Start-up advice: Accounting and taxes – you don't need to be a maestro

The number has grown sharply in the past five years – since the onset of the recession – as more people, either having lost their jobs or facing that prospect, took the decision to go it alone.

However, while setting up a business is exciting, as you are in charge of your own destiny and can potentially earn a lot more, you will rarely be successful without the basics in place.

And the most basic part of any business is the financials. Unless a company’s numbers are managed correctly, and carefully, it will generally not succeed.

Now you don’t need to be a maestro of accounts to run a small business successfully, but a basic understanding of the principles of bookkeeping and finance will go a long way.

Bookkeeping

Good bookkeeping is the bread and butter of any business. There are various ways of tackling this — from manual records to snazzy accounting software based online. Creating, issuing and chasing invoices, recording expenses and monitoring outgoings, and paying employees (if applicable), is integral to most businesses. If you haven’t got the time to do it all yourself, find someone or use a service that can.

Annual Accounts

This is a formal record of your business’s financial performance over the year, including sales, costs and amounts owed, and is laid out in a prescribed format. When they are due depends on whether you operate as a sole trader or limited company. In either case, you can choose when your accounting year ends, but since taxable income for sole traders is calculated on an April to April basis and accounts need to be sent to HMRC for this period, it often makes sense for sole traders (and partnerships) to have an accounting year that runs from 1 April to 31 March. The accounts will need to be completed before the following 31st January, so they can be used when completing your self-assessment tax return which is due on this date.

Corporation Tax

Paid by all UK limited companies, CT is currently charged at 20% on any profit generated within the year, for profits up to £300k (and slightly higher for companies with profits above this). A corporation tax return must be completed, with tax due for payment to HMRC within nine months of the accounting period.

Self-assessment income tax

This is the form that must be filed to calculate your personal income tax on all of your income for the year 6 April to 5 April. It must be completed and filed, and any tax paid, no later than the 31 January following the previous 5 April tax-year.

Income tax rates

Everyone receives a tax-free personal allowance on which no tax is payable – currently £9,440 (until April 2014). Roughly the next £32,000 of ‘basic rate’ income above the personal allowance is taxed at 20%. Income above this is falls into the ‘higher rate’ band and is currently taxed at 40%, and then 45% for earnings above £150,000. Those earning over £100,000 also start to lose their personal allowance.

National Insurance is also payable on income from employment (salary and wages) at various rates and within various thresholds. Dividend income, from a limited company, is taxed at slightly different (lower) rates and also attracts no National Insurance.

VAT

Regardless of your business structure, if your annual turnover (sales) is £79,000 or more, you must register for VAT. If below this, registration is optional. Where registered, you will generally be required to charge your customers at the standard 20% rate VAT, i.e. add 20% to your sales invoices. You will then be able to reclaim any VAT you have paid on business-related purchases and expenses. VAT returns and payments are due on a quarterly basis.

PAYE

When you take out a salary, or employ staff, you will generally be required to calculate income tax and national insurance and pay it over to HMRC on their behalf. This is calculated and paid monthly and you deduct this from your employee’s gross salaries, so it is not a cost to your business.

National Insurance is deducted at a rate of 12% for employees (although both income tax and NI only kick in once a certain earnings limit is reached). Employer’s national insurance is also charged at a rate of 13.8 per cent on the gross salary (again within certain thresholds).

What next?

Having read the above, you’ll probably have an instinctive feeling about whether bookkeeping and basic accounts are something you can manage yourself or if you’re better off outsourcing it to an expert.

Whichever it is, try to make this decision as quickly as possible and then commit to it. The one thing you should avoid is spending hours trying to do it all yourself and then, having discovered you’re out of your depth, getting someone else to do it.

When you start out in business, spending on something as unexciting as bookkeeping and accounts can feel a bit frustrating, but over time the investments will reap dividends as your company starts to grow. The real benefits are in being in good control of your business and in ensuring that you are set up in a tax-efficient way.

John Hoskin is a director of CleverAccounts.com, an online accountancy firm that seeks to simplify the task of business accountancy. Paying a fixed monthly fee, small businesses, limited companies, sole traders, freelancers and contractors have access to accountancy, business-set up and tax planning services, simple-to-use online bookkeeping, a 24/7 view of their figures and on-going tax advice.


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John Hoskin

John Hoskin initially trained and worked as an accountant and consultant at Deloitte for five years. He then spent the next 13 years working as a Financial Director in businesses across the transport, outsourcing and healthcare sectors and running his own accountancy practice, before founding CleverAccounts. John and his co-founder Chris Mollan, wanted to provide a service that used modern technology to give small businesses and self-employed individuals access to all the accountancy functions they needed but without the crippling costs of a larger firm and with better levels of service and greater simplicity and clarity that they often receive.

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John Hoskin initially trained and worked as an accountant and consultant at Deloitte for five years. He then spent the next 13 years working as a Financial Director in businesses across the transport, outsourcing and healthcare sectors and running his own accountancy practice, before founding CleverAccounts. John and his co-founder Chris Mollan, wanted to provide a service that used modern technology to give small businesses and self-employed individuals access to all the accountancy functions they needed but without the crippling costs of a larger firm and with better levels of service and greater simplicity and clarity that they often receive.