Starting a new business venture

Even in an economic boom, starting a new business is a risky proposition. There are many factors to consider, including: the nature of the business; your target market and competitors; the potential for profit; how you plan to extract those profits; how fast the business will grow; how the business will impact on your life; the potential risks involved; and how you plan to exit the business.

Business plan: A comprehensive business plan is essential. This should include: your sources of funding, tax-efficient borrowings, whether the business needs a PAYE scheme or to be VAT registered and, not least, the business structure that will best meet your needs (sole owner, partnership, limited liability partnership or limited company). We can help you through the decision-making process – and to make the appropriate registrations. A good cash flow forecast can help you spot potential times when cash will be short, and regular updates will help you to see how your business is performing.

Business structure: There are both advantages and disadvantages for each trading structure and each has implications for control, perception, support, and costs. For example, careful consideration is needed regarding whether or not to retain personal ownership of any freehold property on an incorporation of business.

Choosing a year end: It is also important to choose the right year end for your business. Is there a time of year when it will be more convenient to close off your accounting records, ready for us? What would be the best time of year for stock-taking? To what extent is your business seasonal? From a tax viewpoint, the choice of a year end early in the tax year for an unincorporated business usually means that an increase in profits is more slowly reflected in an increased tax bill. Conversely, a reduction in profits will more slowly result in a lower tax bill.

HM Revenue & Customs registration: Advising HMRC when you become self-employed, and probably liable to Class 2 national insurance contributions (NICs), may not be very high on your list of priorities in the first weeks and months of a new business – but failure to notify will attract a penalty if tax or NICs are unpaid as a result. You should register as soon as possible to begin paying NICs and notify HMRC of your new self-employed status.

Deductible expenses

Our role is to work with you to minimise your taxes, and it is important to take advantage of all available opportunities.

You will pay tax on your taxable profits, so it is essential to claim all deductible expenses, many of which will be included in your accounting records. You can claim a proportion of your heating and lighting bills and a proportion of your home telephone bills if you work from home.

You can also claim for the cost of travel and accommodation when you are working away from your main place of business. You must keep adequate business records – including a log of business journeys – because in addition to ensuring your accounts are accurate, these records may be requested by HMRC.

Have you considered using an appropriate computer package for record keeping?

Claiming capital allowances

‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for expenditure on business equipment, in lieu of depreciation.

Annual Investment Allowance (AIA): The first £50,000 of the year’s investment in plant and machinery, except for cars, is allowed at 100%. This applies to any size of business and most business structures, but there are provisions to prevent multiple claiming. Businesses are able to allocate their AIA in any way they wish; so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as long-life assets or integral features) - see below.

Writing Down Allowance (WDA): Any additional expenditure over the AIA level enters either the main 20% pool or a special 10% pool, attracting WDA at the appropriate rate. For expenditure in the year ending 31 March 2010 (corporates) or ending 5 April 2010 (individuals and partnerships) there will be a 40% first year allowance for plant and machinery that would normally be allocated to the main pool. The special rate 10% pool applies to long life assets, the addition of thermal insulation to existing commercial buildings, and integral features of buildings, specifically:

Businesses may claim a WDA of up to £1,000 where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.

Enhanced Capital Allowances (ECA): In addition to AIA, a 100% first year allowance is available on energy saving or environmentally beneficial equipment. Where companies (only) have losses arising from ECAs, they may choose how much they wish to carry forward and how much they wish to surrender for a cash payment (tax credit payable at 19%).

There is a separate ECA scheme for electric and low CO2 emission (up to 110 g/km) cars and natural gas/hydrogen refuelling equipment. They still qualify for the 100% first year allowance, but do not qualify for the payable ECA regime.

Buildings: The phased withdrawal of industrial and agricultural buildings allowances impacts during 2009/10 with essentially a reduction in the WDA by 25%. If a trader obtained 3% allowance previously, the allowance is now 2%, subject to transitional rules.

A maximum 100% initial allowance is available for conversion of parts of business premises into flats, business premises renovation allowance and Enterprise Zone Allowance. WDA of 20% applies to expenditure on which initial allowance is not claimed.

Cars: A rate of 20% applies to cars with CO2 emissions exceeding 110 g/km. However, cars with CO2 emissions above 160 g/km will be restricted to 10% WDA. Expenditure incurred before April 2009 on “expensive” cars continues under the old regime (£3,000 per year cap on capital allowances). Cars with a non-business use element continue to be dealt with in single asset pools, so the correct private use adjustments can be made but the rate of WDA will be determined by the car’s CO2 emissions.

Investing in research and development

Tax relief is available on research and development (R&D) revenue expenditure at varying rates. Maximum rates of relief for 2009/10 are as follows:

This is subject to a minimum annual spend of £10,000. SME relief is capped at 7.5 million per project and subject to the most recent accounts having been prepared on a going concern basis.

SMEs barred from claiming SME R&D tax credit by virtue of receiving some other form of state aid (usually a grant) for the same project will be able to claim the large company R&D tax credit. This means that they will qualify for relief on 130% of their R&D expenditure. SME changes are subject to compliance with EC guidelines.

