Regulation and administration

Taxation

Whilst there are several areas to be considered from a tax perspective, if the business is likely to make more profits than what is to be distributed then the limited company option would seem a better one.

With the increase in the personal allowance threshold, you can choose to pay minor PAYE contributions by paying yourself above the primary threshold. The primary threshold is the point when national insurance contributions become payable on your salary payments. If you set your annual salary in line with the personal allowance for 2013/14, this is £9440, you will receive a net monthly salary payment of £770.04. This is an increase of £129.04 per month and there is only a small amount of national insurance payable over the year totalling £444.74. This works out as £37.06 per month, a small price to pay considering you’re receiving an extra £129.04 per month in your pay packet.

If you would like to discuss switching from a sole trader to a limited company to take advantage of the tax savings available, please contact us on either of the following numbers: 01620 823991 or alternatively 07854 762505.

The age old problem of understanding the difference between ‘marking up’ your product or service and the ‘margin’ you achieve with each sale. You might think that this isn’t applicable to your business but this isn’t specific to any one business type or sector, it’s a basic fundamental of understanding:

- Your product and the selling price it has within the marketplace

- Your suppliers and how much they charge you for the product

- Your customer and what there prepared to pay for your product

So the quick questions are:

Do you have good turnover figures and achieve good sales but fail to deliver the profit targets you’ve set for your business?

What do you think your profit margins are and is it enough to cover the fixed and variable costs associated with running your business?

If you answer yes and you’re not to sure of your profit margins, we can follow the example below.

The markup is the profit made on a sale relative to the cost price. So if you bought an item for £9.99 and sold that to the consumer for £12.99, your markup would be 30%.

The profit margin is the profit relative to the selling price. So if you sold an item to a consumer for £12.99 and it cost you £9.99, your profit margin would be 23%.

Now hopefully you’re still with me and understand where the differences are in the figures but to make sure I’ve converted the statements above into the sums to make it clearer to see.

Markup:  £12.99 – £9.99 = £3  Then we: £3 / £9.99 = 30% (expressed as a %’age)

Profit margin: £12.99 – £9.99 = £3  Then we: £3 / £12.99 = 23% (expressed as a %’age)

This is a very easy process and can quickly highlight where your problems are, this could be issues with your selling prices or increases in fixed and variable costs. The importance of completing this process cannot be under estimated and in some cases can be the difference between your business succeeding or failing.

As a further example, I’ve collated a table to give you a quick and easy overview of the markup v margin position. So as an example, if you markup by 100% your profit margin will be 50%.

Management accounts provide the business owner with a clear view of how their business is operating. They contain the key financial figures and ratios you require to run your business efficiently and effectively. They give you a real time, up to date position on your business unlike annual accounts which are based on historical events.

I hope you found the above of assistance and if you would like to discuss further how management accounts could help your business, then please don’t hesitate to call me on 01620 823991 or 07854 762505. Alternatively you can use the following link to my contact form.

As well as committing to further checks this year, HMRC’s intention is the continue with the Business Records Check scheme during 2012/13 and expect to complete 20,000 visits to SME’s.

HMRC’s director of local compliance, Richard Summersgill, said: “Good record keeping helps businesses pay the right amount of tax at the right time, thereby potentially avoiding interest and penalties.” He continued: “Adequate records give businesses a clear idea of their trading position and profitability, allowing them to make business decisions and adjustments to ensure survival and success. Where a check has shown a business keeps adequate records, it gives HMRC a greater degree of assurance as to the likely accuracy of it’s tax returns.”

The pilot highlighted that of the 800 visits completed to date, 44% of businesses visited had record keeping issues and a further 12% reported seriously inadequate records.

Although HMRC will only levy a penalty in the most extreme cases of poor record keeping, the longer term plan is to issue penalties of up to £3,000 for serious inadequacies in record keeping. A further announcement is expected from HMRC of when this will be implemented.

This is an easy situation to avoid and if you feel your records are becoming too much then you need to make the necessary changes now. If you would like to discuss how we can help you and your business then please use the following contact form. We also have a free guide to the records your business needs to keep and if you would like a copy then please mention this on the contact form.

These announcements are becoming more frequent, as we’ve highlighted previously HMRC have also started looking into rogue plumbers who are failing to pay the necessary taxes and national insurance.

