by Angela Taffs | Jan 2, 2015 | Finance, Tax and NI
An introduction to tax, national insurance and VAT
The amount of tax you need to budget for and then pay, depends on your business structure.
The two most common business structures for small business are:
* Self Employment (also known as Sole trader)
* Limited Company
Tax Payable for Self Employment (& When)
Class 2 National Insurance
For the 2015/16 tax year (6 April 2014 to 5 April 2015) you pay £145.60
Unless you have been approved for a small earnings exception certificate (profits under £5,965) then you will pay Class 2 contributions even if you make a loss.
Class 2 National Insurance is collected with Class 4 national insurance and income tax from 2016 and has transitioned to an annual payment structure.
Class 4 National Insurance
Once your profits have exceed £8,060, you begin to pay Class 4 National Insurance at 9% on a sliding scale.
For example – if you have £10,000 profit for the tax year, you would pay Class 4 National Insurance at 9% on £1,940 (£174.60) which is payable in line with self assessment deadlines 31 January after the end of the tax year).
Income Tax
The 2015/16 Income Tax Allowance is £10,600 therefore you do not pay income tax until your profits reach this level. However, if you have employment income at any point in the year, this is also included in your £10,600 allowance.
Limited Company
If your business is registered as a limited company, it is liable to pay corporation tax on any profits the company makes. The directors of the company pay income tax on their salaries, as do any other employees.
The Corporation Tax rate may change each year on April 1st. The current rate payable is 20% on profits of £300,000 and under. Above £300,000 the rate is 21%.
VAT
You do not have to register for VAT (Value Added Tax) until your turnover is £82,000. However, you can register for it voluntarily if you wish. You will then need to charge VAT on all your income and submit quarterly VAT returns (unless you elect to submit an annual return if you meet the criteria).
If you sell BTE products (Broadcasting, Telephone and E-Services) to other EU countries, you may need to pay the applicable VAT for those countries which is done via registration for MOSS (Mini One Stop System).
If you are looking at going down the limited company or voluntary registration for VAT, I strongly advise you have a chat to an accountant first.
This guide to small business tax and VAT was written in conjunction with
Kylie Fieldhouse ACA CA (AUS)
KFH Accounting
www.kfhaccounting.co.uk
by Angela Taffs | Jan 2, 2015 | Starting a Business
All about Market Research
So many people start up a business without doing any market research. They then wonder why their product or service does not get the sales they were expecting and ultimately, why their business is failing. Read on to find out why market research is important for your business and why by doing it you will have a better chance of success.
Why market research is important if you want your small business to be successful
Unfortunately, many small business owners disregard the importance of market research. It is all too common for small business owners to ignore market research altogether and to base their business idea on their own assumptions. All too often, this results in the business failing which could have been avoided by doing some basic research.
The Danger of Assumptions
Many small business owners assume that they understand what their customers want and what motivates them to buy. But relying on assumptions is a dangerous game. I have met all too many business owners who think that by creating a similar product at a lower price point, buyers will flock to them. This is not always the case and has proven to be a downfall for far too many.
You need to find out how to connect with your target market and understand their needs and buying habits. You need to understand why your target market buy what they do (and rarely is it price!), why they choose one supplier over another and what would motivate them to move to a new supplier should one enter the market (you!)
Go out there and get cold, hard facts and figures, not just base your business on loose guesses. This will then give you a competitive advantage when entering the market. The more you can find out about how much demand there will be for your product or service, who is likely to buy it, what they will pay and what your competitors are doing the better chance you have of creating something successful.
Market research will help you:
- Test the viability of your business idea
- Who your ideal customers are (your target market)
- Will these customers buy from you and how much will they pay
- What the market trends are in your industry
- Find out who your prospective customers buy from already (your competitors)
- What your competitors are doing well, doing badly and what they are charging (competitor analysis)
You need to plan your market research carefully to get the answers you need and you also need to allow time to carry it out.
And if you don’t get the answers you were hoping for, this does not necessarily mean that your business idea will fail. It just means that you may need to adapt your product or service to suit the needs of your target market. I started up my business consultancy but a lot of the women I met who needed my help couldn’t afford my hourly rate. That is when I decided to start up my on-line advice which was more affordable for them and gave them access to a lot of the advice they needed.
On the other hand, please do not bury your head in the sand and ignore the results of market research if you don’t hear what you want to. Too many small business owners get personally attached to their idea and refuse to listen to the evidence in front of them.
Now you know why market research is important, it is essential to remain objective when carrying out the research and to use the results to plan the most effective way to give your business the best chance of success.
by Angela Taffs | Dec 30, 2014 | Finance, Tax and NI
Getting started with Income Tax and National Insurance
If you are self-employed, you will need to pay Income Tax and National Insurance on what is known as taxable income.
Taxable income is mainly the profits you make from working for yourself. This means you pay tax not on the entire income you make in your business but the difference between the income you make and the amount you spend on expenses for running the business.
You will pay Income Tax and National Insurance throughout the HMRC Self-Assessment system and will need to complete a tax return following the end of every tax year.
As soon as you start in business you will need to register with HMRC.
Once you have registered, HMRC will send you a Self-Assessment Unique Taxpayer Reference which you will need to quote whenever you contact them.
The deadline by which a tax return is due to be completed and sent to HMRC is dependent upon whether you choose to send your tax return in on paper on online. Paper returns must reach HMRC by 31st October and online returns by 31st January following the end of the tax year to which the tax return relates.
There are late filing penalties if you don’t send in your tax return on time.
There are also deadlines for paying the tax you own. If you don’t pay on time, you may have to pay interest and late payment penalties.
