new business...advice needed re tax

foxydan

Hi All,

I hope some of you can answer the questions I have regarding my situation. I currently work as a teacher full time and earn around £45,000 p.a.

From next year I will be reducing the time I work at school to just three days a week (part time). The reason for this is that I am setting up my own educational consultancy business working the other two days a week.

The questions I have are regarding the tax side of things of my business. I would like to run my accounts myself. I understand that I need to register for self assessment and complete my returns paying tax on my profits. Obviously all the money I make will be profit but am a little confused as to work out how much I should keep aside for tax. Basically if I kept say 50% of the earnings in the account would this be enough to cover the tax?

I will have minor expenses such as website cost and maybe stationary things like that and as I understand I minus these from the profits and then tax is paid after. I will be using a car but only for short journeys and don’t think I’ll bother trying to put this through it as it seems more hassle then it is worth. The only issue I can foresee is if my business expands and then I will be using it more and therefore become an expense.

What sort of accounts do I need to keep?
Does anyone recommend any sort of spreadsheets, simple accounts programs etc I can get hold of or should I just create these myself?
Is this the sort of thing I can realistically do myself?
Are there things I am missing or need to consider?

Any help would be much appreciated in putting me straight and helping me decide what to do.

Thanks

chrismac1

45 pence per mile should sort you out for motor expenses. £3 per week use of own home is the "no questions asked" HMRC rate. 20% of net profits is likely to cover the tax, and your first payment will be on 31 Jan 2013 for the 2011-12 tax year we are now in.

The most important thing about any records system is that the person keying in source transactions understands the system well enough to get 90% of the transactions in the right box first time. If Excel is something you are familiar with, I have some ready made spreadsheets many of my start-up clients use with no real problems.

I think you can probably do your own as a sole trader without much trouble. Another option is simply to hire an accountant for year 1, making sure it's the sort of accountant who shares the workings - or asking where every number on your tax return came from unless it's clear to you. You then have a template for year 2 and beyond and can be confident things are going into the right box on the return and not flagging up any alerts to the HMRC database.

foxydan

chrismac1 wrote: »

45 pence per mile should sort you out for motor expenses. £3 per week use of own home is the "no questions asked" HMRC rate. 20% of net profits is likely to cover the tax, and your first payment will be on 31 Jan 2013 for the 2011-12 tax year we are now in.


when you say £3 per week use of own home, what do you mean by this?

Thanks

chrismac1

My guess is you'll be using a room in your own home for business. £3 per week is accepted by HMRC as a "no questions asked" expense value for this. I have clients who claim much more than this, for example a website designer running two hungry servers from his home. For those who claim more I recommend keeping records of a detailed calculation - PM me for more details on this.

ceeforcat

I would recommend engaging an accountant leaving you to fully concentrate on your business. Do not forget that the expense is tax deductible like your other expenses (stationery with an 'e' by the way) aside from the tax return and you will effectively benefit from 42% tax relief.

Good Luck in your new business!!

chalkie99

I disagree with the comment that 20% of net profits will cover tax as I assume your intention is to make at least as much money in total as you already earn, thus putting you into a higher tax band.

I, too, would recommend speaking to an accountant (many offer a free initial consultation) to decide not only how you will keep your records but also whether you would be best served by being self employed (sole trader) or setting up a limited company and, possibly, paying yourself in a more tax efficient way through dividends.

chrismac1

Just to spell out the 20%. You are currently - just - a 40% taxpayer by £3k. You are giving up some PAYE days and going self-employed part of the week. Unless the rates are a lot higher per day and from day 1 you are fully loaded 2 days per week self-employed, your gross income will initially either stay the same or drop. If it were just about income you'd still pay 40% tax.

But as we've seen it's not just about income. You'll claim use of own home, mileage, stationery, telephone, perhaps some advertising, maybe buy some equipment. You might hire an accountant, those costs are a business expense. If your accountant is any good, unless your gross income for those 2 days per week adds up to over £20k, 20% is going to cover the extra tax.

foxydan

Well thank you to all the replies so far, they are much appreciated even the spelling corrections lol!