Small businesses should be making sure there records and accounts are up to date, now more than ever as these announcements will continue in the months and years to come. HMRC have the task of finding £7 billion of additional tax revenue each year through these investigations and they’ll leave no stone unturned.

Professional advice could help to save you hundreds, if not thousands each year in tax and keep you the right side of the tax man.

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The key points for the new ‘micro entities’ initiative are as follows:

– A company can be defined as a micro-entity if it does not exceed the limits of two of the following three criteria: a balance sheet total of €250,000, a net turnover of €500,000 and an average number of 10 employees during the financial year in question.

– The agreement simplifies the rules for the profit and loss account and balance sheet reporting requirements. Member States will be provided with the flexibility not to require publication of these accounts. Simplified balance sheet information will still need to be filed at Companies House.

Now what this initiative fails to recognise is that small businesses still require to submit full accounts to HM Revenue & Customs in the iXBRL format. What is being proposed will save a business in the region of 30 minutes annually but the question is will it?

As you can see from the second point above, there’ll still be a requirement to publish a simplified balance sheet with Companies House. So is this a government PR project, full of smoke and mirrors to make it look like there removing red tape and administrative burden?

Maybe the government should do a little more research as there are plenty of areas they could be improving to encourage people to start there own businesses.

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Choosing your businesses legal structure is one of the most important decisions you’ll make. There are varying differences based on the legal structure you choose and we’ll help you understand these in our analysis below.

The changes in the budget should make you consider the following:    Why would I start my business as a sole trader?

So, why are you a Sole Trader?

Is this because you wanted to just start a business? You knew what you wanted to do and you wanted to start trading straight away? Was it a hobby which evolved into a business?

Or was it because you didn’t want to get involved with all the legal obligations and formality of the other legal structures and this was the easiest way to form your business?

Either way, with the right advice you can find out which legal structure is right for your business. There is no right answer for everybody as each case has its own positive and negative aspects. All you can do is ensure you sought enough advice to have made the correct decision taking into account your own personal circumstances.

So let’s look into why you may be better off considering the limited company structure for your business.

Liability, do you know how much you could be liable for?

As a sole trader, you’re a business entity that is owned and run by one individual, there is no distinction between you and your business. This means that you’re completely liable for any of the businesses debts, as they’re your debts. As the businesses debts are yours, should the business run into trouble, your personal assets could be used to clear the business debt.

This means that you could end up losing your own personal assets to cover the debt held against your sole trader business. That means you could lose your car or even your family home / personal dwelling.

As a limited company, any business debts incurred are the responsibility of the company itself as you’re considered a separate legal entity. This means that unless you’ve offered personal guarantee’s against any borrowing or debt, your assets cannot be used to pay the debts of the company.

From a liability point of view, the limited company offers a far more attractive proposition compared to the sole trader business structure.

Tax, do you know how much tax you could be saving as a limited company?

Depending on the level of profit your business is making during an accounting period, you could be in line for a surprisingly generous tax saving. We have drafted an example below based on a sole trader and a limited company.

Tax as a Sole Trader

As a sole trader you pay income tax on any earnings over your personal allowance, if you have any other forms of income, this will be included as well.

Sole traders are also liable for:

Income tax at 20%.

Class 2 National Insurance (NI) contributions at £2.70 per week.

Class 4 NI contributions on profits over £7,755 at 9% up to £41,450 and then 2% thereafter.

As an example, if after drawing up your accounts your business had a profit below the £9,440 personal allowance, it would probably be best for you to continue as a sole trader. This is due to the fact you’ll pay no income tax and very little, if any class 4 NI contributions.

If you’re profits are below £5,725 you may want to consider applying for an exemption to class 2 NI contributions. For more information please see here [added hyperlink].

Tax as a Limited Company

Since the budget review in April 2011, the rate at which businesses pay corporation tax (the businesses form of income tax) on its profits has fallen from 21% to 20% up to £300,000. From the 6th April 2013 profits over £300,000 are taxed at a different rate as the rate rises to 23%.

As well as being a director of the limited company, you’re also classed as an employee and as such can draw profits from the business in the form of a salary and also dividends if you’re classed as a shareholder. One of the key benefits is being able to take advantage of the small salary and dividend remuneration as a company director.

