An Accountant's Guide to Company Registration, VAT, Tax and Employment

Discussion in 'Money, Accounts & Finance' started by ladyvgw, Sep 12, 2010.

  1. ladyvgw

    ladyvgw

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    I have noticed recently a large amount of people posting about company registration, tax etc and I thought that as an accountant I would try to compile a guide to the basics in the hopes that it would stop a lot of the same questions being posted over and over.

    I hope you find it useful.
    Vicky:)


    How do I gain access to wholesalers and cash and carry, if I am a member of the public?

    In most cases you can’t, you HAVE to be a registered business! Many wholesalers will not care if you are a sole trader or a Limited Company, but they will want proof of some sort – bank statements, bills in the business name and trade references.

    What are my options with regards to setting up a business and how do I go about it?

    The 2 main options for setting up a business are to be a sole trader (i.e. self employed) or to set up a Limited Company..

    • SOLE TRADER

    If you decide to be a sole trader, you must inform HMRC (i.e. the Taxman!) as soon as you start trading, the rule used to be (and might still be but there is some confusion over this) that you had 3 months to register but I would advise doing it straight away to avoid any problems. This link on their website lets you know how to go about this! (http://www.hmrc.gov.uk/selfemployed/register-selfemp.htm)

    If you are self employed, you will need to submit your Self Assessment Tax Return each year by 31st January, and most people feel happy to do this themselves, but you should be able to find an accountant to help you with this. Their fees won’t be too high if you keep fairly decent records!

    If you are going to be self employed, you should think of using a Trading name and getting a separate bank account set up in this name. This is not only much easier when doing your accounts at the end of the year, as all your business transactions will have gone through one account, and your personal transactions through another. But also, many wholesalers and cash and carry’s will want proof that you are a business – and a business bank account is a good way of proving this!!

    If you run your business from home you may also consider having a phoneline – landline or mobile – in the business name, as again these bill will be used to prove you are an active business.

    • LIMITED COMPANY

    Setting up a Limited Company is a pretty straightforward thing to do. There are hundreds of websites out there to do this online, often with in just a few hours. You can form a company for just £16.99 at www.companiesmadesimple.com, for example! When forming the company you can set anyone you wish to be directors and shareholders – but keep in mind the directors are each legally obliged to file all the necessary paperwork throughout the year and the shareholders are the people who can have the profit at the end of the year! You can of course just set yourself up as the sole director and shareholder!

    Once your Company is set up, you will receive your Company Number and a certificate. You will then need a business bank account in this name!

    Once a year you are obliged to file an Annual Return – this can be done online for £15 and is basically a summary of who the directors and shareholders are. If these details do not change from one year to the next, by the second year, this will take you about 5 minutes to do! But be warned, if you don’t do it on time you could be fined!

    You will also need to have proper accounts made up each year and these will be filed with Companies House and submitted to HMRC along with the Corporation tax Return. Unless you know what you are doing, I strongly advise you pay an accountant to do this for you!! There are lots of very strict rules for what the accounts must look like and it would be very difficult for me to offer any help with this on here! The best way to find an accountant is ask people for recommendations! Try to avoid the big firms if possible – they will just charge you an extortionate fee and you probably wont be treated as very important if you are a relatively small company! Another good way of finding an accountant is to get in touch with your local BNI – a business networking group. Most chapters will have an accountant as a member and should come with glowing references!
    One tip for keeping your Accountant fees down though, is to keep good records!!

    How should I keep my accounting records?

    If you run a relatively small business, you may be able to keep your records in a simple spreadsheet. This could be as simple as having one sheet for all sales and one for all expenses!

    If you do feel you would benefit from a more substantial accounting system, I personally would recommend Sage. You can buy various packages depending on the size of your business and how much you want the program to do for you. There are other accounting programmes out there, but you would need to have a look online to see what people recommend!

    Sage is nice and user friendly. You can easily keep track of payments into and out of your bank. You can keep track of money you are owed and owe. And it will collate all your information for the year end at a touch of a button!

    However, whatever means of keeping your records you decide on, remember that you need to keep all your invoices and receipts as well and everything must be kept for 7 years! So invest in some files and dividers and make it as easy as possible for you to find something if you need it!

    Do I NEED to register for VAT? And how do I go about it?

    You do not need to register for VAT until your turnover (from either your sole trader business or your Limited Company) is over £70,000 in any 12 month period. You can however become VAT registered before you are anywhere near this threshold – a couple of perks of this are that you can start claiming all your VAT back on purchases and also it may make you ‘look’ like a bigger business to people – i.e. your suppliers and your customers will assume you must be turning over at least £70,000 a year, when you could only be making sales of £5,000!

