Starting a business is very stressful. Perhaps one of the least appealing aspects is getting to grips with basic paperwork and red tape. Tax, National Insurance, VAT, tax and National Insurance, health and safety, environment issues, buildings, intellectual property and licenses are a few pressing issues to deal with, not to mention employee rights and data protection. Under “starting a business” we shall cover all these issues in detail and present a straightforward set of guidelines for dealing with each.
This article outlines the main tax and national insurance obligations for both sole traders and limited companies, giving the current allowances and exemptions, plus those important deadlines for paying up. There is also a separate section on corporation tax, which all limited companies need to understand and a section on capital gains tax. Although tax and national insurance issues can appear daunting, and the help of an accountant is invaluable, much of it is fairly straightforward and you need to understand it.
Before you can start on tax and national insurance you need to define your employment status. The route you choose will dictate how much tax and national insurance you pay at what time of year. Do you want to be employed or self-employed? If you have set up as a sole trader, or are a partner in a partnership or a member of a limited liability partnership you could be taxed either as self-employed or as an employee, depending on the way your work is organised. If you set up a limited company, you will be a director and therefore taxed as an employee on your earnings, from that company – even if you work on your own. The advice below will help you decide, but for further detailed information look at the articles on limited company, sole trader, partnership and limited liability partnerships.
Are you self employed?
If you are not sure if you are self-employed or not, try answering the following questions. Do you have the final say in how the business is run, do you risk your own money in the business and are you responsible for meeting the losses as well as taking the profits? Are you free to hire other people on your own terms to do the work you’ve taken on and pay them out of your own pocket? Do you provide the main items of equipment for work and are you free to take on work at a fixed price regardless of how long it takes to compete? Do you have a lot of control over your work (for example, over hours, location, what you do and how you do it?) Are you in control of the business and have to correct unsatisfactory work in your own time and at your own expense, and work regularly for a number of different people? Answering yes to the above usually means you are self employed, but if still in doubt there is further guidance from the tax office.
If you are self-employed you must register with the tax office within three months of starting up. To find your local Inland Revenue Tax Office go to www.inlandrevenue.gov.uk/enq/index.htm . Special rules are enforced if you work in the construction industry and there are also different rules if your work is arranged through an agency or through a limited company or partnership to provide your service or the services of others to clients. (If any of these apply to you see separate article on the rules which are commonly referred to as IR35).