Starting a Business

Take a look at our guide to starting up a new venture – then contact us for more help.

Before you begin

If you are considering starting a new business venture, Certax can provide expert assistance. But before you begin, there are some important questions for start-ups to consider…

Is it right for you?

Running a business can be an extremely fulfilling experience, but it can also prove a significant challenge.

Many small businesses fail in the first essential stages, which is why it is essential to plan your venture carefully. You should start by including us in your initial planning. The more forethought you can give to the job of running your business, the more likely you are to succeed.

Before you begin, you’ll need to consider questions such as:

Are you suited to running your own business?

While being your own boss certainly has its advantages, it also brings extra responsibilities and pressures, hard work and probably long hours, especially in the early stages of the business. There might also be an element of personal financial risk. To be successful, you will need dedication and determination.

What are your key objectives?

You should define the main aims of your business proposition, including what you hope to achieve. This might include fulfilling a personal ambition, or providing a range of new services to a particular target market, as well as providing a financial return for your endeavours.

What are your expectations?

It can take time for new businesses to become established, and as a consequence many small businesses do not make significant profits in the first few years. Before you begin, make a realistic estimation of your expected profits, and the level of salary you expect to achieve.

How much finance will your business need?

What funds do you have to put into the business? Do you need help raising finance for initial investment and working capital?

We can help you to answer these questions and to clarify your business objectives.

But for personal, one-on-one advice, make sure you contact us.

Certax have a wealth of experience in helping start-ups, and can help you to answer these questions and clarify your business objectives. Contact us for more advice.

Start-ups – your business and the law

At Certax we can provide start-up businesses with help and advice. Here are some general points to consider regarding start-up businesses and the law.

One of the key complaints voiced by small business owners is the amount of ‘red tape’ they have to deal with on a day to day basis. Keeping up to date with business legislation can seem like something of a minefield.

The regulations you need to comply with will depend to a large degree on the specific nature of your business. Here are some of the key areas that are covered by the law.

Discrimination

By law you must ensure that your business services and employment processes do not discriminate against any individual on the basis of disability, age, race, sexual orientation, gender, or religious or similar belief.

Employment

Employing staff carries with it a range of additional legal responsibilities. Key areas covered by employment regulations include:

  • employment contracts
  • holiday and sick pay and allowances
  • statutory maternity, paternity and adoption leave and pay
  • disciplinary and grievance procedures
  • redundancy and dismissal
  • monitoring your employees
  • working time
  • the right to request flexible working patterns.

Health and Safety

There are numerous Health and Safety laws which are applicable to businesses. The aim of these is to provide a safe working environment which minimises the risk of work-related accidents or illnesses.

Insurance

The law only requires businesses to purchase motor insurance for any vehicles, and compulsory employers’ liability insurance for businesses that employ any staff. However, other forms of insurance, such as public liability, product liability, and business interruption insurance, are also advisable.

Intellectual property

These laws exist to protect the intellectual property of a business. This includes the name of a business, and any material covered by copyrights, designs, patents and trade marks.

National Minimum Wage

The National Minimum Wage was first introduced in April 1999. It applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall. Please ask us for the latest rates or refer to http://www.lowpay.gov.uk.

Privacy and data protection

The processing of personal data is restricted by the principles of the Data Protection Act, while email marketing and telesales are also restricted by regulations.

Specialised sectors

Some businesses are also subject to specific regulations relating to their line of work. This may include food businesses, health and care services, and transport businesses.

Tax and National Insurance

There are numerous tax implications when starting up a business. We have expertise in this area, and would be happy to assist you.

Trading regulations

There are a number of laws governing the description and supply of goods and services, terms and conditions of sale, and distance selling.

These are just some of the areas covered by the law, and new rules are constantly introduced.

You should obtain professional legal advice to ensure that you are complying with the appropriate regulations.

If you are starting a business and would like professional assistance, contact Certax.

Getting started

Our guide to the difficult early steps when starting up…

Incorporation

If you run your business as a company you may save a considerable amount of tax. However there may be disadvantages and a sole trade or partnership structure may be better. At Certax, we can show you the potential tax savings currently available to you from operating as a company but also other factors you will need to consider before you make this decision.

The issue of whether to run your business as a company or a sole trader or partnership is an important decision. In this factsheet, we summarise the relevant tax changes which apply and show the potential tax savings currently available from operating as a company.

Changes to the taxation of dividends

Significant changes to the taxation of dividends took place for dividends received from April 2016. Our calculations show that incorporation in 2016/17 and beyond may still result in lower tax bills than remaining unincorporated but the tax savings are significantly reduced from prior years.