    There are of course perks to NOT being VAT Registered unless you need to be. You do not have to submit a VAT Return every 3 months and you do not have to record quite so much detail when keeping your accounts! Also, if your customers are primarily members of the public (i.e. not business who would potentially be VAT Registered and able to claim the VAT back), by not charging VAT on your goods, you would possibly be cheaper than most of your competitors and therefore more likely to make more sales! Or alternatively, you could still charge the same amount as your competitors and make a bit more profit!!

    You can register for VAT with HMRC through this link - http://www.hmrc.gov.uk/vat/start/register/how-to-register.htm, but be warned it can sometimes take a few weeks for your VAT number to come through!

    Once you have a VAT Number, any sale you make that is eligible for VAT MUST have VAT charged on it. If you are running a Limited Company, this means ALL the company’s sales must charge VAT. If you are self employed, ALL of your sales you make personally must have VAT charged on. You must also disclose your VAT number on your website and all your invoices – as well as making it clear that your prices include VAT on your website and showing the total VAT charged on your invoices!

    When you are VAT registered you will be obliged to submit a VAT Return every 3 months on line. This is very simple to do now – the most complicated bit is setting it up! Once you have registered to file them online, you can set a standing order up as well so the amount you owe will automatically be taken from your bank account a few days later. Be warned though that you do not want to be late filing VAT Returns! The first one they may over look, but after that the more Returns you file late, the bigger the fines you will get and the more trouble you could get into with the VAT man!

    The VAT man also likes to select people at random, for no specific reason, to inspect now and then! If you keep good records and file all your invoices nicely, this will take a few hours tops and they will go away happy! Keep sloppy records that do not match up to the returns you have submitted and you will be in for a stressful time!

    A Few VAT Facts

    It is worth keeping in mind that the standard VAT Rate will be going up from 17.5% to 20% on 1st January! So prices of everything will be going up then! If you AREN’T VAT registered, it would be worth buying any ‘big’ purchases before then to save a few pennies!

    There are 4 ‘rates’ of VAT:

    • Zero Rated - not to be confused with exempt items! This includes food (that hasn’t been cooked!), books, newspapers and magazines, some printing costs and children’s clothing and footwear.

    • Exempt – this includes insurance, some medical services and some training services. The difference between Exempt and Zero rated is that potentially the government could change items that are currently zero rated into standard rated items. But things that are exempt are unlikely to ever have VAT on them.

    • Reduced Rate – this is currently 5% and includes domestic fuel and power, children’s car seats and ladies sanitary products.

    • Standard Rate – currently 17.5%, soon to be 20% as of 1st January 2011 and basically covers everything else!

    Finally, if you ARE VAT registered you are officially just a tax collector on the governments behalf – you are charging your customers VAT to then pass on the VAT man, so this money is not technically yours! Most banks, when you set up a business bank account will also give you a deposit account. I suggest you use that as your VAT savings account and try to put the VAT you charge each month in there. At the end of the VAT quarter, you will deduct the VAT you have claimed back and pay the difference so should have some money left over at the end! This amount can then go towards your end of year tax bill!

    What other tax implications should I consider?

    Whether you decide to be a sole trader or set up a Limited Company, you must keep in mind that you will need to pay tax at the end of each year!!!

    If you are a sole trader, your tax year will go up to 5th April each year and you must have paid all tax due by the following 31st January and you basically pay in advance in two instalments by 31st July and 31st January. You will have to pay Income Tax AND National Insurance on all profits your business makes.

    • Income Tax and National Insurance rates for 2010/2011:

    Income Tax – 20% on profits up to £37,400, 40% between £37,400 and £150,000 and 50% over £150,000.
    National Insurance – Class 2 is currently £2.40 per week (paid monthly) AND Class 4 which is 8% on profits between £5,715 and £43,875 and 9% on profits over that.
    If you are running a Limited Company, your tax year will end on a date you specify and you will pay Corporation Tax on all profits the company makes. This must be paid 9 months and one day after your year end.

    • Corporation Tax Rates 2010:

    21% on all profits up to £300,000, 28% if profits are over this.
    Keep in mind that if you draw a salary, this will be liable to PAYE tax and National Insurance.

    If the Company is profitable, you can take dividends out of the taxed profit. Tax paid on this would depend on any employment income you earn!

    What happens if I employ anybody?

    If you employ the services of anyone, unless they are self employed and liable provide you with invoices, you should be running a proper PAYE Scheme to pay them through – i.e. deduct tax and national insurance each week/month and pay it HMRC, give them paid holidays, pay them the minimum wage and ensure you follow all the other millions of pieces of employment legislation!

    Minimum wage is currently £3.57 for under 18’s, £4.83 for 18-21 year olds and £5.80 for anyone 22 and over. (This goes up every year in October!)

