Starting a Business - Independent Financial Advice for New Businesses

Are you contemplating starting your own business? If so, you’ll know it’s an exciting, yet daunting prospect. Read on to ensure that every decision you take is the right one for your business.

Getting started

To start with, you should prepare a full business plan and establish sources of funds and tax-efficient borrowing. You should also consider whether your business needs a PAYE scheme or should be VAT registered, and, not least, assess the business structure that will best meet your needs: sole trader/sole practitioner, partnership or limited company.

Which structure?

There are both advantages and disadvantages for each structure with respect to control, perception and costs. Another important consideration is selecting the right year-end for your business.

Did you know?

If you plan to become self-employed, failure to notify the Inland Revenue within three months of the last day of the month in which the self-employment begins will result in a £100 penalty.

Incorporated business benefits

Forming a limited company can make sense when the limitation of liability is important. Trading through a limited company can also be an effective way of sheltering profits from personal tax as profits paid out in the form of salaries, bonuses or dividends will normally be taxable at an individual’s top rate, whereas profits retained within the company can be taxed at a rate as low as 0 per cent.

Retaining more profits – and saving some National Insurance

Although leaving profits in your company can be tax efficient, you need money to live on. An accountant or financial adviser can explain the most advantageous ways for you to extract profit from your company. A salary may meet most of your needs, but don’t overlook the use of benefits in kind, which may save you income tax and could also result in a lower National Insurance bill.

Employed or self-employed?

Should you become self-employed or employed? There is no statutory definition of employment or self-employment. But there are a series of tests that the Inland Revenue (IR) will apply if they believe someone has been incorrectly classified.

The IR35 rules require companies and partnerships to consider each and every contract they enter into for the provision of services. The question is whether or not the contract is one which, had it been between the owner or partner and the customer, would have required the customer to treat the owner or partner as an employee and therefore being subject to PAYE. The contract passes the test if the owner/partner would have been classified as self-employed; it fails if the owner/partner would have been classified as an employee.

See also:
Business Protection
Commercial Mortgages

The Financial Services Authority does not regulate tax advice.

Business considerations

Expenses
It is essential to ensure that you claim all deductible expenses.

Capital allowances
For expenditure on your plant and machinery, tax relief is given in the form of capital allowances. For small and medium-sized businesses, the allowance given in the first year is 40%, with further allowances in subsequent years at the rate of 25% per annum on the reducing balance.

Research and development
Small and medium-sized companies can obtain enhanced tax relief on research and development expenditure. For companies that are not yet profitable, the relief can be claimed now at a special rate.

Involving the family
If you employ family members in your business, you will need to be able to justify the amount you pay them. You can remunerate family members with a salary, and perhaps also with benefits such as a company car or medical insurance – and you can make payments into an appropriate pension scheme.