The new rules for the taxation of dividends

From 6 April 2016:

  • The 10% dividend tax credit has been abolished with the result that the cash dividend received is the gross amount potentially subject to tax.
  • New rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
  • A new Dividend Tax Allowance will remove the first £5,000 of dividends received in a tax year from taxation.

 The table below shows a comparison between the pre and post 6 April 2016 tax rates.

Dividend falls intoBasic rate bandHigher rate bandAdditional rate band
Effective rate before 6 April 20160%25%30.6%
Rate from 6 April 20167.5%32.5%38.1%

There are winners and losers from the changes to taxation of dividends.

Winners

An example of a winner is a higher rate taxpayer who has dividend income of £5,000. Under the previous rules they had a tax liability of £1,250 (25% of £5,000). From April 2016 they will have no tax liability.

Losers

An example of a loser under the regime will be the sole shareholder of a company who takes a small salary and then dividends up to the threshold at which higher rate tax is payable. Under the previous rules they have no income tax on the salary (as the salary is below the personal allowance) and no tax on the dividend. From April 2016, only £5,000 of the dividend will not be taxable.

Is trading as a limited company still be the best option?

If you trade as a limited company you may think that to trade as a sole trader or as a partnership may now be a better option from April 2016. In our view there is still a benefit in tax terms for most individuals to continue to trade as a limited company. The tax saved by incorporation compared to being unincorporated is lower for 2016/17 than for 2015/16 but there is still an annual tax saving.

Will it be better to take a dividend rather than an increase in salary?

In our view there is still a benefit for a director-shareholder to take a dividend rather than a salary. The amount of the tax saved will be less than under the previous rules but is still beneficial.

Tax savings

The examples below give an indication of the 2016/17 tax savings that may be achievable for husband and wife who are currently in partnership.

Profits£30,000£50,000£100,000
Tax and NI payable:£££
As partners3,1428,94225,262
As company2,7767,61820,618
Potential saving3661,3244,644

The extent of the savings is dependent on the precise circumstances of the couple’s tax position and may be more or less than the above figures. The examples are computed on the basis that the couple:

  • share profits equally
  • have no other sources of income
  • both partners take a salary of £8,060 from the company with the balance (after corporation tax) paid out as a dividend.

When might a company be considered?

A company can be used as a vehicle for:

  • a profitable trade
  • buy-to-let properties.

Summary of relevant tax and national insurance rates

Rate of corporation tax

Profits are taxed at 20%.

National Insurance

The rate of employees’ NIC is 12%. In addition, a 2% charge applies to all earnings over the NIC upper earnings limit (£43,000 for 2016/17). The rate of NIC for the self-employed is 9%, and 2% on profits above £43,000 for 2016/17.

All NI contributions can be avoided by incorporating, taking a small salary up to the threshold at which NI is payable and then taking the balance of post-tax profits as dividends.

Pension provision

As an employee/ director of the company, it should be possible for the company to make pension contributions (subject to limits) to a registered fund irrespective of the salary level, provided it is justifiable under the wholly and exclusively rule. For further details of the tax position of pension provision for individuals see the factsheet on Pensions – Tax Reliefs. Such contributions are deemed to be a private expense for sole traders or partners.

Other tax issues

In addition we consider other relevant factors including potential disadvantages. It is all too easy to focus exclusively on the potential annual tax savings available by operating as a company. However, other tax issues can be equally, and in some cases more significant and should not be underestimated.

Capital gains

Incorporating your existing business will involve transferring at least some of your assets (most significantly goodwill) from your sole trade or partnership into your new company. The transfer of goodwill may create a significant capital gain although there is a mechanism for deferring the gain until any later sale of the company if the business is transferred in exchange for shares in the company. 

Changes to relief for goodwill

Generally where goodwill was sold to the company for cash or debt on or after 3 December 2014, individuals are prevented from claiming Entrepreneurs’ Relief (ER) and capital gains tax arises on the gain. The exceptions to this rule are that a claim to ER is allowed :

  • for partners in a firm who do not hold or acquire any stake in the successor company
  • where the individual claiming relief holds less than 5% of the shares and the voting power of the acquiring company
  • where an individual holds 5% or more of the shares or voting power if the transfer of the business to the company is part of arrangements for the company to be sold to a new, independent owner.

Stamp Duty Land Tax (SDLT)

There may be SDLT charges to consider when assets are transferred to a company. Goodwill and debtors do not give rise to a charge, but land and buildings may do so.

Income tax

The precise effects of ceasing business in an unincorporated form, including ‘overlap relief’ need to be considered.

Capital allowances

Once again the position needs to be carefully considered.

Other advantages

There may be other non-tax advantages of incorporation and these are summarised below.

