thereof (ie, £250.00 per quarter or (£83.33 per month).

If this criteria is met then the business will be regarded as a “limited cost trader” and MUST apply a fixed Flat Rate percentage of 16.5% to its’ VAT inclusive turnover.

All businesses using or considering using the Flat Rate Scheme should now review their status.

If you would like to discuss anything in this article please contact either David Pegg or Leanne Macgregor on 01905 777600

Brexit and Business in Britain: What’s next?

On 23 June the UK voted to leave the EU. Currently the decision to invoke Article 50 and give official notice to exit the EU has not happened. As ‘Brexit’ seems to be raising more questions than answers, many UK businesses are wondering what happens next.

VAT

UK VAT law derives from European law and was introduced as part of our original accession to the Common Market in 1973. It is also one of the largest revenue generating taxes for the UK government. As such, it is unlikely to be abolished or significantly changed as a result of Brexit.

However, the way UK VAT currently operates is closely connected to our EU membership, so once the UK has left the EU we may see some changes come into place. For businesses operating mainly within the UK the effects are likely to be less than for more internationally-focused businesses.

Once we leave the EU, the government will have more flexibility over setting VAT rates and liabilities. The current single claim mechanism will cease to apply, making the process for UK businesses to reclaim VAT incurred in EU member states more administratively complex.

We may see the UK maintain a parallel VAT system for the first few years because of the confusion and cost changes would cause.

Customs duties

The UK is currently part of a customs union with other EU member states, which means that goods can flow freely without customs duties or import VAT.

Brexit negotiations are likely to try and preserve these arrangements, but it is likely that the transactional costs of trading with the EU will increase. Additional costs in the form of customs duties may also be considered.

Outside of the EU, the UK will be able to negotiate free trade agreements with other countries, although these agreements can take many years to implement.

UK employers of EU workers

At this stage the arrangements for existing EU workers in the UK is unclear. Speculation in the media has suggested that there are several possible arrangements which may come into place:

  • Those employed may remain in the UK without any restrictions
  • Entry restrictions may be imposed on EU workers
  • EU workers may have to gain a new type of permission to stay

Employers are advised to carry out some contingency planning, such as formalising current EU workers’ employment with paperwork showing that they were employed prior to the Brexit vote.

Emergency Budget

The Chancellor has discounted the possibility of an early Budget in response to Brexit. We can expect the Autumn Statement to set out a roadmap of how the UK’s tax and spending plans will evolve going forward.

Outside the EU, the UK government will have even more flexibility over the administration of taxes and much will depend on the negotiations which take place once Article 50 is invoked.

What’s next?

Until formal negotiations start it will not become clear what ‘Brexit’ really means for business in Britain. These detailed negotiations will determine the exact arrangements going forward.

It is important not to act in haste while so much remains unclear. At this stage there is not enough information to make decisions, however over the coming months we should start to see some clarity over how the UK’s relationship with the EU will evolve.

Businesses should focus on staying informed at this stage and be prepared to undertake some contingency planning on key issues as the political and economic landscape becomes clearer.

Only a third of taxpayers happy with HMRC services, says study

According to a new study, only a third of individual taxpayers say that they would describe HMRC as ‘fair and efficient’.

The statistics come from HMRC’s own data, after the tax authority carried out a satisfaction survey among personal and business users.

Following recent criticisms over HMRC’s diminishing telephone services in the wake of Making Tax Digital (MTD), just 45 per cent of Small and Medium-sized Enterprises (SMEs) told the tax authority that they would describe its telephone services as ‘good’.

Only 43 per cent of individual taxpayers agreed.

Furthermore, more than half of individual taxpayers and 43 per cent of SMEs added that they thought HMRC did not ‘have the right systems in place’ to sufficiently prevent taxpayers from making tax return errors which provoke ‘unnecessary investigations’.

Experts predict that thousands of taxpayers fall victim to making ‘honest mistakes’ on their tax returns every year – which inevitably results in HMRC conducting thousands of investigations.

Filling out tax returns can be a complex and lengthy process and a tax investigation can be provoked only too easily – especially when access to HMRC telephone advisers is growing increasingly limited.

If you need help accurately completing your tax return or you need advice about tax investigations, contact us to arrange your free initial consultation today.

Businesses able to submit ‘voluntary’ tax payments under HMRC’s PAYG proposals

Sole traders, landlords and unincorporated businesses will be able to submit ‘voluntary’ tax payments towards unexpected tax liabilities, under new HMRC proposals.

The news comes alongside the much anticipated publication of six consultation documents into HMRC’s ‘Making Tax Digital’ campaign, which the tax authority hopes will make all tax “100 per cent digital by 2020”.

HMRC’s proposed pay as you go system is one of many unanticipated changes to Making Tax Digital outlined in the tax authority’s latest consultations, which were published this week.

The proposed system will allow taxpayers to take full control over how often they wish to pay, and how regularly – although businesses with an annual income of £10,000 or more will also find themselves under new obligations to report accounts information to HMRC “at least quarterly” according to the consultations.

HMRC has said that their optional voluntary system will apply to the likes of Capital Gains Tax (CGT), income tax and national insurance (NI) contributions from 1 April 2018 – and to VAT from April 2019.

By 2020, HMRC hopes PAYG will also be open to incorporated businesses in respect of their corporation tax affairs.

Proposals under Making Tax Digital are complex and confusing, and taxpayers and businesses alike are advised to seek advice, to determine exactly how HMRC’s tax overhaul will affect them personally.

The Association of Taxation Technicians (ATT) recently branded Making Tax Digital “the biggest change to the way taxpayers will engage with HMRC since the introduction of PAYE in 1945”.

SMEs failing to take cyber security seriously, says study

Small and Medium Enterprises (SMEs) across the UK are putting themselves at risk by failing to take their cyber security seriously, according to new research.

A study carried out by Barclaycard found that just one in five SMEs consider cyber security a ‘top business priority’, despite the fact that 74 per cent of UK firms found themselves facing at least one security breach during 2015, according to HM Revenue and Customs (HMRC).

The Government has warned that the average cyber-attack can potentially cost a business anywhere between £75,000 and £311,000.

The National Audit Office (NAO) has added that cyber-attacks could become more common following HMRC’s shift to an all-digital tax system.

Making Tax Digital (MTD) proposals came under fire last week, after an NAO report fund that much more still needs to be done by HMRC ‘to use data and technology to reduce fraud and error’.

The NAO said that HMRC is facing a great challenge in building “public trust that the new digital tax systems are easy to use and secure”, in order to protect both itself and SMEs from potential data loss and IT crime as the new systems are brought online.

Their report added that HMRC “must also demonstrate to taxpayers that its controls to verify each taxpayer’s identify and protect the confidentiality of data and working effectively.”

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