    Employees are entitled to 28 days holiday per year, pro rata. They will also be eligible to Statutory Sick Pay, Statutory Maternity Pay and Statutory Paternity Pay.

    Each month you need to provide your employees with payslips, showing how much they have earnt and what taxes have been deducted. You then have to pay this amount over to the tax man on their behalf. At the end of the year you have to provide your staff with end of year summaries and you have to submit different forms to HMRC.

    If you have employed someone and it isn’t working out, you cannot necessarily just fire them! There are so many employment laws now protecting the employees from unfair dismissal that you have to be very careful! (Of course you cannot discriminate when employing people either!!)

    So this area is one to be very careful of! You may think that if you have someone help you out it may be easier for them to be self employed, but this isn’t necessarily as easy as it seems! I know of a company who got fined for paying their cleaner on a self employed basis. The lady was retired, worked a few hours a week and gave them an invoice each month – she then did her own tax return and paid any tax she owed. However, she only worked for the one company and when that company got a tax visit the said that as she only had the one client she should technically be employed!! So I cannot give any advice that would cover every circumstance – each case is different and you would need to do plenty of research as and when the need arises!

    There are plenty of websites out there that a full of advice for people running businesses of any size – some are easier to understand than others!

    www.hmrc.gov.uk
    www.direct.gov.uk
    www.businesslink.gov.uk

    Please note, I have done this as just a guide to give a few tips and pointers and not taken as gospel!!
    wisebusiness, torvet, SimonN and 13 others like this.
  2. HungryX

    HungryX

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    Re: An accountants guide to company registration, VAT, tax and employment

    Exactly what I needed. An idiot guide. Great stuff!
    Cody likes this.
  3. steveshaw

    steveshaw

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    Re: An accountants guide to company registration, VAT, tax and employment

    Iv'e learned so much in one month on this forum, especially from you, a big thanks.
    I bet you even know where I can buy Sapph bra's from, any info please.
    steve
    Cody likes this.
  4. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    You're welcome Steve.

    Sorry not my area of expertise.
  5. mdsltd

    mdsltd

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    Re: An accountants guide to company registration, VAT, tax and employment

    Superb thread for newbies & experienced sellers alike, lets hope it helps stop the repeat posts ;)
  6. canada

    canada Retired Moderator

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    Re: An accountants guide to company registration, VAT, tax and employment

    Thread moved to a sticky post.

    Scott
    Cody likes this.
  7. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    Awesome, thanks Scot :):)
  8. ProTronics

    ProTronics

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    Re: An accountants guide to company registration, VAT, tax and employment

    Great thread...thanks!
    Cody likes this.
  9. UKbuyer1

    UKbuyer1

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    Re: An accountants guide to company registration, VAT, tax and employment

    An excellent contribution to the forums Vicky, valuable for new and more experienced people (I learned a couple of new things!)

    Thankyou.
    Cody likes this.
  10. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    No probs. You're welcome :)
  11. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    If anyone has any specific accounting questions I am happy to help :)
  12. JustCraig

    JustCraig

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    Re: An accountants guide to company registration, VAT, tax and employment

    Fantastic thread.
  13. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    Cheers mate. Here to help :)
  14. DTWLH

    DTWLH

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    Re: An accountants guide to company registration, VAT, tax and employment

    I'm thinking about running my own buisness full time when i'm 18 just need the funding

    But after reading some of that it looks complicated lol:(
    Cody likes this.
  15. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    Lol, dont get daunted it really isnt that hard once you know what you are doing.

    If people like Jordan and Jade Goody can become successful business people then surely anyone can :p

    And besides I am always here if you need any advice.
  16. DTWLH

    DTWLH

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    Re: An accountants guide to company registration, VAT, tax and employment

    Well even if it gets complicated there are people on here who will help me , I'm sure of that :thumbup:
  17. sjwtrade

    sjwtrade

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    Re: An accountants guide to company registration, VAT, tax and employment

    Great stuff. I am sure many will find this useful, I am no expert in the accounting field but I am sure this is a worthy sticky.

    Stu
    Cody likes this.
  18. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    Cheers Stu :)
  19. jinwang1

    jinwang1

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    Re: An accountants guide to company registration, VAT, tax and employment

    Many thanks for the useful info which is written in a friendly and simple language! Already bookmarked it for read now and later referrence.

    As a beginner, I sometimes wonder what is the right way to start with:

    1) just quickly start and expect many issues in the future

    2) study all the laws and regulations first

    Obviously way 2 is probably the right approach, but all these complications sometimes are frustrating.
  20. ladyvgw

    ladyvgw

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    Re: An accountants guide to company registration, VAT, tax and employment

    I would always recommend doing as much research as possible before jumping into a project. I you know all the potential pitfalls before you start then you are less likely to get any nasty surprises.

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