Limited liability

A company normally provides limited liability. If a shareholder’s shares are fully paid he cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.

Legal continuity

A company will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). It can own property, sue and be sued.

Transfer of ownership

Effective ownership of the business may be more readily transferred, in comparison to a business which is not trading as a limited company.

Borrowing

Normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company and this will increase the extent to which monies may be borrowed against the assets of the business.

Credibility

The existence of corporate status is sometimes deemed to add to the credibility or commercial respectability of the business.

Pension schemes

The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.

Staff incentives

Employees may, with adequate safeguards, be offered an opportunity to acquire an interest in the business, reflecting their position in the company.

Disadvantages

No analysis of the position would be complete without highlighting potential disadvantages.

Administration

The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher for a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances, the accounts need to be audited by a registered auditor.

Details of the directors and shareholders are filed on the public register held by the Registrar of Companies.

Privacy

The annual accounts have to be made available on public record – although these can be modified to minimise the information disclosed.

PAYE/Benefits

If you do not have any employees at present, you do not have to be concerned with PAYE and returns of benefits forms (P11Ds). As a company, you will need to complete PAYE records for salary payments and submit details of salary payments on a timely basis under PAYE Real Time Information. You will also need to keep records of expenses reimbursed to you by the company. Forms P11D may have to be completed.

Dividends

If you will require regular payments from your company, we will need to set up a system for you to correctly pay dividends.

Transactions with the business owner

A business owner may introduce funds to and withdraw funds from an unincorporated business without tax implications. When a company is involved there may be tax implications on these transactions.

Director’s responsibilities

A company director may be at risk of criminal or civil penalty proceedings eg for late filing of accounts or for breaking the insolvency rules.

How we can help

There may be a number of good reasons for considering use of a company as part of a tax planning strategy. However as you can see from this factsheet, there are many factors to consider and proposed changes to the tax law may change this advice for some individuals. We would welcome the opportunity to talk to you about incorporation and your own specific circumstances. Please do not hesitate to contact us at Certax.

An introduction to the tax system for the self employed

Certax can advise self employed people on all aspects of tax – here is an overview of some of the main things to consider.

Registering with HM Revenue & Customs (HMRC)

If you start working for yourself, you must register with HMRC within the first three full months of self employment. Otherwise you may be liable to penalty of £100.

There are three ways that you can register:

Once you become self-employed, the tax rules are quite different from those that may have applied when you were an employee. Instead of tax (and national insurance) being deducted from your earnings at source, you must be prepared to receive a bill at some time in the future. This can be a nasty shock if you haven’t put enough money aside.

We aim to give you as much warning as possible of the likely timing and amount of tax payments, but it is not easy to do this during the first year of your new business, or if you do not keep your records up-to-date.

What profits do HMRC tax?

The starting point for the calculation of taxable profits is your profit and loss account. In calculating taxable profits you are entitled to claim deductions from your business income in respect of any expenses incurred for the purposes of trade (with a few minor exceptions).

When you buy equipment for your business, you will be entitled to deduct the full cost (up to a maximum of £500,000 per year from 6 April 2014 to 31 December 2015 and £200,000 per year thereafter). For most cars, you can deduct only a proportion of the cost for each year you own them and use them in the business.

If you take stock for your own use, the disposal should be shown in the accounts at market value, and not at original cost. It may be possible to avoid this by arguing that such items never actually formed part of your stock and showing the original purchase as private expenditure (drawings).

Tax is payable on the whole of the profits of a trade, and so payments for your own ‘wages’ (drawings) are not deductible. However, if your spouse works in the business, the wages are an allowable deduction, provided they are actually paid and are a reasonable reward for what is done.

How does HMRC allocate profit to tax years?

The aim of the system is that over the lifetime of your business the profits will be taxed in full, once, and once only. But to make the system fair, there are certain complications you will have to cope with.

The general rule is that the tax for a particular tax year is based on the profits of the twelve months to your accounting date in that tax year. For example, the tax for 2015-16 could be based on accounts for a year ending on various dates ranging from 6 April 2015 to 5 April 2016. This demonstrates that you get more time for the tax to be worked out if your accounts end early in the tax year, which is why 30 April is such a popular year-end for self-employed people.

How is the tax collected?

Tax returns

Tax returns covering income for the year ending 5 April 2016 have to be submitted to HMRC by the ‘filing date’ which is 31 October 2016 for paper returns and 31 January 2017 for online returns. The return will include a self assessment of your liability to income tax and capital gains tax.

There are automatic penalties for late filing of tax returns.

