New analysis from Direct Line for Business (DL4B), based on data from the Office for National Statistics (ONS), reveals that just over half of all UK small firms are run from the home of the business owner.
The findings show that there are currently 2.5 million home-based business owners in the UK, representing just over half (52%) of the total number of UK SMEs. These home-based business owners now account for 8% of the UK’s total workforce.
The largest concentration of all is in Herefordshire – where 27% of the county’s 92,000 total workforce is a home-based business owner. Pembrokeshire is second with 23% and Eastbourne is third with 20%.
Men are more than twice as likely as women to run their own business from home, with 1.7 million male home business owners across the country, compared to around 818,000 female home business owners.
Small businesses are a vital part of the UK economy.
Marketing Donut reported this week that a study of UK small businesses has shown a rise in the number of people setting up micro businesses and hiring people for part-time work.
The study by Freelancer.co.uk assessed 300,000 businesses over the past 12 months and it concludes that an entrepreneurial boom is taking place in the UK, with significant numbers of people starting up new ventures across the country.
According to the study, Brighton and Newcastle have seen the highest growth in the number of new micro businesses being launched (up by 24%), followed closely by Manchester and Southampton with 23% growth. London has seen 21% growth, Edinburgh and Liverpool 20%, Birmingham 19% and Sheffield 8%.
The research also shows that there have been positive knock-on effects for freelance workers in business support sectors, such as website design. It found there has been a 19% increase in the number of micro businesses commissioning new ecommerce websites.
In addition, orders for shopping carts to be installed on new small business websites are up 18%, email marketing is up 20%, graphic design is up 12% and logo design is up 6%.
So why are micro businesses taking off:
You can start off working at home
Your start up costs are low
You can do it part time when it suits you
With wages frozen and costs rising it can provide a useful additional income
Its easy to be price competitive with low overheads
The Internet makes it easy to sell your goods and services
Your social capital can be used to generate sales ie use your contacts and connections
There could tax advantages – employees generally pay more tax than sole traders
Profit is vital to every business, what is the point of being in business if you don’t make a profit?
So here are my tips on how to improve your profitability:
Weed out loss making products, clients and departments – concentrate on high margin products and services
Reduce Employment Costs – use Freelancers instead of Permanent Employees where appropriate
Use Virtual Communication Technology – meetings can be held over the internet with Skype or other systems, it will cut traveling time and costs
Use Social Media and Networking – marketing can be costly and the results can be hard to measure, use your contacts to generate leads and sales and always ask for referrals
Increase Productivity – eliminate wasteful and unnecessary processes, I was told it used to take 17 people in the NHS to change a light bulb on a hospital ward (requisitions, approvals, payments, changing the bulb…) the solution to cut wasted processes was to keep a stock of bulbs on the ward
Negotiate with suppliers – always look at ways to reduce cost including using alternative suppliers
Understand your clients requirements – the client knows what he wants and what represents value, if you deliver value you will get more business
Seek add on sales – what other products or services might be useful to your existing clients
Keep an eye on your competitors – competitor analysis will enable you to understand differences in price, distribution, market and demand
Find New Markets – use market research to expand into new areas
Decrease Overheads – analyse all of your overheads including Rent, Rates, Utilities – could you sub-let part or your premises or reduce waste
Reduce Stock Levels – can you turnover your stock more quickly or buy to order
Improve your Cash Cycle – reduce slow payment by debtors, invoice promptly and settle disputes quickly
Invest in Technology – automate processes with ERP systems
Use Key Performance Indicators – KPI’s help you achieve your goals
You are entitled to plan your tax affairs in a way that makes sure you do not pay more tax than you have to. There are many legitimate ways in which you can save tax, or example by saving in a tax-free ISA (Individual Savings Account), making donations to charity through Gift Aid, claiming capital allowances on assets used in your business or paying into a pension scheme.
Here are 10 ways to pay less tax:
Choose the right business structure for your business – most businesses start out as sole traders but once they start making profits convert to limited companies, this is because sole traders pay income tax starting at 20% and national insurance class 2, £2.70 per week and class 4, 9% on profits between £7,755 and £41,450, whereas, in a company a you could pay the tax and NI free salary of £7,748 and then pay dividends from profits after corporation tax of 20%
Employ your family – Children can legally work from the age of 13 which means they can perform activities which are relevant and justifiable in your business. Each member of your family has a tax free allowance of £9,440 (2013/14).
Avoid earning more than £100,000 – Once you earn over £100,000 you start to lose your personal allowance, when earnings are above £118,880 all of your allowance of £9,440 will have been lost
Pay into your Pension – Currently you can pay £50,000 per year into to your pension
Pay Dividends – Generally directors will take a low directors fee and the rest of their income in Dividends
The Intermediaries legislation known as IR35 was introduced on 6th April 2000.
The aim of the legislation is to eliminate the avoidance of tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships, in circumstances where an individual worker would otherwise –
For tax purposes, be regarded as an employee of the client; and
For NICs purposes, be regarded as employed in employed earner’s employment by the client.
Many Freelance Contractors have some assignments within IR35 and some outside, you can ask HMRC for their opinion.
