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If you’re thinking about starting up, you must carefully consider whether to form a limited company straight away or hold off for a while and become a sole trader. 

You may think forming a limited company will save you tax and must therefore be the best route.  However, many start-ups incur considerable costs in their initial months. And even if you do not have sizeable initial outgoings, you should still factor in a realistic margin for error in your budgeting. 

You will more than likely have a “learning curve cost” if this is your first time in business or if you’re going to be operating within a sector of which you have no prior experience. In either case, you should not expect the same return straight away as your more experienced competitors. 

If you make a loss as a sole trader, it can be set against your employment income for previous years, which in all likelihood will give you a handy refund after the first tax year. If you make a loss as a limited company, it can only be carried forward and set against future the company’s profits.  If the company never makes a profit, it will be wasted.

Even if you’re more confident that your business plan will be a success, you may still profit from waiting until you form a company. As a sole trader, you can build up custom, contacts, brand awareness and reputation in the business. From a tax point of view, this goodwill can be sold to the company. Future drawings from the company can be taken in the form of a director’s loan repayment, which will be especially beneficial if you expect to be paying tax at a higher rate.

You can set up as a sole trader by simply telephoning HMRC or registering online, whereas the route for a company formation is more complex.  Ongoing accountancy costs are bound to be higher and Companies House will publish your company’s financial results for anyone to see – including your competitors, suppliers and potential clients.

Yes, if your salary and dividends are organised properly, a company can save you considerable tax. It can also limit your liability to company debts. But the decision is not so straightforward. If you want to protect your trading name, you can always form the company and leave it dormant at Companies House until you are ready to start trading.

A limited company can save you tax in certain situations, but it is not always the best way to start out. A brief review of the options with your accountant could save you time and money in the long run.

  • Raphael Coman is the owner-manager of chartered certified accountants Coman & Co.

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We’ve seen many new taxes come in under the radar over the past few years, but for me, this is probably the most badly thought-out, badly communicated of the lot. And once again, it’s being left to accountants and tax advisors to communicate the bad news.

If you employ staff, you’ll be familiar with the need to pay monthly PAYE and NI contributions to HM Revenue & Customs (HMRC) by the 19th of the following month.

Up until now, the legislation has been such that if you pay late, it doesn’t really matter. HMRC might write nasty letters – or even send someone round – but ultimately, there was no penalty for paying late. The trick was to get everything square by 19 May annually, and there was no comeback.

This changed on 6 April this year, when the new legislation came into effect.

Here is a brief synopsis of the new rules and penalties for those on the main monthly scheme:

  • pay your monthly liability by the 19th of the month following (this is the date by which the funds must be deposited in the bank account at HMRC – so beware of paying online on the 19th. Confirm with your bank that it will get there on time);
  • pay late once in any year and there’s no penalty – unless the payment is more than six months late – see below;
  • pay late two-four times in any year, you’ll be fined 1% of the total amount that is late (ignoring the first late payment), so, if your monthly payment is £10,000 and on four occasions you’re a day late paying, the penalty will be 3 x £10,000 x 1% = £300;
  • pay late five-seven times and you’ll be fined 2% of the total amount that is late (ignoring the first late payment);
  • pay late eight-ten times and you’ll be fined 3% of the total amount that is late (ignoring the first late payment);
  • pay late 11-12 times and you’ll be fined 4% of the total amount that is late (ignoring the first late payment);
  • if any payment is more than six months late, you’ll have a pay a penalty of 5% of the overdue amount. If the payment is 12 months late, you will pay a further 5%.

No due reflection is given to the extent to which you’re late. If you are one day late, the penalty will apply.

From an administrative point of view, the law allows HMRC to charge penalties at any stage during the tax year, or after the end of the tax year up to two years of the due date.

In 2010-11, penalties will be charged after the end of the tax year. Therefore, penalty notices will not be sent out until April or May 2011. So please don’t test the system and think you’ve got away with it – you will get a nasty shock in April next year!

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Tax is never a popular subject – made even less so by recent revelations that HMRC has got many of our tax codes wrong, meaning excessive charges for some. Mistakes by HRMC aside, ‘tax doesn’t have to be taxing’, as the saying goes. If small firms take the time to keep their books in order throughout the year, a mad dash at key dates in the taxation calendar can be avoided.

2010 has only just begun, so now is the perfect time to turnover a new (bookkeeping) leaf. Start by buying yourself some filing equipment, with different folders for sales invoices, paid and unpaid bills, bank statements and VAT returns, plus wages, if you have staff.

Now you have some inviting looking new folders, go through your in-tray – at least once a week – and put all your bits of paper in the appropriate place. If you set aside a small amount of time to sort out your books, weekly – or even daily – it shouldn’t become too much of a chore. Bookkeeping needs to be part of your routine, like reading emails, otherwise it can be all too easy to find something else to do instead.