Payment of tax

Payments on account of income tax, Class 2 and Class 4 national insurance contributions (NICs) will be due on 31 January 2016 and 31 July 2016. These interim payments are based on one half of the total liability (less any tax deducted at source) for 2014-15. You will have the right to reduce payments on account if you believe the income tax for 2015-16 will be lower.

The balance of income tax for 2015-16 is due on 31 January 2017 (along with the first payment on account for 2016-17 and any capital gains tax for 2015-16).

Interest and penalties will be levied for late payment.

What about the complications?

Opening years

In the first tax year of your business, the tax payable is based on the profit arising between the starting date and the following 5 April. This is taken as the appropriate fraction of the profit shown in your first set of accounts. Say you start on 1 June 2016 and your first accounts run to 30 June 2017 with a profit of £13,000, then tax will be worked out (to the nearest month) on the profits of the following periods:

2016–17
1 June 2016 to 5 April 2017 – 10/13 x £13,000 i.e. £10,000
2017–18
1 July 2016 to 30 June 2017 – 12/13 x £13,000 i.e. £12,000

You can see that the profit from 1 July 2016 to 5 April 2017 (9 months) has been taxed twice. The ‘overlap’ profit of £9,000 will be available for deduction when the business comes to an end, or (at least in part) if you change your accounting date to one nearer 5 April.

Change of accounting date

If you decide to change your accounting date from 30 June 2018 to 31 December 2018, and the accounts for the 18 months ending 31 December 2018 show a profit of £27,000, the taxable profit for 2018-19 will be worked out as follows:

Profit based on accounts (18 months)£27,000
Less overlap relief£6,000
Profit for 2018-19£21,000

Cessation

If you then cease trading on 31 August 2020, and your final accounts for the eight months ending on that date show a profit of £11,000, the taxable profit for 2020-21 will be:

Profit since accounting date in previous tax year£11,000
Less balance of overlap relief not already used£3,000
Profit for 2020-21£8,000

What about national insurance?

The self-employed are subject to a two-tier system of national insurance contributions (NICs). Class 2 NICs are at a flat rate of £2.80 per week, if earnings exceed £5,965 per annum.

Payments for self-employed Class 2 NICs are due on 31 January and 31 July (as part of the self assessment tax bill).

However, Class 2 NICs are due to be abolished from April 2018 and Class 4 NICs will be changed to give the payer rights to pensions and benefits.

Profits between £8,060 and £43,000 are subject to Class 4 NICs at a rate of 9%. Any excess of profit above £43,000 is subject to Class 4 NICs at the rate of 2%, without any upper limit. Class 4 NICs are collected by HMRC and are payable at the same time as the instalments of income tax.

Save for your tax

It is essential that you make proper provision to ensure the availability of funds to pay income tax and Class 4 national insurance. Interest on unpaid tax is chargeable by HMRC, and is not deductible from business profits.

Please call us if you would like further help or advice on this matter.

Cash basis for small businesses

As a result of consultation on simplifying the calculation of taxable income for small businesses, HMRC has introduced an optional alternative system for eligible unincorporated businesses. As from 6 April 2013 they may calculate taxable income figures on a simpler cash basis if this suits the business. Such businesses will not have to compile figures of debtors, creditors and stock, or distinguish between ‘capital’ and ‘revenue’ expenditure and will not have to compute capital allowances to arrive at taxable income.

A second measure allows all unincorporated businesses to choose to use flat rate expenses for particular items of business expenditure.

If you are self-employed and would like advice on tax or any other business issue, contact Certax.

Your business vision

If you are starting a new business, Certax can provide expert help and advice…

If you are starting your own business, you probably have a great idea, a new way of looking at things, or a vision.

But have you thought about how you can exploit a niche, or differentiate yourself from the competition with a Unique Selling Point (USP)?

Many business owners underestimate the importance of researching their target market and learning about the potential competition. Yet undertaking market research in the early stages can minimise the chance of failure.

Know your competitors

Whatever your business, there is always competition. Before you start up, make sure you have studied all the potential competitors.

This means indirect as well as direct competition. Direct competition is usually obvious: a new plumbing business will be in competition with all of the other plumbers in the area.

You might need to think more laterally to identify the indirect competition. For example, a new flower shop on the high street should view the local chocolate shop as a potential competitor (since both are in the gifts market); while the Italian restaurant has competition from the local cinema.

Know the difference

Having thought laterally to identify them, continue thinking in the same vein to work out how to persuade potential customers to come to you.

For example, the Italian restaurant could consider a cheap early evening menu to capture theatre and cinema-goers without taking too much more of their hard-earned cash.

Showing that you have conducted research into your market will also help when you come to present your business plan to would-be financiers.

A vision based on real research has more chance of becoming realised.

