Starting a new business is quite exciting and if you’re anything like me you can’t wait to tell everyone that you run your own company, you are an entrepreneur, your business is blossoming etc…
This feeling gets even better when the idea you’ve dreamt of for so long starts coming to life – and you can see it unfolding before your eyes. You focus on getting the word out there to get as many new clients/ customers as you can service. You hold on to the vision of you being successful, doing whatever you like, no boss telling you what to do; it’s all good. You imagine the money is flowing and don’t think bills will ever be a problem. This is often called the honeymoon period, and is a common experience when starting out in business.
But there is something lurking in the distance. An obligation – a necessity – a tiresome administrative hurdle…
(Or that how it feels for many least!)
However because this required compliance is so many months away, you ignore it……there’s nothing to worry about right now, right? I have loads of time, I am building my business…..
Then the deadlines finally arrive! Oops where did the time go?
Here are some of the things you should NOT do when starting out in business:
- Not plan compliance deadlines. As soon as your business is up and running, you need to let HM Revenue know that you are trading with in 3 months of this.
- If you are a sole trader, depending on when the start date, your self assessment tax return will be due on the 31st of January. For example if your start date was 1st September 2017, then your tax return will have to be filed by 31st January 2019. However this can be filed from 6th April 2018.
- If you are running a limited company, make note of when the confirmation statement is due (usually the anniversary of the date of incorporation). Failing to file this may result in the company you working so hard to build being struck off, i.e. closed.
- Again, for limited companies, note the date the accounts will be due at Companies House and the Corporation Tax Return at HM Revenue. Missing the deadlines results in automatic penalties and eventually strike off. Not knowing is usually not considered as a grounds for appeal.
- Not think about the taxman. There is a myth that businesses don’t pay tax in their first year. For as long as the business is profitable there is tax to be paid. Yes, there are allowances that can be claimed, but there is nothing like no tax is due in the first year, unless of course the business is loss making. Tax is not something to be dreaded or avoided, because it is an indicator of how well your business is doing. The key is to ensure that you are paying the correct amount of tax, and not more than you should be.
- Not keep business records. You must keep all business records for at least 6 years , such as sales invoices,purchase invoices, receipts, contracts, delivery notes, petty cash, etc. HMRC can potentially impose fines of up to £3000 for not doing this or get you disqualified as a company director. From day one, set up a system to help you with this. It can be in paper format or electronic.
- Not look after finances. Always have a separate bank account for the business.
- As a limited company it is a legal requirement that there must be one opened in the names of the company. As a sole trader, although not strictly expected, it is good practise to keep business and personal finances separate. In addition, should you be subject to an HM Revenue inquiry, it is easier to deal with it when there are clear boundaries i.e different bank accounts.
- Set up 2 bank accounts, (or 3 if possible).
- If you choose 2, then one is a current account for the day to day running of the business and the second one is a savings account for purposes of paying taxes.
- 3 bank accounts would be ideal, where one is a current account where all the money comes in. The second one is also a current account from which all bills a paid and the third a savings account for taxes. Money is transferred from account one to two and three. It may sound like such a hassle, but once in place, it helps to keep the business finances clean, and you are able to plan your cash flow better. Read the full article here
- Lack of tax planning:
- Get knowledgeable on tax allowable expenses. For example entertaining clients may be a business expense but in most cases is not tax deductible. Having a company car creates a benefit in kind which means there is an additional national insurance bill to be paid.
- Salaries (including your own) paid at or above the national insurance lower earnings limit have to go through a payroll scheme. The limit is currently £5,564 per year, which works out to be £107 per week or £464 per month.
- If you are running a limited company, get up to scratch with the salary/ dividend mix. Although its “your business” the money belongs to the limited company and the legal way of withdrawing it is via salary or dividend. Keep an eye on your directors loan account as this attracts additional corporation tax if overdrawn 9 months after the company year end.
- Ignoring VAT. You need to keep an eye on the amount of income coming into your business. The moment you become aware that the turnover will go over £85,000 in any given 12 months period, then you must register for VAT. You need to plan for the implication of this on your prices as it is an extra 20% that you have to think about….will you pass this on by increasing your prices by 20% or absorb it? It doesn’t matter so much if your customers are also VAT registered but those who are not will most likely be price sensitive.
Although this is a good place to start, it is just a snippet of the accounting and tax side of the business.
Looking for things you SHOULD be doing when starting your new business? Head over to our growing library of FREE resources to get you off on the right foot!
When are starting out in business you want to avoid unnecessary costs, penalties and tax burden by setting up right in the first place. If you need an accountant to put your mind at ease, do get in touch.