I can start your business: Everything you need to know to run your limited company or self employment - for locums, contractors, freelancers and small business

by Russell Smith

Thinking of starting a business but don't know anything about business finances, tax or accounts? This book will tell you everything you need to know in an easy to understand way by an accountant who grew his practice from no clients when he started to over 400 clients all over the UK. Covering such topics as: Whether you should be a limited company or self employed? What part of business finances do you really need to understand and which parts can you ignore. Whether you become VAT registered. When your tax is due and how much it will be. Setting up bank accounts. Getting paid by your customers. Managing your cash flow. Getting your pricing right. Russell Smith has worked with over 400 clients all across the UK and is a national expert on small business tax and accounts. His clients include doctors, dentists, psychologists, web-designers, musicians, marketing agencies, IT contractors, artists, graphic designers and many more. Russell Smith is the only chartered accountant in the world to blog every day - you can find it at www.rsaccountancy.co.uk/daily-blog. Russell also has a YouTube channel where he releases weekly 2 minute finance basics: www.youtube.com/RussellSmithtips. There is also a free tax, accounts and profit review with customised action plan worth 200 for readers of this book. This editions is updated for the new 2017/18 tax rules. "The first accountant I've worked with that I wouldn't hesitate in recommending" Stuart Bruce "Impressed with the initial meeting, Russell clearly knows his stuff, he asked me the right, specific questions showing a real interest in my business and he put me at ease. the SME accountancy space is clearly their specialism" Dmitri Wychrij "I was impressed with Russell's energy, drive and motivation to improve upon the service/advice given by other accountant's firms. I particularly wanted proactive advice with my tax planning and Russell convinced me that his firm would excel at this" Dr Kurt Von Bussman

Genres: Business, Finance

106 pages, Paperback

Published December 23, 2015

Reviews

[Harry Harman]

I wasn’t completely in the dark.

The government sets the tax rates, HMRC’s job is to collect it. My job as an accountant is to make sure you comply with the tax law without needlessly overpaying tax.

Direct costs are directly attributable to sales which means if your sales go up, your direct costs should go up.

The profit and loss account is NET of VAT i.e. VAT is NOT included. Vat is a funny tax (strange not humorous). Essentially, you are collecting VAT from your customers, paying VAT to your suppliers and paying the balance over to HM Revenue & Customs. Based on the fact that businesses should be making profit i.e. charging more VAT than paying it out, the government gets the VAT bonus (£27 billion at the last count).

The main benefit of the profit and loss account is quite simple, it tells you if you are making a profit or a loss. If you are making a profit it also tells you how much tax you have to pay.

Accountancy, the recording of business transactions, is based on a practice called ‘double-entry bookkeeping’ which basically means every transaction is recorded twice so that nothing is missed. The balance sheet is a check that everything has been recorded.

Debtors (how much your customers owe you including VAT)

All your liabilities (people you owe money to - bad)

Taxman (VAT, PAYE/NI (if you have employees), Corporation Tax (if you are a limited company)

The shareholder funds should be exactly the same number as net assets.

The shareholder funds is simply all the profits you have made EVER, less the amount you have taken out. This is a crucial number to a bank to see if you are worth lending to. If you have made profits but rinsed the company, they won’t like you. If you’ve left some in, they’ll like you because they can use it as security.

Thirdly, what the shareholder funds also tells you is that if your business closed today, the shareholders’ funds would be the number that ends up in your bank account i.e. you would sell your computer equipment, sell your stock, collect all the money from your customers, pay your suppliers, pay the tax man and be left with a bank balance that will match shareholders’ funds. However, whilst accountants would say that the shareholders’ funds is what your business is worth on paper, of course, your business is actually worth what someone is willing to pay for it.

The most important numbers to keep your eye on are your Debtors, the customers who owe you money (including VAT), cash – the lifeblood of your business and that your liabilities don’t exceed your assets.

A cash flow forecast should be for 13 weeks or 3 months.

You save tax as a limited company. This is the best advantage and applies to every business with profits of over £30,000.

Register for self-employment
If you opt for self-employment then the first step, registering, is very very easy. Call this number: 0300 200 3504. This is the HMRC helpline for the newly self-employed. They will ask you for a few details, name, address etc. When the registration process is complete, you will be given a new code, the UTR – unique tax reference (this is in addition to your national insurance (NI) number.