Certax have a great deal of experience in helping start-ups. If you would like to talk about your business start-up, contact us for more advice.

A mission statement

Certax can provide expert help and advice on all aspects of starting a business – not only the finance and tax issues…

Having a vision for your business is fundamental. Your vision will inform every strategic decision you make, and you can crystallise this vision in a mission statement.

Ask yourself: where is the business going and what is its purpose? A mission statement allows you to define and articulate the purpose and aims of your organisation, giving staff a focus and direction, and allowing you to assess over time whether your objectives are being met.

Here are the four steps for a successful statement:

Step 1: Write it
Your mission statement should be a clear and concise account of the principles of your organisation – your business in a nutshell. It should include the nature of its work, the customer base it is intended to serve, and above all, its ultimate goal.
You may want to elaborate on the company’s ethos and aspirations with details, but the key is to make sure that all of your points link back to the fundamental principles of the company.
Step 2: Communicate it
When you are up and running, staff and customers all benefit from knowing your mission statement. Make sure that employees are aware of the principles that inform it. A mission statement should promote a collective understanding of your business, both internally and externally.
Step 3: Use it
Your mission statement provides you with an opportunity to highlight those elements that set your organisation apart from others, affirming your place in the market. It should influence all kinds of decisions that you make, from launching new products and devising marketing campaigns to recruiting staff.
Step 4: Review it
Review your statement over time and continue to challenge it. This will help you to see whether you are reaching your targets, and whether the company’s aims and principles have evolved.

If you are a start-up and would like some expert advice, contact Certax.

Writing a business plan

At Certax we can provide objective assistance with writing a business plan, based on our experience in helping start-ups. Here are some of the key aspects to consider…

Creating a business plan is one of the most important things you will do when starting up. It will help determine whether you gain funding from potential investors, and it will help you to clarify your business objectives and direction.

In this section we look at how to write an effective plan, the ingredients it should contain, and some of the common pitfalls to avoid.

Before you begin writing

Before you start writing a plan, you will need to consider what information you need to assemble, the initial decisions to be made, and the sales and marketing options open to you.

Assess the expertise and assistance you already have, and decide what additional help you will need to prepare your plan and harness your resources effectively. For example, you might need accountancy or marketing assistance.

Examine your business ideas critically and check these against your initial perception of the marketplace. Perform a ‘SWOT’ analysis on your business: look at its Strengths and Weaknesses, and consider the Opportunities open to you, and the Threats you face.

The marketplace is the key to the success of your business. You should review the market for your goods or services, and the competition you face. Use market segmentation to identify potential customers, and market survey methods to characterise your customers and their needs.

Presentation

The length of the business plan will depend on individual circumstances, but it should be short enough to maintain the interest of any potential investor.

The presentation should be professional and clear, with graphics and charts where appropriate.

Essential ingredients

Your business plan should include:

1. A business description and mission statement.
Every business needs a clear declaration of why it exists, and a basic description of how it intends to meet its primary objective.
If you look at a good company website, it will often include elements of the mission statement in an ‘About Us’ section. It need only be a few sentences, and might be something like “Our company aims to provide outstanding solutions and service to the x industry in and around the area of y“. Think of your mission statement as the heart of your business plan. All your goals and activities should flow from it.
Having prepared your mission statement, you next need to comprehensively describe your business. Provide a brief history and then explain what it does, identify the marketplace niche it fills and assert why you and the business will succeed. You may also wish to reveal why your business chose its location and how you will benefit the local community.
2. Management and people profiles
In business, as in any walk of life, people matter. Potential investors, lenders and even employees are not interested in a faceless, soulless corporate entity. They need to know that competent, experienced people are steering the ship.
Provide an outline of your organisational structure and management team, giving solid reasons why you and any colleagues are competent and can deliver results.
3. A financial portrait and strategy
Prospective investors and lenders need a good idea of the financial aspects and potential of your business. Include projections of basic data such as a projected balance sheet, a profit and loss account and an analysis of cash flow. It is important to be as accurate as possible. Do ask for our assistance with this.
Above all, make sure your numbers demonstrate that you and your management team have considered the key ‘drivers’ that will determine your success or failure. Don’t fill the business plan with overly optimistic financial projections that could ultimately depict your business in a bad light.
4. Sales and marketing objectives
Expertise and past success mean little without an up-to-date strategy for bringing your products or services to market. Describe your intended market, giving specific details on its size and how much of it you intend to serve. What is your market’s growth potential? What specific geographic and economic factors play a role?
Competitor intelligence is another crucial factor. Name your largest competitors and explain why you can serve your market better than these rivals. Do not conceal your weaknesses: recognising the challenges you must overcome shows that you are realistic.
5. An executive summary
The likelihood is that many potential lenders will initially only read an executive summary. That’s not to say they’ll never read your entire business plan – but it does mean that a concise, readable executive summary may be necessary to get your ‘foot in the door’.
An executive summary should show the highlights of each section of the business plan, providing a clear synopsis of who you are, what you do and where you’re heading.

