Sister and I plan to start an online craft store. Questions on starting, tax, and registration...

MadRatters

At the moment we have not made any money from the business but have spent our own money on a website domain, a logo and a workspace for us to share buisness related things and a CRM system. 

• When do we register with HMRC? now or when we make money? 
• What do we do about taxes? 
• At the moment, there's just me & my sister but what if say one of our friends want to join, what would we register as then? 
• Apart from signing up to HRMC , is there anything else to sign up to? 

Jeremy535897

See https://www.litrg.org.uk/tax-guides/self-employment

tacpot12

Have a look at the Small Businss Toolbox channel on YouTube: (1) Small Business Toolbox - YouTube

The channel owner, Andy McLelland is a self-employed handyman, but also runs a tutoring business for Drums, and has a lot of useful information on how to get started, and how to setup your business. 

If you don't already have one, your next purchase should be a Password Manager service for your business so that you have somewhere to store the passwords and references that will be issued by HMRC, and your CRM and Website providers. There is a review of Password Managers for Businesses here: The Best Password Managers for Businesses in 2023 (pcmag.com)  The main features you are looking for are ease of use and the ability to have multiple users with access to the password store (you and your sister). 

You want to consider insurance for your business. You might talk to an insurance broker to understand what risks your business might face. 

I would also recommend reading a book called "Profit First" by Mike Michalowicz. This gives first time business owners a simple accounting system that really helps to ensure you make a profit AND know the financial state of your business. It is a system that can easily be combined with the spreadsheet accounting processes recommended by Andy McLelland. I would recommend using Andy's spreadsheet processes until you find you need something better. 

DullGreyGuy

MadRatters said:

At the moment we have not made any money from the business but have spent our own money on a website domain, a logo and a workspace for us to share buisness related things and a CRM system. 

1. When do we register with HMRC? now or when we make money? 
2. What do we do about taxes? 
3. At the moment, there's just me & my sister but what if say one of our friends want to join, what would we register as then? 
4. Apart from signing up to HRMC , is there anything else to sign up to? 

First of all, what is your legal structure? Are you a partnership? Are you forming a company?

1) Depends on your legal structure
2) Pay them
3) Depends on what you've registered as now and if they are going to be employees or additional partners or...
4) Depends on how you are operating... by the sounds of it you are renting business space... is stock going to be kept there or at home? You may need to be dealing with business rates if you have rented a whole unit. Have matters to deal with insurance, mortgage etc if you have stock at home

Accountants often do a 30 minute free session and it may be worth a conversation. Be aware that 30 minutes will not be all you getting free advice but also their sales pitch to you.

A lot more detail is required before any meaningful answers can really be given.

tightauldgit

MadRatters said:

At the moment we have not made any money from the business but have spent our own money on a website domain, a logo and a workspace for us to share buisness related things and a CRM system. 

• When do we register with HMRC? now or when we make money? 
• What do we do about taxes? 
• At the moment, there's just me & my sister but what if say one of our friends want to join, what would we register as then? 
• Apart from signing up to HRMC , is there anything else to sign up to? 

Are you planning to set up as a limited company or just be a sole trader with one or the other of you as an employee, or a partnership? If the sole trader option then i dont think you need to do anything other than register for self-assessment with HMRC. You then just submit your personal tax return each year showing the income less expenses from the business. 

Partnerships I know very little about and would suggest you get some legal advice on. You would need to create a partnership agreement and if a third party wanted to join then you would amend the agreement. Once that's done I think the thing operates more or less the same as a sole trader so no annual reporting etc - just self assessment for tax.

Setting up a LTD company is relatively straightforward online but it does create an admin burden to submit annual accounts etc. You need to register yourself with companies house and then HMRC will be in touch about corporation tax. 

If you are spending significant money to set up the business you might want to consider registering for VAT so that you can claim back the VAT on what you spend, but you don't need to until you hit quite a substantial income threshold and it may be better holding off as once you are registered you need to charge VAT on your sales.

 

DullGreyGuy

tightauldgit said:
If the sole trader option then i dont think you need to do anything other than register for self-assessment with HMRC.  

As you said, sole trader + employee then it would be more than just registering as a sole trader for self assessment. They'd also have to register as an employer for a PAYE number and buy Employers Liability insurance

tightauldgit said:
You would need to create a partnership agreement and if a third party wanted to join then you would amend the agreement. Once that's done I think the thing operates more or less the same as a sole trader so no annual reporting etc - just self assessment for tax.

Technically a partnership agreement is optional but highly recommended. Without one you operate under the terms of the Partnership Act 1890. May not be so bad if it's just you and your sister but clearly worse when others come in.

For a partnership each partner does a self assessment return but there is an additional one required for the partnership itself so not the same as a sole trader. 

tightauldgit said:
If you are spending significant money to set up the business you might want to consider registering for VAT so that you can claim back the VAT on what you spend.