Well I guess one thing I am starting to understand is that I probably do need to speak to someone who knows about these things like an accountant. I suppose this is the only way I will truly find out what is best for me.

I was thinking of going down the sole trader route, purely for ease but probably need to look at the limited co route as well. Does anyone know what accountancy fees are like? What savings could I make doing my own books? Can you pay an accountant to just do your tax return?

So many questions!! Thanks again all.

chrismac1

Yes an accountant will do whatever bits you ask for. PM me for a link on the pros and cons of setting up a limited company. I usually not only ask clients to read this, but also if I have doubts if it is the right step I have clients who are in the process of striking off their companies, having rushed into the setting up process too quickly despite my efforts to get them to think things through a bit. One of these guys has agreed to talk to potential limited company clients to explain this, I feel this personal experience example is more likely to cause a start-up client to properly think about things than just reading my advice or listening to it.

For start-ups I usually advise kicking off as a no-haslle, low accountancy fees sole trader - except for businesses such as pubs where I demand limited liability because breweries are so keen to screw tenants into the ground and if you're a sole trader that means your house. In your case limited liability is probably not a big benefit provided you get decent PII cover.

Once the business is well-established and making money and the self-employed lifestyle is suiting you well, you can set up your limited company with a happy heart. It takes just 3 hours to get your limited company and a minimum of 3 months - often a LOT longer - to get rid of one.

property.advert

You should look at the total net gain from Ltd status. Filing annual returns costs £14 and takes seconds. Incorporation takes a few minutes online. Some very good portals out there which auto set up your login with Companies House. Very handy.

You can run a non trading company for a few pounds a year so I don't know what the worry is about issues going forward. You can run a trading company for a few pounds more. It isn't rocket science.

Accountants will happily suck you for a thousand or two to prepare documents which you can automate in Excel and should do anyway to keep an eye on your cashflow. Your company is dead simple. You sell your labour and you have few costs. It is truly A-B=C.

Have a look at whether you can benefit from VAT registration, either regular or flat rate. Remember though that if your competitors are non VAT registered and your customers are also not registered, your being registered would mean your prices were 20% over theirs. If that is an issue, you might need to think about how you construct a number of companies which do different jobs / contracts to allow them to operate under the VAT threshold.

Most people I know who have companies either read up about it and do it all themselves or they can't be bothered and pay an accountant.

chrismac1

It is very easy to set up a limited company. That is the problem. I am currently in the process of striking off 3 companies for clients, all of which have traded for less than 18 months. There is one more in the pipeline in my view. In my opinion, only one of these 4 companies was set up with proper consideration of the full implications, the guy was in a similar position to the OP except he was a doctor not a teacher and has now taken a full-time job in a practice instead.

Getting rid of a company is also easy if you're the sort of person who doesn't care about HMRC, the Companies Act or being barred from future directorships. For the rest of us, it can be a time-consuming and costly process, though not for the OP should the need arise. But it takes 3 months at the absolute minimum.

You also have to be organised to run a limited company. If you are a sole trader and file accounts a day late, that's £100. If you messed up a few things no problem, just re-submit. You don't even need to have a set of accounts, just fill in the tax return.

Limited company accounts must comply with the Companies Act. There are a lot of extra disclosures needed and in a precise format. There are extra considerations such as the ultimate controlling party - the OP in this case - and how that person has traded with the company. The penalties for late filing are:

1 day late 150
1 day and a month 375
3 months and a day 750
more than 6 months 1,500

There is more or less no chance of getting a client off a late filing penalty, barring death, flood or earthquake. Anyone who thinks this is scaremongering, just visit the UK Business Forum Finance and Accounts section, every month there are some sad threads over folks who've got into real difficulties with supposedly simple companies.