How do you become self employed? 2

businesswoman is very multitasking

The UK saw the fastest growth in self-employment in Western Europe in 2014, according to the Institute for Public Policy Research (IPPR).

The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.

The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If this growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.

Your responsibilities

You’re responsible for:

Naming your business

You can use your own name or trade under a business name – read the rules for naming your business.

You must include your own name and business name (if you have one) on any official paperwork, like invoices and letters.

When should you get help from an Accountant?

Often business owners wait too long before they realise that they need help from an accountant.

Key reasons are:

– not understanding the difference between a book keeper and an accountant
– thinking that an accountant will just be an extra cost – the reality is that most accountants will save the business many times their cost
– thinking that accountants are just bean counters.

But if you choose a qualified and experienced accountant they can bring huge benefits: management tools to improve profitability, cost controls, tax savings, growth strategies, business planning, business structures and much more. So don’t wait too long – getting an accountant should be a priority for all businesses!

Common Mistakes

First off – not having a separate bank accounts. Many start ups try mixing business and personal transactions in their personal bank accounts, its a total nightmare, don’t do it, get a business bank account. Mixing things up will almost certainly have tax implications.

Not registering for tax or filing returns is another one. Getting things right at the beginning is extremely important and a CIMA Accountant can make sure that you choose the right business structure and will help you register for VAT, PAYE, CIS and other taxes. Choosing the right VAT scheme will save you tax. Not registering and filing returns will have severe consequences and lead to fines and penalties.

Also – contract mistakes. Ask your Accountant to review your contracts, they will be able to give you lots of useful tips.

Running out of cash: draw up a Budget and Cashflow and forecast how much cash you will need to run the business, looking at your cash cycle and managing it will be vital. If you need funding ask your Accountant for help, they will be able to look at all the options and help you choose the option that’s best for your business.

Accounting – many start ups fail to keep control of their accounting, by working with an accountant and using Debitoor or Sage One you can avoid this problem.

 

 

steve@bicknells.net

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What is Overlap Profit? Reply

what

Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080

Example 1 – one overlap period

A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.

The basis periods for the first three tax years are:

2010-2011 Year 1 1 October 2010 to 5 April 2011
2011-2012 Year 2 12 months to 30 September 2011
2012-2013 Year 3 12 months to 30 September 2012

 

The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.

Example 2 – more than one overlap period

The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).

The basis periods are:

2014-2015 Year 5 12 months to 30 September 2014
2015-2016 Year 6 12 months to 30 April 2015
2016-2017 Year 7 12 months to 30 April 2016

 

The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.

If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).

Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.

Tax Cafe point out in their guide ‘Small Business Tax Saving Tactics

Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?

There are two ways to gain access to your overlap relief: cease trading or change your accounting date.

Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.

Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!

There is also some useful advice in Helpsheet HS222

steve@bicknells.net

We love Self Employment in UK….. Reply

Business people group.

The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).

The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.

The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If current growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.

According to Tax Research UK

Something like 80% of all the new jobs created since 2010 are, in fact, self-employments, and there are a number of things that very significantly differentiate self-employments  from jobs.

The first is security:  there is none.

The  second is durability:  vast numbers of new small businesses fail, which is one reason why I doubt the official statistics.  I am sure they record the supposed start-ups  correctly but seriously doubt if they have properly counted the  failures.

Then there is  the issue of pay. The evidence is  overwhelming  that in recent years earnings from self-employment have, on average, declined significantly.

A worker’s employment status, that is whether they are employed or self-employed, is not a matter of choice. Whether someone is employed or self-employed depends upon the terms and conditions of the relevant engagement.

Many workers want to be self-employed because they will pay less tax, this calculator gives you a quick comparison between being employed, self employed or taking dividends in a limited company.

HMRC have a an employment status tool to help you determine whether a worker can be self-employed or should be an employee http://www.hmrc.gov.uk/calcs/esi.htm

In summary, why is it attractive to use Self Employed Freelancers?

  1. 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
  2. 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
  3. Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
  4. 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.
  5. 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 do you think self employment is good for the UK?

steve@bicknells.net

Business Disclosure – do it right or risk a penalty Reply

Young woman with checklist over shoulder shot

Displaying the right information on the right documents is important, so here is a quick reminder…
LetterheadThe rules for companies are set out in The Companies (Trading Disclosures) Regulations 2008

The key sections is…

6.  (1)  Every company shall disclose its registered name on—

(a)its business letters, notices and other official publications;

(b)its bills of exchange, promissory notes, endorsements and order forms;

(c)cheques purporting to be signed by or on behalf of the company;

(d)orders for money, goods or services purporting to be signed by or on behalf of the company;

(e)its bills of parcels, invoices and other demands for payment, receipts and letters of credit;

(f)its applications for licences to carry on a trade or activity; and

(g)all other forms of its business correspondence and documentation.

(2) Every company shall disclose its registered name on its websites.

Companies House enforce the regulations and can levy penalties of £1000 for non compliance.