Paying Class 2 National Insurance
The first thing that will happen (unfortunately) is that you will begin to pay something that you have never paid before – Class 2 National Insurance. This is the national insurance contributions for people who are selfemployed (you probably have been used to paying Class 1 as an employee). It is currently £2.85 and is paid annual with the other tax on the personal tax return. If you are self-employed and employed at the same time, you want to opt out of this since there is no need to pay Class 1 and Class 2.

Having said that, some shareholder partnerships work amazingly well. All I would advise is, proceed with caution and get a shareholder agreement.

The basic rule is if your sales are going to be more than £85,000 in the next 12 months you should register for VAT.

Here’s what they have to pay for:
- Holiday
- Sick pay
- Pension
- Training
- Appraisal
- Toilet breaks
- Cigarette breaks (well, maybe)
- Sorting out your desk
- The times when you were mucking about
AND they have to pay National Insurance at 13.8% on top of your £40,000 which calculates at approximately £4,500. So they actually pay you £44,500 for all of these things.

If you take into account your holiday which let’s say is 22 days + 8 days statutory, this equates to approximately a month of being paid to sit on the beach.

The common ratio is to charge a day rate or hourly rate at 3 times what you pay them. A third of this covers their payment, a third of this covers the overheads of your business and a third should be profit.

If you are a limited company, you must also put your registered office and company number.

The cost goes up by £100, the profit goes down by £100, the tax goes down by £19 – 19%

If you wanted to know how much the train ticket was actually costing you, then it would be £81 (£100 less the £19 tax saving).

Point no. 1 – If you miss out costs in your accounts (which is easily done think of the train ticket getting lost or not being recorded), you will pay more tax than you need to, since your profit is artificially high.
Point no. 2 – if you are thinking about investing in marketing, training course, employee, computer or piece of equipment, remember that if the cost is £1,000, it will always actually cost you 19% less i.e. £810 because the tax will be reduced by £190
Note. If you are self-employed, the tax is usually reduced by 29% and if you are VAT registered, you can reduce the cost by a further 20% because you can claim the VAT back (as long as you are not on the flat rate VAT scheme.

Employee costs (this could also be in cost of sales if a service business)

Staff entertaining (e.g. Christmas party), customer gifts up to £50 per person advertising your business

NOT ALLOWED: Customer entertaining, Food if not away from home (e.g. 40 miles from home)

The three most common expenses that people think can be claimed are as follows: a) Customer entertaining

You can claim employee entertaining up to £150 per employee per year. There are also some reliefs available for award voucher schemes that you set up (e.g. best sales person of the month etc.)

You spend food in your business:
Is it entertaining staff?
YES – Tax deductible (up to £150 per employee per year)
NO……………
Is it entertaining clients/customers?
YES – Legitimate business expense for the accounts but not tax deductible, needs to be added back on Corporation Tax return (disallowed)
NO………………… Is it subsistence? (i.e. food consumed on a business trip more than 40 miles from home)
YES – Tax deductible
NO – Directors loan account (paid for by the business but the director has to reimburse the company as it is a personal cost)

Any fines that are not tax deductible

Tax is not in itself tax deductible. You always get taxed on profits which is after all the expenditure (see Chapter 1). To make it slightly confusing, the tax that you pay on behalf of your employees (their PAYE tax and Employees National Insurance) and the tax that you pay on top of employees’ salaries (Employers National Insurance) is tax deductible in the accounts.

Mobile and landline telephone bills
I certainly wouldn’t encourage you to get two mobiles. Simply get itemised billing and have a decent stab at estimating what % is business. I wouldn’t do this every month (you won’t have time) but maybe do it twice a year and err on the side of caution i.e. don’t over-cook it! It is also a good idea to record in the supplementary information box on the self-employment page your % estimates, it is often better to disclose more information to HMRC than less.

1. Keep your car in your personal name
2. Record the amount of business miles you travel in a notebook every week
3. At the end of the year, add up your miles and multiply it by 45p – this is the cost of your motor travel
4. It drops down to 25p after the first 10,000 miles (on every mile over 10,000)
5. You don’t need to keep petrol receipts and all other motor costs (e.g. insurance, road tax, repairs) are irrelevant.
Please note: Vans are a different thing entirely, the tax rates are much more generous. Generally, it is better for your van to be in your business.

