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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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Planning before the end of your accounting year could reduce your tax bill and improve your cashflow. With 5 April fast approaching and many start-ups reaching the end of their year on 31 March, here are my ten tips for year-end tax planning:

  1. Bring forward costs and get tax relief a year earlier. Be careful though, because some expenses have to be spread over tax years, even if you paid for them now. Also keep in mind that tax rates are increasing next tax year, especially for higher income groups.
  2. Make your investment in the business before the year-end and enjoy the reduction in your tax liability a year sooner. Businesses are still entitled to 100 per cent tax relief on most capital expenditure of up to £50,000 per year.
  3. Delay invoices. If possible, plan larger jobs until after the year-end and you will delay payment of tax thereon for a further year. Be careful though, because you must account for tax on fees built up through work in progress.
  4. Value stock. Now is the time to do a stock take to assess write-offs. Stock is valued at the lower of its cost and its net realisable value.
  5. Consider changing your year-end. If your profits have been going down recently, then you could benefit from extending your year-end towards 31 March. If profits improve over the next twelve months, you will delay tax on these profits. Moreover, any profits you made when you started the business could be offset to further reduce your tax bill.
  6. Plan when to take profits out of the company. Any profits for the current year, plus any undrawn profits for previous years, can be taken as a dividend. If you are already a higher taxpayer this tax year, you could delay paying a dividend. If you may become a higher taxpayer next year, you could bring forward the payment. If your spouse is a shareholder in the business, effectively, you have two lots of personal allowance and basic rate to keep taxes low across the family.
  7. Use your ISA allowance. Up to £10,200 for the over-50s and up to £7,200 can be invested in an ISA for the year to 5 April 2010. Income and gains in an ISA are tax-free. Any unused allowance cannot be carried forward, so there are only a few days left to take advantage of the allowance.
  8. Realise capital gains. You can realise capital gains of £10,100 each tax year before you are liable to pay tax. A capital gain could arise on your shares, second home or buy-to-let property.
  9. Be aware that it is widely predicted that taxes will rise with this year’s budget. Capital gains tax is at a historically low level of 18 per cent, and many are predicting that it will increase to 25 per cent or more. Cashing in your investments or transferring them to someone else (other than your spouse) now will ensure you are taxed at the current rate.
  10. Assess whether to change your business type next year. Becoming a sole trader is a cheap, simple way to start – and tax efficient, if you made an initial loss. Now could be the time to go limited or form an LLP, especially with the upcoming rises in tax and National Insurance.

Ray Coman,  Coman & Co Tax Accountants (specialising in helping start-ups to succeed through quality accounting and tax advice)

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I’m stuck in a Premier Inn in Oxfordshire for the third day… Three more to go… M&S biscuits from the Simply Food outlet at the BP garage are starting to take their toll and having to abstain from the internet is leaving me itchy. Why? Because Premier Inn thinks £12 per day is a fair price for internet access. I disagree. Why am I buying expensive M&S biscuits? Because I’m bored and they’re nice.

The hotel is primarily used by business people. The room rate, at about £60 a night, is fair and everything else is fine (apart from housekeeping popping in while I was in bed). But their internet access is extremely overpriced.

In the end I had to cave in. I don’t mind buying the M&S biscuits, because they’re a treat, but being forced to pay that much for internet for one day left me feeling a little bit cheated. I won’t be doing it again.

It got me thinking: how small businesses pitch their prices is crucial. A lot of small start-ups set their prices too high and never get off the ground as a result, while a scarily large amount of others believe their only way to compete is on price and from day one their margins are so low they get trapped and never make a profit.

Over the past few years in the various businesses I’ve had experience of both. So how do you know what price is right? Test, test and test again. Just because the price seems right to you on your calculator at home doesn’t mean your customers will agree.

Cheap isn’t always the answer

At the minute, other owners I know are constantly telling me how their businesses are struggling, as they regale tales of half-price sales and the like. For me, the most important figure in any business is its gross margin. Sales mean bigger turnover yet smaller margin, so as a rule I’m not a terribly big fan of sales.

But it got me thinking, although we’re doing perfectly fine during the recession with some sort of sale – could we do better?

Not wanting to slash prices on Karacha.com, my online music instrument shop, I decided to carry out a little experiment. I sent out some of our sale products under a different name at sale prices. I wanted to see if people would buy solely on price.

Every week or so I adjusted the price to see what effect it had. At first, the weeks went by with no difference and no real sales, but then I hit a particular price at which people went nuts for one product and we sold a lot. Slight problem: the price we reached was horrendously low, no profit and no point. Sale Over? Not quite.

At the same time I was doing exactly the same experiment with another product, but things turned out differently. I thought we might have excess stock of a particular item, so I sold some at £20 off, but unlike the first experiment where £20 made no difference, sales of this second product went from one or two per day to 10-20. Quick as you like this offer has been applied across all of Karacha and it looks like every bit of excess will be sold by Christmas at a tidy profit.

This shows that what’s right for one product might not be right for all and it’s worth giving your customers options and seeing how they react.

My advice when starting out is test, test and test some more, but always go for slightly higher prices, because next week, month or year you can discount if necessary. Having to increase prices can lose you customers.

If your business genuinely brings something new to the table, build good margins into your prices, have the confidence in yourself and your products, if you do, then your customers will.

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