You must maintain adequate records when you are self-employed such as retaining invoices you have issued and keeping receipts for any purchases you have made for the business.
Records should be organised in separate accounting periods. The last date of an accounting period is known as your accounting date. This is the date that you will close your accounts each year. Your business accounts will be prepared from the details recorded during your accounting period.
Whichever accounting period you choose, having a good record keeping system in place will make things easier when you come to complete your Self-Assessment tax return.
When doing your tax return, you can deduct your business expenses from your income to reduce the amount of tax you have to pay.
by Angela Taffs | Dec 30, 2014 | Finance, Tax and NI
Basic business accounting
Every business, no matter how large or how small, needs to keep accounts and review them at regular periods in order for them to known how much profit or loss they have made. They will also be able to use these figures to help predict the future of their business and if any financial problems are looming. This is why every figure should be recorded and accounted for, down to the last penny. Here are a few tips for you to set up some basic business accounting.
Choose a basic business accounting system
Be consistent with your accounting system. Choose one system and stick with it. If you run a number of different accounting systems, things are in danger of getting missed and lost. It does not matter whether you use a manual system or automated software, just keep everything in one place.
Keep records up to date
It is all too easy to leave sorting out your records and accounts until a later date but the longer you leave it, the more difficult and cumbersome it will be. Keep track on a daily basis if possible of everything you have spent and earned in that day. As an absolute minimum, book out time each month to collate your figures. The longer time period you leave, the more difficult to remember what those odd expenditures relate to. Have a system for keeping your receipts and invoices in order until you come to the time of recording them.
Balance the books
Each month, print off your bank statements and double check the money in and out against your accounting records. This is where you will be able to identify if you have properly accounted for everything coming into and going out of the business. Again, don’t leave it longer than a month to check or it is all too easy to forget what has happened where there may be an error.
Have a backup in place
You may swear by a manual paper system but think what would happen in the worst case scenario and your office suffered from a fire. Also, paper is easy to lose. Log all your paper entries on to a computer database and ensure you carry out a regular backup. Alternatively, you may wish to use one of the many cloud based accountancy software packages which will prepare accountancy reports for you and have inbuilt backup in case of disaster.
By getting a basic business accounting system in place from the start will save you time and effort when it comes to your end and the preparation of your financial accounts. And your accountant will thank you for it too.
by Angela Taffs | Dec 30, 2014 | Starting a Business
Are you thinking of starting a business?
If so, there are a few considerations to bear in mind before ploughing ahead in order to give your business idea the best chance of success.
Create a business plan.
It is very easy during the initial enthusiasm of thinking of starting a business to jump in with your new idea and overlook the finer details that can help indicate the likelihood of success. Many think that business plans only need to be written when trying to raise finance, but the actual writing out of a business plan can help you define your business idea, assess it’s viability, define your goals and plan how you are going to achieve them. It will help you think about your competition and what you are going to do to stand out amongst them. It will help identify where you product or service will be placed in the market and what people are likely to pay for it. Most importantly it will help you plan your cash flow and how you are going to survive in the early days until you get it fully off the ground.
Beware of going ‘all in.’
There are many people who have used their credit cards to the max or re-mortgaged their homes to fund their business idea. For the rare few, this gamble paid off. But for many more, this led to tears and financial ruin. Think carefully before putting everything on the line for starting your business. Starting a business is stressful enough as it is without the additional worry each month that you may be on the verge of losing your home. Do your research, write your business plan and consider carefully how your business will be funded.
Test the waters before giving up the day job
To minimize the risk of failure, try testing your business idea out on a small scale before you throw in the towel on your day job. There are numerous small business owners who remained in their day job whilst building their own business slowly in the evenings and at weekends. Yes, it will take you longer, but the risks are far lower and you will still be able to earn a salary to pay the household bills each month. A word of warning though, do check there are no restrictions in your employment contract restricting you from carrying out work elsewhere.
Save for a rainy day.
Even the most successful of start-up businesses can be caught in an unexpected market downturn. And there is always the unexpected scenario or emergency that no one could have predicted. From the moment of thinking of starting a business, make sure you build up a financial buffer and continue when your sales are good so that you have something in reserve in case the lean times hit. If the unexpected does happen, you will still be responsible for the business bills. Having a cash buffer will take the pressure off if the bad times hit and could mean the difference between your business surviving or failing long term.
Protect yourself.
Too often I hear ‘it will never happen to me’ but every business is vulnerable to potential risks. It is so important to have a backup or disaster recovery plan in place and to protect yourself and your business from potential risks. Take some time to think about worst case scenarios and how you’d handle them. What if a fire or flood destroyed your office? What would happen if a customer or employee sued your business? What would happen if you were ill or injured and couldn’t work? Make sure you have insurance protection in place and put procedures in place to ensure your business could continue to run in the worst case scenario.
Start with the end in mind.
Start with the end in mind. Many start up business owners think it crazy to be thinking about selling their business before it is fully up and running, but by planning what will ultimately happen with the business in the future, will help you plan and set goals to achieve along the way. Without an end plan in place, a business can drift along and go off track and not be as successful as it could be with a clear exit plan in place. Remember, one day you will either want to hand over the reins or sell on and have a nice lump sum in place for your retirement.
Seek professional advice.
If you’re serious about starting your own business and making it a success, find yourself a mentor or advisor to give you expert advice. An experienced business advisor can be there to help you develop your business plan and launch your new career. They can be an invaluable sounding board and their experience and independent perspective can help you steer clear of the numerous start up mistakes so many make.
So if you are thinking of starting a business follow the steps above to help you make it a success.
Kylie Fieldhouse ACA CA (AUS)