Avoid some common pitfalls

Here are some business plan traps which you should be careful to avoid.

1. Over-optimism
Most business plans are over-optimistic, especially as regards predicted sales, often massively overestimating the size of the market. Research your market thoroughly. Too many business plans include a SWOT analysis, but concentrate on the strengths and opportunities and ignore the threats and weaknesses.
2. Ignoring the competition
Business plans commonly assume that the competition will make no competitive response or indeed, will have no new initiatives of their own. Study your competitors and try to anticipate their plans.
3. Ignoring risk
What are the risks attached to the plan? Think through these and consider the costs of failure as well as the rewards of success.

An ongoing process

Like keeping a ‘To Do’ list, writing a business plan is an ongoing process. Don’t make the mistake of abandoning or forgetting about your business plan after you’ve presented it to investors. The plan should adapt to changes in your company, its market and the economy – and that means regular reviewing and updating.

Creating your plan will open your eyes to the realities of your business. Keeping it updated will help you stay on the right track.

Start-ups and established businesses looking for help with writing a business plan should contactCertax for more help and advice.

Which business structure?

Choosing the right business structure is essential for a range of business and tax reasons. Certax can help start-ups and businesses…

You will need to decide which business structure best suits your needs:

  • sole trader/sole practitioner (an individual);
  • a partnership (two or more individuals or companies);
  • a limited liability partnership or
  • a limited company.

There are both advantages and disadvantages for each trading structure in terms of control, perception, support, costs and tax implications.

Each situation must be judged individually. As well as the tax and national insurance issues, you will need to consider such things as the nature and expected rate of growth of the business, the degree of commercial risk, administrative obligations, pensions and retirement, and your personal preferences.

In the early years of a business, operating as a sole trader is often attractive because funds can be used with fewer restrictions. But as your business develops, there may be advantages to incorporating (forming a limited company).

If you are thinking of starting up in partnership, it is essential to have a formal agreement drawn up, and to take professional advice.

Care needs be taken, and we can help you though the decision-making process.

At Certax we have a wealth of experience in providing professional advice to start-ups about choosing the right business structure, and we can help you through the decision-making process.

Should you buy a franchise?

Certax can provide advice to start-ups who are considering buying a franchise.

Franchising is growing in popularity in the UK, and can be a profitable way of doing business. However, there are advantages and disadvantages.

The process involves the licensing of a business ‘blueprint’ by a franchisor, to a franchisee. The franchisee buys the rights and obligations of the business, using the brand and operating the system provided by the franchisor, while the franchisor retains the overall control.

The benefits

By buying a franchise you can take on a brand which has a successful reputation and working format, thus reducing the risk of failure.

As a franchisee, you will receive initial training in running the business, as well as ongoing support, which might include advertising and promotion, administration services, and product development.

The limitations

The amount of scope to run the business your way will be limited, so you should make sure that you are happy not to have complete free reign over the business management.

You must also consider the costs involved in the venture: for example, you will need to budget for stock, premises, and management service fees.

What you need to do

When considering taking on a franchise, you must consider the structure of the business, and examine its accounts carefully, with professional help, in order to ensure that the business is both viable and financially stable.

You should also do the following:

  • Research the market for your proposed franchise
  • Calculate your projected earnings
  • Find out exactly which kinds of support are being offered by the franchisor
  • Consider any conditions that may be imposed, such as minimum sales levels.

You are strongly advised to take professional advice before entering into a franchising agreement.

If you are a start-up and are considering buying a franchise, contact Certax for further advice.

Allowable expenses

Certax can provide assistance to self-employed people on allowable expenses and other tax and financial issues…

We are often asked “What expenses can I claim now that I am self employed?”

The rather glib answer is “Anything that relates to your business”. Whilst this is generally true, there are some expenses which, although genuine business expenses, are specifically excluded from tax relief, such as:

  • Business entertaining including the VAT; however input VAT on business entertaining of overseas customers is recoverable
  • Charitable subscriptions and donations, except to small local charities
  • Political donations
  • Costs and Fines for breaking the law
  • Loan Capital Repayments
  • Drawings, including payments for tax and National Insurance contributions
  • Depreciation; capital expenditure is subject to the capital allowance regime
  • Expenditure on plant and machinery for most small businesses is likely to be covered by the annual investment allowance of up to £200,000 (from 1 January 2016).