The only time that is sensible is when you are selling 0% rated items (not exempt) or the vast majority of your customers are VAT registered (ie businesses). 

Yes you can reclaim the VAT you spend but have to charge your customers the VAT. Given you typically sell items above cost the impact is negative. Imagine an item is £120 wholesale inc VAT and the OP can sell it for £200.

Unregistered - £240 - £120 = £120 gross profit

Registered - £240 - £40 to the taxman - £120 +£20 recovered VAT = £100 gross profit

pjcox2005

This isn't the correct answer but you get a £1k allowance for trading income so that it's exempt from tax for an individual.

Given that protection, I'd probably not worry about structure, registration, tax etc yet although it is very important. But first invest all your energy and time in crafting, try to create sales and marketing. If you see signs that it is going to work and make more than £2k then get thinking about structure, but it's very hard to drive it and people get stuck on getting the structure in place and worrying about issues when focus number 1 should be to see if you can make it work.

Appreciate that's not the by the book advice though. 

MalMonroe

Hi, I found the information in the following link invaluable when I initially decided to set up my small online business - 

https://www.gov.uk/set-up-business

Especially the bit in the link at the bottom - "Get Help and Support".

Hope you find it helpful, too and all the very best to you and your sister with your business.   

tightauldgit

DullGreyGuy said:

tightauldgit said:
If the sole trader option then i dont think you need to do anything other than register for self-assessment with HMRC.  

As you said, sole trader + employee then it would be more than just registering as a sole trader for self assessment. They'd also have to register as an employer for a PAYE number and buy Employers Liability insurance

tightauldgit said:
You would need to create a partnership agreement and if a third party wanted to join then you would amend the agreement. Once that's done I think the thing operates more or less the same as a sole trader so no annual reporting etc - just self assessment for tax.

Technically a partnership agreement is optional but highly recommended. Without one you operate under the terms of the Partnership Act 1890. May not be so bad if it's just you and your sister but clearly worse when others come in.

For a partnership each partner does a self assessment return but there is an additional one required for the partnership itself so not the same as a sole trader. 

tightauldgit said:
If you are spending significant money to set up the business you might want to consider registering for VAT so that you can claim back the VAT on what you spend.

The only time that is sensible is when you are selling 0% rated items (not exempt) or the vast majority of your customers are VAT registered (ie businesses). 

Yes you can reclaim the VAT you spend but have to charge your customers the VAT. Given you typically sell items above cost the impact is negative. Imagine an item is £120 wholesale inc VAT and the OP can sell it for £200.

Unregistered - £240 - £120 = £120 gross profit

Registered - £240 - £40 to the taxman - £120 +£20 recovered VAT = £100 gross profit

Yeah, my suggestion on the VAT was more on the start up costs - if they spent 20k on fixtures fittings IT etc and 20k on initial inventory it might well be worth registering for VAT to get that initial spend back. Probably not for a small business like this but quite often if you're doing B&M then it's worth doing - you can always deregister yourself again as well.  

Jeremy535897

For an online craft store, assuming the customers are unlikely to be VAT registered, registering for VAT before you have to is unlikely to make sense. The customer won't care whether you charge VAT or not. The price they will be prepared to pay is the same either way, but if you are registered for VAT, you will have to hand over the VAT element of your sales (one sixth), less VAT you can reclaim (a VAT scheme might reduce, but not negate, the disadvantage). It is unlikely to be worthwhile to register for claiming back VAT on initial inventory, as VAT will be charged on that inventory when it is sold, and if you deregistered for VAT, you would have to charge yourself VAT on the value of any fixtures that you had claimed VAT on originally.

tightauldgit

Jeremy535897 said:

For an online craft store, assuming the customers are unlikely to be VAT registered, registering for VAT before you have to is unlikely to make sense. The customer won't care whether you charge VAT or not. The price they will be prepared to pay is the same either way, but if you are registered for VAT, you will have to hand over the VAT element of your sales (one sixth), less VAT you can reclaim (a VAT scheme might reduce, but not negate, the disadvantage). It is unlikely to be worthwhile to register for claiming back VAT on initial inventory, as VAT will be charged on that inventory when it is sold, and if you deregistered for VAT, you would have to charge yourself VAT on the value of any fixtures that you had claimed VAT on originally.

Depending on timing and cashflow also though - when i opened my shop I invested about 40-50k in opening stock and fixtures - maybe half of that was VATable so that is 4 or 5 grand that I could reclaim but the sales came over the next 12, 24 or 36 months and the cash to pay the VAT was already taken in from customers at that point when it was due.

If and when you deregister you're only due to pay on the value at that point and I think theres a minimum (£1000?) under which its ignored?

I agree with the basic point that its generally not worth doing, but I think its worth knowing the option is there.