Want to be your own boss?
Have you dreamed of being your own boss and setting up a business? If you are thinking of working for yourself there are many tax implications to consider.
Initially you need to decide what legal structure you intend to work through.
If you work as a self-employed individual you are a Sole Trader and will pay income tax on your business profits through the Self Assessment System as well as self employed National Insurance Contributions (known as Class 2 and Class 4 Contributions) .
If you work with other people you will be in partnership and will pay income tax on your share of the partnership profits along with National Insurance as per a Sole Trader.
Alternatively you may wish to work via a Limited Company. The company will be a separate Legal Entity of which you will be a Director, Shareholder and an employee. The company will pay Corporation Tax on its profits and you can extract your drawings as salary and dividends.
Most people starting in business will initially work as a Sole Trader. The first step is to register as a self-employed person with HM Revenue and Customs, regardless of how small your estimated earnings are. This must be done within three months of starting trading.
You are legally required to keep records of all business income and expenditure and must keep receipts to back up all costs claimed. The details can be recorded manually or using simple analysed spreadsheets. It is important to get your system for recording business transactions correct at this stage. You will not be required to submit accounts figures for up to 18 months after commencing trading. At this point it can be very difficult to work out what the business profits are if inadequate records have been kept.
You will need to record details of:-
- Sales in the form of invoices raised or receipts from customers (both cash and cheque).
- Direct costs such as stock, postage, stationery & telephone.
- Office overheads, if you work from home you can claim a portion of your household lighting and heating costs.
- Travel and Motor expenses, business mileage can be claimed at 40p per mile.
- Set up costs such as equipping a home office, redecoration of an office room and purchase of equipment.
- It is a good idea to open a business bank account to keep all business transactions separate from your personal affairs. Many banks offer free business banking to new businesses for at least a year. It may also be worth having a separate credit card for business expenditure.
Once your sales exceed £64,000 you will need to register the business for VAT but you can also register on a voluntary basis if your sales are below this. You will then need to prepare quarterly VAT returns and account for VAT on sales and expenses. At this point you may consider using a simple accounting package to record business transactions and produce VAT returns.
As a Sole Trader you will need to prepare a set of accounts for the business after the first year of trading. These will show the profit or loss the business has made and it assets and liabilities at that date. These figures will then need to be submitted on a Self Assessment tax return and any Income tax and National Insurance due on the profits will need to be paid. At this point it may be worth using an accountant to ensure all available tax deductions have been claimed.
For the tax year 2007/08 people can earn profits of up to £5,225 (the personal allowance) before they have to pay tax.
Article written for Spring 2008 issue by
Juliet Morris ACA
Redshield Accountancy Services
Tel - 01892 667606
Mobile - 07973 844685
E-mail: juliet@redshield.co.uk