April 2013 saw the introduction of a new cash basis for calculating taxable income for small unincorporated businesses. One of the measures allows any unincorporated business to choose to use flat rate expenses for the following items of business expenditure:

  • Fixed allowances for business mileage
  • Expenses relating to business use of the home
  • Adjustment for private use of business premises

This information is not exhaustive. Please contact us if you have any queries about the allowability of specific expenses.

If you are self-employed and would like advice on claiming allowable expenses, contact Certax.

Choosing a year end

One of the things to consider when starting a business is choosing the best date for your year end. Certax can advise you on this.

It is important to choose the right year end for your business.

To what extent is your business seasonal? Is there a time of year when it will be more convenient to close off your accounting records, ready for us, your accountants?

From a tax viewpoint, the choice of a year end early in the tax year for an unincorporated business often means that an increase in profits is more slowly reflected in an increased tax bill.

If you are start-up business and would like help with choosing your year end, contact Certax.

Raising finance

Businesses needing to raise finance to start up a new venture or expand an existing one require professional advice, which Certax can provide. Here are some of the issues you will need to consider…

If you are thinking of starting a new business, the chances are that you will need to raise finance from an external source. Like everything else, this requires careful planning and good professional advice.

Sources of finance

Some of the more common sources of finance are:

  • overdraft
  • loan
  • mortgage
  • share issue for your company
  • hire purchase
  • leasing
  • debt factoring
  • assistance from Government-backed schemes and from regional authorities
  • venture capital

We can help you to do a comparative study of the costs of each possibility, and also consider any tax implications before making a final decision about who to approach.

Security

Most lenders will require some form of security from you. No amount of security will make a bad plan good, but it does demonstrate commitment from your side and provide insurance for the lender.

Typical forms of security include:

  • fixed or floating charge over your business assets
  • second mortgage on your home
  • personal guarantees

If the lender requires personal guarantees you should proceed with caution. Try to ensure that any such guarantees are limited in amount, if not in time. You can also consider insuring the risk. You will almost certainly be required to present a comprehensive and convincing business plan to show how you are going to service the loan.

In all three areas – choosing a finance source, securing the finance, and preparing a business plan – you will benefit greatly from our advice.

Maximising your chances of success

While many business owners feel confident about presenting a finance proposal to a bank, a surprising number of proposals are actually turned down. Here are some essentials for raising finance:

1. Choose the right financier
Spend time thinking about the most appropriate funding source for the project or objective. Learn about the various sources of finance and select those best suited to your purpose. If in doubt, seek our help.
2. Provide the financier with the right information
Often, unsuccessful applicants will complain that the lender did not seem interested in their business, but this is not necessarily the case. More often, it is not because the idea is lacking, or because the bank disapproves of the proposed development. Rather, it is because the proposal is not presented in terms that will appeal to a potential lender.
Make sure that you fully understand the information that the lender wants. This often means much more than simple financial projections.
To have confidence in an enterprise, a financier usually wants to gain an appreciation of the business, the quality and depth of management and the key people involved – and this information should be presented in a suitable way.
3. Take professional advice
It is best to use the services of a professional when preparing and presenting a proposal. We can help you prepare a solid, detailed business plan that will attract financial support, and perhaps identify potential financiers who will meet your needs.
A well-prepared proposal presented to a carefully chosen lending source will have a greater chance of success.

At Certax we have experience of drafting well-presented proposals that will have the maximum chance of success in raising business finance for a start up or business expansion.

Names, trademarks, patents and other registrations

Business names, trademarks, patents and registrations are vital considerations for start-ups – Certax can advise businesses in these areas.

Choosing a business name

Your business name is an ideal starting-point for building a brand, which can help you to forge a strong identity in the marketplace.

You might want to draw up a shortlist of several possible names. Before settling on your first choice, you should check your ideas on internet search engines, in local telephone directories and trade journals, and with the Trade Marks Register, in order to ascertain whether anybody else is already using the same or a very similar name.

Conducting such checks could help you to avoid legal disputes later on.

It is recommended that you take legal advice before using your new business name, as there are laws governing the use of certain words and expressions, and the disclosure of details of ownership.

If you are setting up a new company there are additional rules and restrictions which apply to the name choices. For example, by law nearly all company names must end in either ‘Limited’, ‘Unlimited’ or ‘Public Limited Company’ (or their respective abbreviations).

Trademarks

A trademark is a sign or symbol which clearly distinguishes your goods or services from those of other organisations. A trademark can include both words and images.

Having a trademark means that only those licensed to do so can trade under your chosen symbol, allowing you to protect the reputation of your business and how it is perceived by the public. It is therefore a valuable marketing tool.