It is likely that you do some work at home and are incurring some extra cost in doing this (at the very least, heat, light and electricity). There are two ways to do this. The simpler way is to charge your business £208 per year (this is £4 a week). This is the minimal amount you can put through the business without HMRC asking any questions. However, it isn’t much and will only save you about £41.60 tax in a company and £60.32 in self-employment.

a computer is a cost that doesn’t go through the profit and loss account in one go. This is because, accounting rules dictate that the computer will last the business for more than one year (probably three years). So, we put the computer on the balance sheet as an asset and depreciate it (write it off) to the profit and loss account over three years.
So for example if you purchase a computer for £1,200. Then the profit and loss account will show £400 in the first year, £400 in the second year and £400 in the third year. At the end of the third year, neither the profit and loss account or the balance sheet will show any trace of the computer since it is now worth zero (even if you are still using it).

The tax rules write the whole computer off in one year. So if you purchase the computer you will get the full tax deduction (19% of £1,200) in the first year. The way that it is actually recorded on the tax return is slightly different, it goes in the ‘capital allowance’ box rather than as a normal expense

It is often the case that you will have some costs associated with the business before you’ve actually set up your limited company or set up your self-employment. You should definitely keep all your receipts and paperwork since this can be brought into your accounts at day 1 of the business starting. The only slight complication for a limited company is that effectively the director has paid for them on the company’s behalf so needs to be reimbursed.

The profit on this job should be £1,000 i.e. you’ve charged your client £59 but incurred £59 of cost which nets off.

If you are a VAT registered, your invoice should look like this:
Service £1,000
Travel £9
Hotel £50
Net £1,059
VAT @ 20% £211.80
Gross £1,270.80

If you are in business for the next 30 years, the certainty I can give is that it is bound to happen at least once, if not many times. You also have to keep all records for 7 years. All records can be kept digitally except for dividend vouchers and notes of directors meetings (see later on) which must be kept in paper form.

Here is a run-down of all the records that you have to keep:
- Sales invoices
- Purchase invoices from suppliers
- Any other expenses or receipts
- Bank statements
- Paying in books and cheque stubs
- HMRC correspondence
- Companies House correspondence
- Record of paying employees
- VAT returns (if you are VAT registered)

Bookkeeping is the recording of all the financial transactions in your business (it is also the only word in the English language with a triple double i.e. two of the same letters in a row three times!).

If you decide to outsource the bookkeeping, there are two options. Firstly, to hire a bookkeeper and secondly to ask your accountant to do it.

Go through all the bank receipts and bank payments in the account and tick this off against the bank account (this is called the bank reconciliation)

If you are starting a business and you think that your turnover (sales) will be under £100,000 and you don’t have lots of transactions then I would recommend a simple Excel spreadsheet.

Xero and FreeAgent are the ones that clients like the most

Sage is far too big for a smaller business, VT is very quick to use but doesn’t have as pretty an interface as the others and Quickbooks is somewhere in between.

The accounts of a business step up in complexity once the business becomes VAT registered. You don’t need to become VAT registered until your sales reach the £85,000 mark.

If your customer base are VAT registered (i.e. businesses bigger than £83,000 turnover) then they won’t mind being charged VAT since they just claim the VAT against their own VAT on their own sales

to rich individuals who can afford the VAT and who want to pay a VAT registered business because they are more trustworthy. Also, if your customer base are VAT registered businesses you may want to consider becoming VAT registered before you have to (before you hit £82,000 sales) simply to look more credible and bigger than you are.

You declare to HMRC all the VAT on your invoices in the quarter minus all the VAT on your purchase invoices and expenses.

(I say COMPLETELY IGNORE, there is a special rule that means you can still claim the VAT on ‘capital costs’ over £2,000 even on the flat rate scheme)

I regularly calculate the difference between going on the flat rate scheme or using the more traditional method of option 1 and 2. If you would like me to do this for you, email me at russell@rsaccountancy.co.uk . The difference could be an annual VAT saving of up to £3,000 per year.

VAT MOSS is a piece of tax legislation that was introduced on 1 January 2015. It affects businesses that sell digital products to consumers in the EU (i.e. not business to business).