Keeping accounts isn’t just sensible, it’s a legal obligation. Companies must keep all records relating to their VAT returns for a minimum of six years after the tax year to which they relate. As a minimum, you must record any income earned or expenses incurred by the company and retain all related documents, including receipts, cheque stubs, invoices, bank statements, PAYE records, etc.

To get a clear picture of where your money is going, your transactions must be recorded in a meaningful way. You should give your ‘expenses’ record a sheet of its own, with columns representing categories such as ‘rent’, ‘utilities’, ‘travel’ and ‘stationery’. This will give you an ongoing sense of where you might be over-spending, which can help you to cut unnecessary costs

Why rely on books or bits of paper when there is a wide variety of accounting software available? For a more simple and cheaper solution, an Excel spreadsheet is a perfectly useful tool for keeping records on your computer.

Keeping your records on a spreadsheet or using bookkeeping software enables you to see your total transactions in an instant. You can also search for a figure among your costs should a mystery debit appear on your bank statement and even produce projections based on the average transactions made in previous months.

You should be using your bank statements as a reference point, checking every figure in your bookkeeping records against transactions on your bank statement. This is a great way to identify missing receipts, while giving you a consistent monthly deadline to follow for getting your records in order.

Make sure you note all key deadlines for filing with HMRC. Set reminders on your computer, so you don’t have to rely on remembering to check your diary. The next one to note is the PAYE deadline on 19 May, when employers must register with HMRC to file online. HMRC is supplying free software so small businesses can file their employee data securely. For more information visit the HMRC website.

If you really can’t commit to the above, it may be time to call in an experienced bookkeeper. Of course, there will be an expense associated with this, but since it could free up your time and give you better information with which to make business decisions, it could be worth the investment.

Anita Brook is director of chartered certified accountancy firm Accounts Assist. Follow her on Twitter.

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When to register for VAT

There are many excellent articles around on when to register for VAT, including the one on the Start Up Donut, so I’ll try not to repeat what is already available.

So, you’ve recently set up or are about to start your business and you want to know what to do about VAT. You should do this when you draw up your business plan and cashflow forecasts, because it could affect your profitability.

What’s the first thing you need to do? Find out the VAT treatment of what you’re selling. The key questions are: would you have to charge VAT if you were VAT-registered? If not, is that because your supplies are exempt from VAT or zero-rated?

This latter point is an important distinction. In simple terms:

  • if they are zero-rated, you can reclaim VAT you pay on your expenses.
  • if they are exempt, you won’t be able to register or reclaim the VAT on your expenses.

If you fall in the latter category, there’s no need to read on.

Otherwise, what you do is liable to VAT at 0%, 5% and/or 17.5%. How do you work out when to register?

The registration limit is based on the value of your taxable supplies (ie the value of what you’ve sold that attracts VAT, in the past 12 months).

Keep track of this by recording at the end of each month what your taxable turnover has been. Add up the past 12 months to see whether you’ve gone over the registration limit. If so, you need to apply for VAT registration within 30 days of the end of the month in which your turnover went over the limit.

If you went over the registration limit in less than 12 months, you should still apply to register at the end of that month. Don’t wait for the end of a 12-month period or you might find yourself liable to a penalty.

Should you apply to register for VAT before you go over the registration limit? That’s a very difficult question to answer and one that can only be determined by you with help from your advisers. There can be benefits to being registered for VAT, particularly where you customers are wholly or mainly businesses that are VAT registered. They will be able to recover the VAT you charge. Some suggest that being registered gives your business a certain credibility, after all, who would register for VAT unless they had to?

One thing that makes this decision a bit of a no-brainer is if you are only selling things that are zero-rated because you will get back the VAT on your expenses, but not have to account for VAT on your sales. This way you get paid by HMRC when you put in a VAT return. The only thing you should consider is whether you will be claiming back enough VAT to make the hassle worthwhile.

Robert Killington, VATark

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The deadline for submitting your tax return is fast-approaching. Below are some tips to help make this an easier process.

31 January deadline

If you have a tax return and do not file it on time you will be fined £100.

If the return was issued in April 2009, or any time up to 31 October 2009, it must be submitted by midnight on Sunday 31 January 2010, with a very small number of exceptions.

(If you were sent a return after 31 October 2009, you have three months from the date it was issued. You can file it online or by paper, and the guidance below does not apply to you.)

If HMRC receive your tax return after 31 January you’ll get a late filing penalty of £100. 

Avoiding Penalties

If you pay all the tax you owe by 31 January you will not need to pay the penalty. 

Submitting your tax return

You will now need to send your return online. If you send in a paper version at this stage, even before 31 January, you will be fined £100.

If you have previously filed online you can use the same system as last time.

You will need your user ID, which was sent by HMRC when you first registered. If you cannot find it, go to the HMRC online filing site where you will be able access ‘lost user id’ or ‘lost password’ services.

