28 March 2018
Small business owners face a major struggle when they ‘go out on their own’ for the first time. For many Britons, the norm is to be a PAYE employee, meaning their employer takes care of deducting and paying their tax and national insurance over to HMRC.
Growing up we have no training, it is not part of the school curriculum to even begin to understand how to work out our taxes, let alone how to be ‘self-employed’. Some of the biggest hurdles faced by entrepreneurs are the fact they just don’t know what to do when they start working for themselves.
The first decision to make when you decide to start a business is whether to operate as a sole trader or through your own limited company. There are significant benefits to both in their own right, so it makes sense to take your time and make the right decision from the offset.
Sole traders have unlimited liability, as they are not viewed as a separate entity by UK law. Typically tax rates on sole traders aren’t as favourable as they are on limited companies; however, legislation to comply is more significant with limited companies and can, therefore, be more costly.
You need to register for self-assessment and Class 2 National Insurance if you’ll earn more than £1,000 from self-employment in a tax year. You still need to do this if you’ve sent a tax return before. If you are trading as a Limited Company, then there are more obstacles to overcome in registering, the biggest being that the company needs to be registered before trading can begin (sole traders can do it up to three months after the fact). Consideration should then be made about the need to register for VAT, PAYE, CIS, which may offer some tax planning or image benefits, as well as the fact there may be a genuine need to register.
Entrepreneurs are typically very good at what they do; but that's generally not record keeping, accounting or reporting to HMRC. It is therefore important to get advice from professionals, who can understand how you do business and provide advice on best practice for record keeping and ways to maximize tax efficiency.
Software can be a useful tool for record keeping, and there are now a significant number of cloud bookkeeping software companies with similar offerings. The packages range from being ideal for the end user, using lay terms, to those which allow superior tracking of information, sales by salesman, source or even pipeline leads. Some software allows photographic uploads of receipts, this works very well for individuals who have a habit of losing paperwork in all sorts of places!
The tax year ends 5th April, and while your tax return can be filed between then and 31st January next year, completing this early could help you with planning cash flow. Regardless of how you choose to complete your tax returns, register for self-assessment or keep your records, one thing is for certain, burying your head in the sand doesn’t get it done, and the longer you leave it the bigger challenge it will become!
For advice on where to begin or more information, visit www.apsaccountancy.co.uk.