A simple guide to getting started in your first business venture and what you need to do in terms of tax and keeping accounts.
You may have been thinking of starting your own business for a while or maybe you just feel like jumping in at the deep end. Whichever way you do it you will probably be wondering what you need to do in terms of informing the tax man and keeping proper records.
Starting a business or registering as self employed is relative simple and not something you should worry about too much.
Informing HMRC
Her Majesty’s Revenue and Customs is the Government Department responsible for administering and collecting tax in the UK. When you start a business you will need to inform HMRC that you are trading. You must do this within 3 months, whether you are making money or not, otherwise you will be liable for penalties.
The leaflet – Are you thinking of working for yourself? provides more information and includes an official form where you can register as self-employed.
You will also need to register for Class 2 National Insurance Contributions (NIC) which are payable monthly. If you have other income (perhaps you still have a full or part-time job) or if you expect your earnings to be low, you can apply for an exemption. You will also be liable to pay Class 4 National Insurance Contributions but only if you actually make a profit.
Paying Tax
You will have to complete and submit a Self Assessment Tax Return for each year that you have been self-employed. You will need to declare all your income, including any income from other paid employment and your total tax liability will be calculated on this. You can do this on-line by registering at the SA Website.
You can do this yourself and for most small businesses the process is relatively simple although as your business expands you might want to engage the services of an accountant to keep your tax affairs in order?
One advantage that many people overlook is that in their first year their business may make a small loss. If you have already paid tax for that year through PAYE in your previous job then you may well be entitled to a refund?
Keeping Records
No matter how small or simple your first business is it is essential that you keep a proper record of income and expenses. Not only will this ensure you are able to stay within the law but will also give you an idea of how well your business is doing.
There are several free and low-cost accounting packages available or, alternatively, you can devise your own system using a spreadsheet program such as Excel.
Bank Accounts
Although you don’t have to have a separate business bank account it can often be a good idea to keep your business and personal accounts entirely separate. Most High Street banks offer account services for small businesses and offer useful extra services such as business credit cards, on-line banking and a dedicated business manager.
VAT
Perhaps the scariest aspect of running a small business is keeping up with VAT. The good news is that for businesses with a turnover of less than £68,000 you do not have to register for VAT. You will, of course, still need to pay VAT on any purchases made and will not be able to claim this back but, for most small businesses, this saves the hassle of dealing with VAT – which can be daunting to a new business owner.
However, as your business grows and your turnover figure starts to near the threshold it is something you will have to do and it’s probably a good time to start thinking about engaging an accountant who can give more qualified and accurate advice.