If you would like HMRC’s opinion on a particular engagement you should send your contract(s) to:
IR35 Customer Service Unit
Ground Floor North
Tel No: 0845 303 3535 (Opening hours 8.30am to 4.30pm, Monday to Friday. Closed weekends and bank holidays) Fax No: 0845 302 3535
If your contract is within IR35 its not the end of the world, the chances are that you will still pay less tax than a direct employee, to calculate the tax you have to work through 8 stages of calculation, here is a summary:
How much were you paid? deduct 5% for business costs
Add any other payments/non cash benefits
Deduct business expenses – travel, meals, accommodation
Deduct capital allowances relevant to the work done
Deduct pension contributions made by your company
Deduct any NIC paid by your company on your salary and benefits
Deduct any salary or benefits already paid and taxed
If the answer is zero or negative then there is no deemed payment, if the answer is positive you do have a deemed payment which will be taxable
HMRC have a spreadsheet you can download which has further details.
Demand from UK businesses for contract workers is continuing to rise in 2013, which could be good news for freelancers looking to get their foot in the door on a lucrative new project.
Why is it attractive to use Freelancers?
Skill is more important than location in many business sectors – we live in world where internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.
So is it a mission impossible for salaried employees to make the transition to Freelancers
On the 8th August, HMRC published a leaflet to help you identify the tell-tale signs of avoidance schemes, and warn you of the potential negative consequences of using them.
You are entitled to plan your tax affairs in a way that makes sure you do not pay more tax than you have to. There are many legitimate ways in which you can save tax, or example by saving in a tax-free ISA (Individual Savings Account), making donations to charity through Gift Aid, claiming capital allowances on assets used in your business or paying into a pension scheme. But there is a big difference between using tax reliefs and allowances in the way in which they are intended to be used, and trying to bend the rules to avoid tax.
There are warning signs you can look for which should help you decide whether you are being offered good tax advice about how to plan your affairs or whether you are being sold a tax avoidance scheme.
Here are the warning signs according to HMRC:
it sounds too good to be true and cannot have been intended when Parliament made the relevant tax law (for example, some schemes promise to get rid of your tax liability for little or no real cost, and without you having to do much more than pay the promoter and sign some papers)
the tax benefits or returns are out of proportion to any real economic activity, expense or investment risk
the scheme involves arrangements which seem very complex given what you want to do
the scheme involves artificial or contrived arrangements
the scheme involves money going around in a circle back to where it started
the scheme promoter either provides any funding needed to make the scheme work or arranges for it to be made available by another party
offshore companies or trusts are involved for no sound commercial reason
a tax haven or banking secrecy country is involved
the scheme contains exit arrangements designed to side-step tax consequences
there are secrecy or confidentiality agreements
upfront fees are payable or the arrangement is on a no win/no fee basis
the scheme has been allocated a Scheme Reference Number (SRN) by HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) regime
At the moment all businesses supplying telecommunications, broadcasting and e-services such as downloaded ‘apps’, music, gaming, e-books and similar services to private consumers located in other EU Member States (referred to as ‘B2C’ supplies) are taxed where the business supplier is established, which is simple to understand and implement.
In the Finance Bill 2014 this will be changed and from 1st January 2015 VAT will be charged in the country where the customer has ‘use and enjoyment’ of the services.
So lets say you are an American (normally zero rated) on holiday in France, even though you pay with an American credit card and buy from a UK supplier because you are reading your ebook in France, French VAT will apply. Sounds like a nightmare, doesn’t it.
To help with this HMRC are introducing the VAT MOSS (Mini One Stop Shop) and businesses can register from October 2014.
Unless businesses opt to register for MOSS, businesses that make intra EU B2C supplies of telecommunications, broadcasting and e-services will be required to register and account for VAT in every Member State in which they have customers. MOSS will give these businesses the option of registering in just the UK and accounting for VAT on supplies to their customers in other Member States using a single online MOSS VAT return submitted to HMRC. This will significantly reduce their administrative burdens.
Examples of telecommunications services include: fixed and mobile telephone services; videophone services; paging services; facsimile, telegraph and telex services; access to the internet and worldwide web.
Examples of broadcasting services include: radio and television programmes transmitted over a radio or television network, and live broadcasts over the internet.
Examples of e-services include: video on demand, downloaded applications (or “apps”), music downloads, gaming, e-books, anti-virus software and online auctions.
The Growth and Infrastructure Act 2013 comes into force on 1st September 2013 and Section 31 makes changes to the Employment Rights Act 1996 inserting section 205A Employee Shareholders.
205A Employee shareholders
(1) An individual who is or becomes an employee of a company is an “employee shareholder” if—
(a) the company and the individual agree that the individual is to be an employee shareholder,
(b) in consideration of that agreement, the company issues or allots to the individual fully paid up shares in the company, or procures the issue or allotment to the individual of fully paid up shares in its parent undertaking, which have a value, on the day of issue or allotment, of no less than £2,000,
(c) the company gives the individual a written statement of the particulars of the status of employee shareholder and of the rights which attach to the shares referred to in paragraph (b) (“the employee shares”) (see subsection (5)), and (d) the individual gives no consideration other than by entering into the agreement.
(2) An employee who is an employee shareholder does not have—
(a) the right to make an application under section 63D (request to undertake study or training),
(b) the right to make an application under section 80F (request for flexible working),
(c) the right under section 94 not to be unfairly dismissed, or
(d) the right under section 135 to a redundancy payment.
Giving up employment rights might not sound like a good idea for employees but there are tax advantages for both the employee and employer:
Dividends are not subject to PAYE or National Insurance
Dividends would not be used as Pay in Auto Enrolment
Capital Gains Tax Allowances should make most gains tax free
The employer will benefit from cost savings on the sacrificed employment rights