If your business falls into the construction industry scheme (for example, builders, electricians, decorators) then you have to comply with the construction industry scheme rules. There are two main parts to this. Firstly, if you pay any subcontractors (not employees), you have to deduct 20% tax from them at source and pay this over to HMRC. Secondly, your customers will do the same to you, so you will receive 20% less from your customers. The CIS returns have to be completed monthly for deducting your subcontractors 20% and have to be submitted by the 19th of the month (the fines are £100 for non-compliance). The CIS that is taken from you by your customer is set off against your monthly payroll submissions. If you end up with more CIS taken from you than you have paid out, you can claim the difference back from HMRC, although they are notoriously slow at paying. CIS can be very onerous for businesses and adds a new complication to the bookkeeping. You can attempt to escape the CIS rules by applying for CIS Gross status. If you are successful you are able to not deduct 20% from your subcontractors and crucially not be deducted from your customers.

HMRC and Companies House deadlines
carry fines if you don’t complete paperwork on time. I would recommend putting all of these in your diary/online calendar.

Year-end accounts – 9 months after your year end If you are a limited company you have to produce year end accounts. These are in a statutory format that only accountants will know how to produce (whilst it is possible for a self-employed individual to complete his own tax return, it is not possible for a business owner to do limited company accounts themselves, unless they are an accountant!). The accounts are produced in two formats, an abbreviated set for Companies House and a full set (about 14 pages) for the Corporation Tax office.

These year-end accounts have to be submitted to Companies House by nine months after your year end. If it is your first year, your year end is the date that is the next month end after your incorporation date. So if you incorporated on 8 June 2015, your year end is 30 June 2016. Strangely, your first set of accounts would be due by 8 March 2016 and not 31 March 2016, although after the first year the deadline would always be 31 March 2016.

Up to 1 month overdue - £150
From 1 month to 3 months overdue - £375
Over 3 months overdue - £750
Over 6 months overdue - £1,500
If this isn’t bad enough, the fines are doubled if you submit the accounts late two years in a row.

Your annual return is a much simpler document than the year end accounts. It is essentially a confirmation that your company name, registered office, director and shareholder’s details are the same. It doesn’t take very long to do and can be completed online. It costs £13 to complete. It has to be completed annually. Just before the anniversary date of your original incorporation date, you get issued with a letter requesting you to complete the annual return within 14 days of the incorporation anniversary date.

The first strange thing to notice is that the corporation tax return and year end accounts are due 12 months after the year end, whilst the corporation tax is actually due 9 months and 1 day after your year end.

It is well worth putting the corporation tax due date in your calendar and ensure you build it into your cash flow since it could be a large sum that if not planned, could kill your cash flow. Whilst you do have 9 months after the year end to complete the accounts and corporation tax return it is far better to complete this much earlier, my recommendation is within 3 months.

The fine for non-submission of a corporation tax return is £100 (so not as large as the Companies House fines).

Personal tax return for the year ended 5 April, due the following 31 January
Both self-employed individuals and directors of a limited company need to complete a personal tax return.

For the director of a limited company, the personal tax return will show dividends taken from the company, plus a minimum director salary in the employment section (see next chapter on tax).

Whilst their personal tax return year end is 5 April (everybody’s is), their company year-end will be the month after whenever they set the company up

The way to look at it is that one year end is for the company and one year end is for the director’s earnings – they are not the same thing.

The deadline for all personal tax returns (for both self-employed individuals and directors of limited companies) is 31 January. This is actually a full 10 months after the year end and is one of the longest deadlines in Europe (in the US they have only 3 and half months).

If it is 1 day late - you get hit with a fine of £100 It is then £10 for each day over 31 January 2015, up to 30 April 2015 (90 days) at which point, the extra fine will be £900. Add on the original £100 and it is £1,000.

The PAYE tax deadline is 19th of the following month.

P11D forms are needed if your company has given you something that has not gone through the payroll. The technical word is a ‘benefit-in-kind’. Common examples of this are company cars or private medical insurance. You declare these ‘benefit-in-kinds’ on the P11D form upto the personal tax year end and these have to be submitted to HMRC by 6 July.

VAT returns are usually quarterly (although you can opt to do them annually). The quarter ends depend on when you first become VAT registered. Your first VAT return can be slightly random e.g. it could be one month or five months! After the first VAT return it will be every three months. It is well worth syncing up your quarterly VAT return quarter ends with your limited company year- end since this makes the accounts much easier. The original VAT return quarters set by HMRC can be changed.

[EP · Rating 4 out of 5]

A very informative book. I learnt a lot and will be referring back to it in the future. It gave me all the basic information I needed to know while thinking about setting up a business.
My only negative comment: at the beginning of the book Russell admits there will be typos and grammar mistakes as he is not an author. I completely understand and accept this, however there were several occasions where because of it I had to re-read parts to understand what he was trying to say.

[Fabrizio Esposito · Rating 4 out of 5]

Good quick read

The book is super dense, giving a lot of info in a very small amount of pages.
I think it packs a lot and the only reason why I think it falls just shy of 5 stars is because it's too short. Running a business would need a few more words spent on marketing, for example, so that's where the title of the book can be slightly misleading.
Still an excellent read for the self employment newbie though, definitely recommended at this price!

[Donna · Rating 1 out of 5]

I bought this for information for the self employed, and in particular the tax rules regarding your first £1000 earnings. I thought this would be suitable as it says "updated for the new 2017/18 tax rules" on the front, but i didn't find any answers to my questions and think it is probably far more useful if you are setting up a limited company.

[Luiz Amaral · Rating 3 out of 5]

Easy to read

Good reading , inspiring for newbies or wanna be entrepreneurs
Would recommend for any business related grad to have an overview of what we (possibly) will be dealing on the years to come

[Angel Serrano · Rating 4 out of 5]

Guía práctica para emprendedores en el Reino Unido. Incluye finanzas básicas, cómo fundar una empresa, cómo fijar precios, facturación, reclamar gastos, archivos, impuestos y Registro mercantil, cómo pagarte a ti mismo, empleados, propiedades, seguros, ventas y marketing.

[David Rodenk · Rating 5 out of 5]

Nice introduction some good tips

There could be much more to this book nonetheless it is a good read and a recommended one. If you are just starting, give it a go and then deep dive in more specialised literature.

[Malobi · Rating 5 out of 5]

Really good introduction for noobs like myself.

[Maree Diamond · Rating 5 out of 5]

Informative

I really like this book, it was an easy read, which is no mean feat when it comes to finances, I liked the chatty style and I felt I had learned things

[Alex · Rating 4 out of 5]

Good basic info if you've never completed a self-assessment before.

[Laura · Rating 4 out of 5]

Enjoyed the read

Sound advice and perfect first read on business subject. I felt it covered all the basics without the off putting jargon

[Paul Jablonski · Rating 5 out of 5]

Great Introduction

Clarified a lot of basic concepts I was struggling with and the author has a great personality! I really enjoyed reading it!

[Christine Harmer · Rating 4 out of 5]

Helpful basics, enough maths from an accountant who's a nice guy

See the headline I put? If you're not sure where to start, can I strongly suggest you start right here?

[Bob · Rating 5 out of 5]

excellent, very informative

[Andrew · Rating 4 out of 5]

Contains just about everything you need to know about running a limited company or undertaking self-employment in the UK.

[David Harold · Rating 5 out of 5]

short but excellent

Very useful guide to the accounting related aspects of setting up a business. Next to nothing on sales, marketing, offer development, hr etc. Still very useful.

[Rachel · Rating 3 out of 5]

It has useful information if you know nothing, but nothing that isn’t freely available on the internet. I did find the pricing your services section helpful though. It would be a good book for someone who is at the very beginning stages of thinking of starting a business but knows nothing about the formalities.

Re-read in 2013 as I have now formed a Ltd company and wanted to check up on things I needed to remember, and also figure out a salary level for next tax year. Some of the info has changed, so do check on this via a Google!

[Tracey CB · Rating 4 out of 5]

This is perfect for learning the very basics of what you need to know for running a Ltd company or being self employed in the UK. It filled in a lot of gaps and now I am much more comfortable with what exactly my duties are as they were mostly half explained by different people.
A lot of the advice helps you for before going solo, ie to help you choose between self-employment and a Limited company and such.

[Simon Pickup · Rating 4 out of 5]

Business made simple

Very easy to follow and gives all the basics you need to know. Nice style and easy to read. Recommend to all small business people.