There are many issues to address and each business is unique. Below are some of the common questions which arise when starting, growing or closing a business. In addition to these specific accountancy questions there are many specific articles on the Duport site about all aspects of commerce.
Why should I find an accountant before I start my new business?
Although you do not yet have accounts to be checked, you can get a great deal of preliminary advice. Much of this is available on the Duport site, but you may want professional help deciding the format of the business – will you operate as a sole trader, a partnership or a limited company? Each choice has implications in respect of legal contracts; registering for VAT and the amount of credit your suppliers will allow your business. Most accountants offer an initial free consultation, where you can ask many basic (or complex) questions, before deciding if you and that particular accountant are right for one another!
Having decided on a format you then need to know what records you are legally bound to keep and an accountant can advise here and help set up the company correctly and efficiently. This will make preparing the year-end accounts, cash flow projections etc. easier. If you do not keep the correct records you can face hefty penalties and it will be harder to file your tax return. You could also lose out on tax relief if you do not have all the necessary receipts.
I started as a Sole Trader but am thinking about incorporating – what are the basic tax differences between being a Limited Company and a Sole Trader?
The total tax and National Insurance (NI) paid by a small limited company is likely to be lower than a comparable unincorporated business when the taxable profits exceed the 40% level. Also, company profits do not attract National Insurance.
Salaries of directors of companies are subject to income tax and NI, but dividends paid out of company profits do not attract NI although there is a 19% tax on dividends. On the downside there may be capital gains tax implications when transferring assets (particularly goodwill) from an unincorporated business to a limited company. There is no right or wrong answer, it depends on your specific business so talk to a good accountant.
My business needs to raise some finance for growth – what are my options?
Get some impartial advice from your accountant before you consult the bank. A bank will want to see a strong business plan. Consider raising equity finance (sharing the risk and rewards by selling shares in the business) but if you go down this route be prepared to grant outside shareholders a stake in the business.
Think through the alternatives to getting more finance. For instance, you might have assets against which finance could be raised, such as factoring debtors. Maybe you could manage the stocks and debtors better to free up cash? A hard look at the cash flow can pay dividends. Could you release cash from underperforming assets? Reduce costs in general? Look also at improving the profitability of your products or services to generate more cash. If none of the above is enough and there is still a gaping hole in the finances, make sure there is a strong business plan to present to the bank.
I have deliberately kept my turnover below £85,000 to avoid the hassle of VAT registration, but now the business is booming and I will go over the limit – what should I do?
You have no choice but to register for VAT if at the end of any month, the taxable turnover of all business activities in the previous year is over £85,000. HM Revenue and Customs (HMRC) must be notified within 30 days. Once registered you must charge VAT on sales (called output tax). The VAT is normally at the standard rate of 20%, but there are also Zero Rate and a Reduced Rate (currently 5%). VAT is charged on goods and services purchased (input tax). You must complete a form and will be given your own VAT number, which must be quoted on all sales invoices. All claims of input tax must include the supplier’s VAT number.
A VAT return must be completed quarterly, by the end of the following month, and on it you must state the total output tax, deduct the total input tax and pay the balance over to customers. If input tax exceeds output tax, HMRC pays you a refund.
Penalties for getting it wrong are severe, and officials will periodically visit your business premises to inspect the records and check you are compliance. Talk to your accountant and read the Duport guides on an introduction to VAT, how to set up records and invoice for VAT and how to complete VAT returns online.
How can I cut down on the time spent on accounts? will it help if I invest in accountancy software?
You can either hand the lot to an accountant or book-keeper or computerize your accounts. If you decide to invest in software, make sure your accountant can work with the chosen package and ensure everyone working on the records is happy about the decision. Consider what you want the system to do. Most systems will record bank account transactions, sales and purchase on credit, but you may also want a payroll programme that analyses costs by departments. Do you want to integrate purchase sales with stock records? How much support and training is on offer, and can you increase this? There are a number of effective software programmes, but do not under-estimate the time it will take to get them up and running effectively.
How do I know what expenses to claim?
Your business will be taxed on its profits, correctly working out what your business has spent is just as important as how much money has come in. Strict rules govern what can and cannot be counted as a business expense. These include the cost of any goods or materials bought as stock and then resold, rent and running costs for premises, marketing costs, costs of travel to see customers, and general running expenses such as postage and telephone. If you work from home you should be able to claim a percentage of the cost of such things as telephone for business calls etc. Your accountant can help you decide the proportion of costs to go against tax.
Costs which are not allowed include personal expenses such as travel to work, clothes or living expenses and fines such as parking tickets. The costs of buying equipment or premises are not allowed as business expenses but are covered by the capital allowance system. Keep records of all income and expenditure in order to fill in your tax return each year.
Is there an advantage if I send my tax return in before 30th september?
Only if you want to HMRC to calculate your liability for you. Otherwise the ultimate deadline is 31st January and after that you will pay penalties for not having filed returns. However, your accountant will want accounts way before January and probably start sending reminders any time after April. These may get more frantic as the year goes on! Do not leave everything to the last minute, otherwise stress levels will soar and mistakes will happen.
What exactly is the self assessment payment on account system?
Income tax (and class 4 National Insurance) is normally collected by means of two half-yearly payments on account, on 31st January in the relevant tax year and the following 31st July. These payments are normally based on the previous year’s agreed liabilities. So there will be a balance owing to HMRC which is collected in the payment on the following 31st January (along with the first payment on account for the following year). So when profits increase there is a time lag before tax is collected on these profits, and problems can occur if later the business is not doing so well. Try to set aside tax early on!
What is the best way to sell my business?
Confidence is vital when selling your business. You probably want to retain value and prevent the loss of key staff. Your accountant may be able to recommend a specialist to help with some tasks. Ideally 18–24 months earlier you need to prepare the paperwork for potential buyers. This will include business plans and financial history. Businesses usually sell for a multiple of profits or turnover, and there might be a standard multiple for your business.
Find out what similar businesses sell for and what deals have been done. Discreetly ask around and also monitor trade publications in order to get an idea of a likely price. Will the management buy the company, or could it merge with another local company?
How do I get my money out of the business so I can retire without closing it down?
Discuss financial planning regularly with your accountant. Apart from an outright sale, the best option may be to groom the management to carry on the business, and/or employ someone to run the business for you. You might want to supervise this initially, and put systems in place to keep control. Incentives might be needed to attract and keep the right trustworthy person, but at the same time make sure you have access to all aspects of the business, especially financial!
