Despite the events of the last year, recent government data has shown the number of people during the pandemic who decided to set up their own company was over 835,000, a staggering 41% increase from the number of new business registrations in 2019.
Starting a new company from scratch can be daunting and often comes with a whole host of questions: that’s why we’ve pulled together a guide to help make the financial implications of starting a new business easier to understand.
Here are 5 things to think about from a financial perspective to help get your new business off the ground.
1. Structure of your business:
The structure of your business is important as it will determine which taxes you are expected to pay.
If you are self-employed, you need to register as a sole trader with HMRC and file a self-assessment tax return every year.
You will need to set up as a sole trader if any of the following apply:
- you earned more than £1,000 from self-employment between 6 April last year and 5 April this year.
- you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.
- you need to prove you’re self-employed, for example to claim Tax-Free Childcare.
A Limited company is a separate entity from the director(s) of the business. This means that the company has finances separate from any personal accounts and can keep any profit it makes after tax.
Once you have decided to set up a limited company and established appropriate shareholders or guarantors, the next step is to register your business with Companies House.
Many people choose to register for Corporation Tax alongside this process where you are then expected to file a company tax return.
In a partnership, both parties share responsibility for the business including any losses or bills the company must pay.
A partner does not have to be an individual but can be a limited company; each partner splits the profits and pays tax on their share.
When setting up a business partnership, you must choose a nominated partner who is responsible for keeping business records and managing the partnership’s tax returns.
The next step is for the nominated partner to register the partnership for self-assessment with HMRC. The other partners must register separately, and all partners must send their own individual tax returns.
You must register as a partnership by 5th October in your business’ second tax year or face being charged a penalty fee.
2. Which accounting platform to use:
There are a variety of accounting platforms to choose from including both free and paid options, or alternatively, you might choose to manually record your finances yourself.
It is important to think about whether you plan to manage your accounts yourself, or if you would prefer to outsource to an accountant. It is also important to choose a platform that suits your business. Do not overcomplicate matters by purchasing an advanced package when you only need basic accounting software.
If, like many small businesses, you wish your books to be accessible online, there are a variety of cloud-based accounting platforms which will enable you to access your books from either a mobile phone app or any web browser.
Cloud accounting software has many advantages:
- You can access your current financial position at any time, from anywhere.
- You can connect the software to your business bank account, meaning transactions flow smoothly from the bank to the books automatically.
- You can enable multi-user access making it easy to collaborate with your team or partners.
As Quickbook accredited accountants, FCF can help you to manage your books online, or alternatively, can set you up so that you have everything you need to manage your business accounting yourself.
For more information about cloud accounting, read our dedicated blog post on the benefits and pitfalls, or get in touch with a member of our team to find out how we can help.
3. Registering for VAT:
You are legally obliged to register your business for VAT with HMRC if its VAT taxable turnover is more than £85,000.
You can still choose to register voluntarily if your turnover is less than £85,000.
Registering for VAT means that you can reclaim any VAT you pay on certain purchases. It does mean, however, that you then need to charge your customers the VAT amount on top of your standard price.
Choosing whether to become VAT registered voluntarily will depend on who your customers are. If, for example, you are selling your products or services to other businesses who are also VAT registered, it is more likely to be of benefit to you. If, however you are selling to individuals, the added VAT sum could potentially deter your customers.
If you choose to become a VAT registered business, you will need to notify HMRC if you plan on selling your products or services within the EU as there are different rules and regulations that apply.
If, over time your business begins to grow, you might think about hiring your first employee to ensure you continue to meet the demands of your customers while still developing the business.
Becoming an employer presents a new set of obligations including registering with payroll and ensuring you have employers’ liability insurance. To find out more about hiring your first employee, take a look at our previous blog post.
To set up payroll, you will first need to register as an employer with HMRC where you will be given a login to PAYE online.
Once you have chosen your payroll software, it is then up to you to collect and keep all records of employee payments and report to HMRC. Alternatively, you can outsource your payroll to a professional team who can manage this for you. Take a look at our post on the benefits of outsourced payroll for more information.
5. Forecasting and Budgeting:
Perhaps the most important consideration for small businesses is funding.
You will need to think about your cashflow and what overheads you might have. It is unlikely your income will be greater than your overheads initially and so you should think about setting up a cash reserve for any outgoing payments.
How you do this will depend on your personal circumstances as well as your business’ income and outgoings. You may need to borrow money initially and so working out how much you need to borrow and how you are able to repay the debt should be part of your wider business plan and can be outsourced to a professional accountant who will support you with forecasting and budgeting.
When it comes to submitting financial information, it is crucial you do so on time to avoid paying a penalty fee.
- Each new tax year begins on 6th April and ends 5th April the following year.
- You must send a self-assessment tax return by 31st October if you choose to submit a paper tax return, or by 31st January the following year if submitting online.
For limited companies, dates are reliant on the company’s registration date and accounting period.
- The standard deadline for paying corporation tax is 9 months and 1 day after your accounting period for corporation tax ends.
- PAYE must be paid to HMRC by the 22nd of the next tax month if you pay monthly, or the 22nd after the end of the quarter if you pay quarterly.
- The deadline for submitting a VAT return online is 1 month and 7 days after the end of an accounting period.
Talk to the Experts
If you’re thinking about setting up your own business but are not sure where to start, hiring an accountant can alleviate some of the stress and allow you to spend more time focussing on growing your business.
At FCF, we support many small businesses with accountancy and outsourced payroll. We offer on-hand support as and when it’s needed or can even set you up on the systems suited to your business and train you how to use them yourself.
To schedule a free, no-obligation consultation with one of our team, give us a call on 0117 379 0810 or fill out a contact form to discuss your requirements.
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This post was written by Tarah