You will be asked a number of questions, following which a replacement user ID and password can be issued. These may be sent online or by post. If you think you may have lost the details, give yourself plenty of time to get a replacement.

If you can find neither ID nor password you should contact the Online Helpdesk.

Registering to file online

If you have not previously filed online, you will need to register to obtain an activation code. You will not be able to file online without this code.

The code will be posted to you, and to ensure you receive it on time you must register by 21 January 2010.

Tips for online filing

There can be many people trying to file at the same time. In 2008, 200,000 people filed on 31 January. Try to use quiet periods.

HMRC provide year round online services, 24 hours a day. Avoid delays by accessing them on weekdays after 5pm or before 8am.

There may be maintenance issues. Check the HMRC site for scheduled downtime.

Use the HMRC website for step-by-step guides, and also the built in help available in free HMRC software.

Visually impaired users can access specific help.

Paying your tax

As well as filing your return, whether paper or online, you must pay tax due for 2008-09 by 31 January 2010.

Direct Debit payments are now possible, provided you have registered online. Paying this way allows you to make a payment as soon as you have worked out what it should be.

HMRC now kindly let you manage your finances by setting up regular payments towards your next bill.

Exceptions to online filing

HMRC allow you to submit using a paper tax return after 31 October if:

  • Their software cannot handle it, for example non-resident companies.
  • You have been told that you cannot!

Julian Shaw

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Just as you were getting used to the VAT rate at 15 per cent, it’s nearly time for the rate to change again. From the 1 January 2010, the rate will be going back up to 17.5 per cent, after 13 months at the lower level.

Many businesses are already using the change to encourage customers to make purchases before the start of 2010, but there are other ways to benefit from the lower VAT rate.

The VAT rate that applies is established by the tax point. If the tax point is before 1 January, then the rate to apply will be 15%. The tax point is the earlier of the date the invoice is issued, the date money is received and the date that the goods are delivered or the service is completed. As an exception, if an invoice is raised within 14 days of the supply of goods, then the invoice date will become the tax point. Therefore, you may wish to consider the following options that may be attractive to customers:

  1. You may accept a deposit or a pre-payment before 1 January 2010, which will be charged at 15 per cent.
  2. You provide goods or services in December and more than 14 days before the issue of the invoice. For instance, you must apply VAT at 15 per cent for goods or services supplied before 18 December, for invoices raised on 1 January 2010.
  3. Where you supply a service over a period spanning the rate change, it is possible to charge VAT according to the value of work done before the 1 January. Be careful, though, because you must be able to show that the way that you have split the value of the work is fair.

There are special rules to prevent avoidance of VAT by establishing a tax point before the new rate comes into force. Under the rules, a 2.5 per cent VAT charge will apply where:

  • The total value of sales are more than £100,000 (and the advance invoice or pre-payment is not normal commercial practice)
  • The supplier and customer are connected
  • Payment is due more than six months after the invoice date or
  • you provide funding for your customer to make a pre-payment.

HMRC has indicated it will only seek adjustment to an error on a VAT return relating to the rate change where there has been an overall revenue loss.

With careful planning, there are ways to reduce the impact of the VAT change on your business, but the fact of the rate rise is unavoidable. To prevent misunderstanding, it may be prudent to start making your customers aware as early as possible of the VAT change and any increase in prices that will result.

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Historically, accountants have charged large fees for preparing the accounts and completing the tax returns for businesses.

In these changing times are these high fees a thing of the past?

All businesses, regardless of size, must prepare accounts and submit a tax return to HMRC. The traditional view is that preparing these returns is a complex procedure resulting in sky-high accountancy fees.

However, two key factors have evolved over recent years that challenge this and as a result the fees charged by accountants should reduce dramatically.

Advances in technology

In all areas of life, there have been huge advances in technology over the past decade. At last the accounting profession is catching up.

Computer-based bookkeeping packages have become easily accessible to business owners at an ever-reducing cost and ever-increasing ease of use.

This means the quality and completeness of information made available to accountants at year-ends is constantly improving.

Coupled with this, accountants now use accounts production software that greatly simplifies the preparation of annual accounts and tax returns.

Logic would dictate that the evolution of technology would have led to a reduction in accountancy fees.

Increase in the number of small businesses

There are nearly five million businesses in the UK. Small, non-complex businesses account for 99.9 per cent of this number. In fact, the growth of small businesses is at its highest level since statistics were recorded.

The accounts and tax affairs of these businesses are simple. They do not demand many hours of tax advice. Most of the time is spent in what is generally known as compliance duties. For example, preparing the accounts, filing the tax return and making sure all deadlines are met.

The accountant’s fee should reflect the level and complexity of the work required.

The accounting profession is gradually waking up to the changes in technology and businesses over the past decade.

This is very good news for small businesses out there that should be able to benefit for dramatic reductions in their accounting fees. A great help in these tough times.

Elaine Clark, www.cheapaccounting.co.uk

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