Involving your family

You can employ family members in your business, provided the package is commercially justifiable. You can remunerate family members with a salary, and perhaps also with benefits such as a company car or perhaps medical insurance – and you can make payments into a registered pension scheme. An alternative to a company car is to provide a van: the maximum annual tax bill on the use of a company van is only £1,200 – or £1,400 with unlimited private use and free fuel.

You can also take family members into partnership, thereby gaining more flexibility in profit allocation. In fact, taking your non-minor children into partnership and gradually reducing your own involvement can be a very tax-efficient way of passing on the family business. Be aware that taking family members into your business may put the family wealth at risk if, for example, the business were to fail.

HMRC may well challenge excessive remuneration packages or profit shares for family members, so seek our advice first. If you operate your business through a trading limited company, under current tax law you can pass shares on to other family members and thus gradually transfer the business with no immediate tax liability in most cases. However, a tax saving for the Donor usually impacts on the Donee, and you need to steer clear of the ‘settlements legislation’, so again, seek our advice first.

Unincorporated businesses

Case Study 2

Natasha, a sole trader, draws up her accounts to 31 July each year. Her profits for the year ended 31 July 2009 will normally be taxed for 2009/10.

There are special rules for the early and final years of a business, and for partnership joiners and leavers.

There is a growing number of ‘fines’ for those not complying with the rules and regulations of Government departments. We have already mentioned income tax and Class 2 national insurance, but other ‘traps’ to avoid are:

Your employment status

There is no statutory definition of ‘employment’ or ‘self-employment’. Rather, there is a series of ‘tests’ which HMRC will apply if they believe someone is classified incorrectly.

Because large amounts of both tax and national insurance can be at stake, HMRC can take quite an aggressive line and mistakes can cost you dearly, so advice specific to your situation is essential.

'IR35' rules require businesses to consider each and every contract they enter into for the provision of services. The test 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 subject to PAYE.

The contract ‘passes’ if the owner/partner would have been classified as self-employed; it fails if the owner/partner would have been classified as an employee.

If the contract ‘fails’, the business is required to account for PAYE and national insurance on the ‘deemed’ employment income from the contract at the end of the tax year.

This is done using specific rules. We would be happy to advise you about these.

Debtors and unbilled work

It is a feature of the tax system that businesses must include in their turnover for the year the value of incomplete work, of unpaid bills (debtors) and of work completed but not yet billed, all as at the end of the year. This was not always the case, and thus HMRC has been ‘catching up’.

We will need to discuss with you exactly what needs to be identified and the basis of valuation.

Considering limited company status

You could form a limited company if the limitation of liability is an important consideration – but do bear in mind that banks and other creditors often require personal guarantees from directors for company borrowings.

Trading through a limited company can be an effective way of sheltering profits. Profits paid out in the form of salaries, bonuses, or dividends may be liable to top tax rates, whereas profits retained in the company will be taxed at rates from as low as 21%.

Retained funds can be used to buy equipment or to provide for pensions – both of which are eligible for tax relief. An increasing number of businesses have incorporated, but there are important implications which we would welcome the opportunity to discuss with you, before you decide whether or not to incorporate your business.

National insurance contributions

Although leaving profits in the company can be tax-efficient, you need money to live on, so you should consider the best ways to extract profits.

A salary will meet most of your needs, but do not overlook the use of benefits, which may save income tax and could also result in a lower national insurance liability.

Increasing net income as an owner-director

As an example, consider how much you might save if, as an owner-director, you wanted to extract the £10,000 profit your company makes in 2009/10 by way of a dividend rather than a bonus.

Case Study 3

As you can see in this case study, the net income is increased by more than 13% by opting to declare a dividend. Be sure to discuss this with us, as this is a complex area of tax law.

Strategies to implement before the year end

Tax payment deadlines

Reducing payments on account

Payments on account are normally equal to 50% of the previous year’s net liability. A claim can be made to reduce your payments on account, if appropriate, although interest will be charged if your actual liability is more than the reduced amount paid on account.

Please do not wait until it’s too late – keep us informed of any factors which might change your tax liability.

We can only suggest business solutions if you tell us in good time about any issues facing your business.

Payments on account will not be required where each payment works out at less than £500, or where the self assessment tax/NIC is less than 20% of the previous year’s total income tax/Class 4 NIC liability (instead, the full liability is due on 31 January after the tax year).

Case Study 4

Elizabeth is self-employed. Her accounts are made up to 31 August each year. When we prepare the 2009 Return we will be including her profit for the year ended 31 August 2008, and that is the profit which will be taxed for 2008/09.

Elizabeth’s payments on account for 2009/10 will automatically be based on the 2008/09 liability.

If we know that Elizabeth’s profits for the year to 31 August 2009 are significantly less than the previous year, we can discuss the figures, perhaps even prepare the annual accounts, and make a claim to reduce Elizabeth’s 2009/10 payments on account, easing her cash flow by reducing the tax payments due in January and July 2010.

Make sure you talk to us about:

Looking ahead: