Business Tips

What legal entity should I choose for my small business?

Limited v Soletrader or Partnership – (most common options)

When setting up a new business often the first consideration given is tax efficiency, however, we also believe that should be coupled with the flexibility and security of the structure chosen.

What taxes will be paid?

Limited companies will pay corporation tax on their profits, currently 19% for the main rate. Normally the directors/shareholders will pay tax on their dividends at their marginal rate in addition to the corporation tax. This can provide tax efficiencies especially during profitable periods as the company can retain earnings, enabling the dividends to be distributed in a more tax efficient way to family members or in future periods.

Soletraders and partnerships will pay income tax at their marginal rates on their profits, this does not allow the flexibility of the above, taxes are paid in the year incurred.

What can I claim for?

Taxes are paid on profits, therefore, increasing legitimate expenses will reduce the tax liabilities. Please see below a non-exhaustive list of common expenses:

  • Start Up costs – any business expenses before the business was registered – there are time limits, but these are pretty generous.
  • Purchases – costs of goods sold
  • Travel and subsistence – parking charges, train and bus fairs
  • Motor expenses – generally mileage for car expenses when operating via limited company. Soletraders and partnerships have the flexibility of considering mileage or fuel, insurance, repairs and maintenance, and capital allowances. Vans are treated the same way for all entities if they are used 100% for business.
  • Staff and subcontractors – salaries, wages or self employed invoiced costs.
  • Use of home – percentage or fixed amount of personal residence costs.
  • Telecommunications – internet, mobile phone, landline phone
  • Insurances – professional indemnity
  • Stationery and office costs – stationery, consumables etc
  • Capital allowances (similar to depreciation) – laptops, tablets, basically any plant and machinery
  • Accountancy – our fees of course
  • Marketing – any advertising or promotion
  • Entertaining – is allowable but NOT tax deductible!!!
  • Christmas or annual party – offered to all employees and even their partners (upto £150 each incl VAT)

Always have the mindset; Is this expense wholly, exclusively and necessary for the purpose of my business ?

Should the business register for VAT?

It is mandatory for a business to register for VAT once it breaches £85,000 on a rolling 12 month basis. However, sometimes a business may make a commercial decision to register for VAT from the outset – reason being, well…

Business to business, often both parties will be registered for VAT anyway, therefore, charging an additional 20% tax will make no difference.

Perception, could be also considered here, some business’ only want to deal with VAT registered business’. It makes a good impression.

VAT threshold is a hurdle that every small business might need to overcome at some point of their business journey. Remaining below the threshold will only restrict the business growing into a much bigger concern.

However, we also recognise that some small business’ want to remain non VAT registered, and that is fine, we can also advise on ways to remain below the threshold, such as getting customers to purchase their own materials.

Flat Rate scheme or Standard?

The Flat rate scheme was introduced to simplify accounting liabilities as it is based on a percentage of gross income, which varies based on each business sector. It is well worth considering this scheme especially when the business has limited input VAT. Please ask us to compare which scheme might be more suitable for your business.

What are my liabilities?

Here, is a key reason why many businesses incorporate a company as their legal entity. The reason being, limited liability, this legal entity provides significantly more protection for the directors personal assets. Soletraders and Partnerships conversely have unlimited liability which dramatically increases the business owners personal risk.

How best to maintain the business records?

There has never been a better time than today to keep your business records in absolute order. Cloud software allows you to bank feed information, data capture receipts, no more disorganised paperwork!!! Our practice is partnered with QuickBooks so please ask us about the discounted rates that we can supply the software. We also provide Dext software free of charge, probably the best data capture software in it’s field.

Meet deadlines to avoid penalties

Soletraders and partnerships deadline for submission is always 31st January following the period end, normally 5th April as HMRC look to abolish year ends outside of the fiscal year. Limited companies must deliver their accounts and pay their corporation tax within 9 months of their year end, the company tax return must be delivered with 12 months of the year end. We advise to prepare these calculations well in advance of the deadline so the business can prepare itself for these liabilities.

Does the business REALLY need an accountant?

The truthful answer is no, however, we would always advise our clients to seek professional advise on certain matters when running their business, and this includes accountancy. A good accountant should more than pay for their cost in not only delivering tax savings but also ways on increasing the businesses activity.