Sole Traders can trade under their own name or a “trading as” name provided its not offensive, contains sensitive or resticted words, includes PLC, Limited Company, LLP or is similar to another business (check the internet for potential conflicts).

Partnerships should show all the partners names or if there are more than 20 partners it may keep a list of names at its principle place of business.

steve@bicknells.net

include the terms public limited company (plc), limited (ltd), limited liability partnership (LLP) – See more at: http://www.nibusinessinfo.co.uk/content/names-sole-traders-partnerships-and-limited-partnerships#sthash.7qxBYEey.dpuf
include the terms public limited company (plc), limited (ltd), limited liability partnership (LLP) – See more at: http://www.nibusinessinfo.co.uk/content/names-sole-traders-partnerships-and-limited-partnerships#sthash.7qxBYEey.dpuf

The tax benefits of goodwill on incorporation? 6

Business people

Lets start with a typical scenario:

  • Mr Smith has been running a small garage for a few years
  • he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
  • he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
  • at the time of incorporation, the goodwill of the business is valued at £100,000
  • Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief (note rules changed 3rd December 2014 and ER is no longer available normal rates of CGT now apply)
  • the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.

In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax. (note rules changed 3rd December 2014 and Section 849C CTA2009 prevents this on related party goodwill)

However, please bear the following in mind:

  1. If the business started before 1st April 2002, Corporation Tax Act 2009 s895 prevents the company from claiming a deduction against corporation tax, also refer to HMRC Spotlight 1: Goodwill – companies acquiring businesses carried on prior to 1 April 2002 by a related party
  2. Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
  3. Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
  4. In general it is expected that intangibles will have a useful life of no more than 20 years (note new rules – FRS102 states
    “If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years.”)
  5. Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief

steve@bicknells.net

Why some Companies are becoming Partnerships… Reply

strategies

Choosing the right Business Structure can have a significant impact on how much tax you pay and it is possible to change from one structure to another.

Here are some useful links comparing structures:

Sole Trader v’s Limited Company

LLP v’s Limited Company

Limited Company v’s PLC

So why are some Companies changing back to Partnerships/Limited Liability Partnerships?

 LLP’s can provide an alternative method of remuneration for key employees, rather than the traditional routes of dividends or salary.  Such employees could terminate their employment contract, form an LLP and provide consultancy services to the business.  The individual would then save an element of national insurance, as rates are lower for the self employed than for the employed.  In addition, the business will benefit from a tax deduction on the charges made by the LLP, and save employer’s national insurance at a rate of 13.8%, potentially a significant saving. IR35 regulations would need to be considered in this plan.

Alternatively, an LLP could be used to remunerate all employees. They could all resign and become members of a “service“ LLP.  This would have the advantages of national insurance savings as above.  There are non tax areas to consider, for example the individuals will lose their employment rights on becoming self employed (this could be a huge advantage to the employer).  Clearly this risk would have to be appropriately managed and considered throughout.

http://www.plummer-parsons.co.uk/business-services/business-planning/business-forms/tax-planning-limited-liability-partnerships-llps

How much NI could be saved?

Employers pay 13.8%

Employees pay 12% on earnings above £146/week (2012/13) and 2% on earnings above £817/week (2012/13)

So for most employees that means on most of their earnings the employer and employee NI is 25.8%

The Self Employed (Sole Traders and Partnerships) pay Class 2 and Class 4 NI

Class 2 is £2.65/week (2012/13)

Class 4 is 9% on profits above £7,605 and up to £42,475, after that its 2% (2012/13)

http://www.hmrc.gov.uk/rates/nic.htm

So we are comparing 25.8% for employees with 9% for partners, a potential saving of 16.8%

Another area of tax saving is on the sale of the business using the Entrepreneurs Tax Relief 

Capital Gains Tax could be as high as 28% or as low as 10% with the Entrepreneurs Tax Relief.

The qualifying conditions are less stringent on partnerships, in a company the shareholder must:

  •  own at least 5 per cent of the ordinary share capital and have at least 5 per cent of the voting rights
  • you must have been an officer or employee of the company

These rules don’t apply to partnerships.

For short term projects such as a property development an LLP could save tax but for many businesses a limited company could be a better option.

You could of course have a mixture with companies and LLP’s holding shares or being partners.

steve@bicknells.net

Tax Break – Self Employed to your own Company Reply

When you are Self Employed your pay tax in advance in January and July, but Companies pay tax 9 months after their financial year end.

So if you formed a Company and it started trading in April 2011, its year would end 31st March  2012 and Corporation Tax would be due in December 2012.

As a director of your own company you will be paid as an employee (PAYE) and get paid dividends as a Shareholder. Dividends are paid out of taxed profits.

What this means is that a Director taking a minimal salary, will probably have a tax break of 12 plus 9 = 21 Months.

In addition the company will buy the assets of the sole trader and it may be possible to include a value for goodwill.

steve@bicknells.net