As we mentioned before, if you have any other earnings or forms of income, this could be rental income then they will be dealt with through a personal tax return unless they directly relate to the limited company profits.

So that gives you a general understanding but which one is really best?

As an example, let’s say your business has end of year profits of £15,000 and no other forms of income.

As a sole trader you would be liable to pay £1,904.45 in income tax and class 4 NI contributions. This can be followed using the example below:

Annual profit – £15,000

Personal allowance – (£9,440)

Net profit on which tax is payable – £5,560

Total tax payable at 20% – £1,112

Class 4 NI payable on profits – £652.05

• (Sum for Class 4 NI is as follows, profit £15,000 – NI allowance £7,755 = £7,245 at 9% is £652.05)

Class 2 NI contributions – £140.40

• (Sum for Class 2 NI is as follows, payable at £2.70 a week 52 x (£2.70)

Total tax and NI payable – £1,904.45

Total funds available after tax – £13,095.55

As a limited company you would be liable to pay £1,502.40 in income tax and class 4 NI contributions. This can be followed using the example below:

Annual company profit – £15,000

Salary drawn – (£7,692)

• (As a company director, you draw salary against company profits and at a rate that you don’t pay income tax. This gives you the added benefit of paying no personal income tax and also lowering company profits and therefore paying less corporation tax.   The sum is £641 x 12 =£7,692)

Net profit on which tax is payable – £7,308

Total tax payable at 20% – £1,461.60

Class 4 NI payable on profits – £0

• (Class 4 NI is not applicable to limited companies)

Class 2 NI contributions – £0

• (Class 2 NI is not applicable to limited companies)

Total tax and NI payable – £1,461.60

Total funds availale after tax – £13,538.40

• (These funds would then be distributed as a dividend payment and no further tax would be payable as long as you were a lower rate tax payer below £32,010)

This means that based on an annual profit of £15,000 you would be better off by £442.55, which is money in your pocket and not HMRC’s.

If you would like to discuss your options and get a better idea of the possible savings by incorporating your business, then please contact me for a no obligation meeting on:

Telephone – 01620 823991 or Mobile – 07854 762505

Or alternatively email here

It does everything you need to run your business and more! If you’d like to take advantage of our current 20% saving, then please call me on 01620 823991 or alternatively 07854 762505.

It would appear that HMRC are continuing there crackdown on tax evasion by issuing the warning to all who work within the plumbing trade. Click >>here<< for more information.

This won’t be only warning issued by HMRC this year, I’d expect these to continue especially in trades and professions where they feel income is taken without being declared. If you would like to discuss the implications of this warning and how I can help, then please call 01620 823991 or alternatively contact me via email >>here<<.

You have several options, you can go down the route of a spreadsheet but that can be very time consuming and also reliant on your experience and skill of using Excel. You can purchase something like Sage or Quickbooks but this can cost quite a lot and is generally payable up front; or you could take advantage of the latest cloud computing technology.

As Iris Openbooks (provided by Free Agent) is our preferred supplier, we can offer you a great discount against individually sourced Free Agent packages. Our prices are detailed below and we’re guaranteed 20% cheaper than buying from Free Agent direct. We also guarantee to never increase your monthly payment* so what you pay now is what you’ll pay next year and the year after that!

If you’ve already signed up to using the Free Agent software, we can get you transferred over to Iris and you can start benefiting from the 20% saving. This is a pain free transfer that will happen within a day and will provide you with exactly the same accounting service. Please take a look at the Iris virtual tour >>here<<

Sole Trader - £15 per month

Partnerships – £20 per month

Limited Companies - £25 per month

Check the comparible prices with Free Agent here

There are no setup fee’s, there’s no commitment as it’s a rolling 30 day contract and best of all you still qualify for the usual Free Agent benefits:

– Free Updates

– Data Exports

– Free Support

– Data Back-up

– Data Security

If you would like to setup a no obligation web demo meeting, then please contact me on the details below:

Telephone – 01620 823991 or Mobile – 07854 762505

Or alternatively email here

*Prices will change if your businesses legal structure changes

* Prices are for software use only and further charges are applied if you require the accounts or payroll packages.