Registering your trademark will offer you protection in the event that somebody else tries to use your trademark to pass off their goods and services, and means that you can more easily take legal action against anyone who uses an equivalent mark on their similar goods and services.

To register your trademark, you must send an application form (and fee) to the Trade Marks Registry. Once approved, your trademark will be recorded on the register in due course.

Patents

If you want to safeguard an invention, and prevent other parties from copying or using it without your permission, you can apply for a patent.

A patent gives the inventor the right to the exclusive use of an invention, and the right to take legal action and claim damages against others who infringe the invention. It lasts for a maximum of 20 years, and can be bought, sold, hired or licensed.

In order to qualify for a patent, an invention must relate to the composition, construction or manufacture of a substance, article or apparatus; or with an industrial type of process. The invention must be new and innovative. You should avoid disclosing your invention to third parties, or making commercial use of it, before your application is made, as this could invalidate the process.

To obtain a patent, you must first file a full disclosure of the invention with the UK Intellectual Property Office. This includes information on everything that is needed to carry out the invention. The Intellectual Property Office will carry out a search in order to check that the invention is new and innovative.

The application will then be published, and examined in detail to determine whether it meets legal and formal requirements, and is technically sound.

Any objections must be overcome before a patent can be granted. You will need to pay fees for processing your application, and renewal fees later on.

A UK patent does not have effect abroad, and to obtain protection in other countries you need to first obtain clearance from the UK Intellectual Property Office.

Other registrations

As well as registering your business name, you will have to determine whether your business needs a PAYE scheme or to be VAT registered.

We can help with these registrations.

If you are a start-up business in the Chesterfield area, Certax can provide advice on registrations, business names and trademarks. Contact us for more help.

Building a brand

Certax can provide advice on all aspects of starting a business – not only the finance and tax issues…

Whatever your line of business, the right brand is essential. Your brand should encapsulate everything you want your customers to think about your business. The right brand can help you to increase your market share and encourage long-term customer loyalty.

The Package…not just the packaging

Think ‘brand’, and the initial tendency is often to picture a particular well-known logo or style of packaging. However, building a brand is really about forging a unique identity in the marketplace – not just a neat logo or slogan – and if you want to go beyond merely differentiating your product or service from others in the market, you need to think about the complete package.

What should a brand do?

When building your brand, your overall aim should be to create a positive, consistent message, which is instantly recognisable for your customers.

Brand recognition is only the start, however. You will want to communicate an association with a particular quality, such as value for money, a traditional approach or exceptional service, which will appeal to customers and encourage them to put your brand first. You might like to refer back to your business plan and/or mission statement.

Brand tips

1. Define your qualities
Begin by defining the qualities which most closely represent your product or service. For example, do you aim to be modern, innovative and dynamic, or more focused on high-class, high-quality and reliability?
Brand names can inspire a feeling of confidence, and over time customers will automatically associate your company with the qualities you have chosen to highlight, when they come into contact with your brand.
2. Be original
Make sure that your brand is original and does not impinge on another design.
3. Be consistent
Make sure your branding and logos are consistent on all of your stationery, mailers, advertisements and website.

If you are a start-up and would like some expert advice, contact Certax.

Premises and location

Certax can provide advice on all aspects of starting a business – not only the finance and tax issues. Here are some key points to consider regarding premises and location…

Finding the right premises for your business is a crucial part of your business strategy. Although your specific requirements will depend on the nature of your business, there are a number of key factors which need to be taken into account when choosing your premises.

Working from home

By necessity, many small business owners start with an office which is based in their home, or in a nearby workshop or garage. This arrangement has its own pros and cons.

Location and access

Think about how your business generates and serves its customers: do you rely on people passing by your premises, or are your clients prepared to make a journey to access your goods or services? This will have an impact on where your premises need to be situated.

You should also look into the following issues:

  • Staff availability – how easy will it be to find suitably qualified personnel in your proposed locality?
  • Transport link and access – will clients, staff and suppliers have easy access to your offices? Could you be affected by a congestion charge?

Planning for the future

When it comes to setting up your own business premises, size matters. While you do not want to spend any more on a property than is necessary, you should make sure that the premises you choose will allow for future expansion of the firm. Relocating an existing business can be expensive and time-consuming, so where possible it’s best to build in some flexibility in the early years.

Purchasing options

Cost is a principal concern for the small business owner, and it is imperative that you set a budget which covers both the one-off and ongoing costs.

This should include the cost of the move itself, making any alternations to the building, and purchasing new equipment, as well as paying the rent or mortgage, business rates, utility bills, insurance premiums, and so on.

Leasing

When leasing a property, you will be responsible for paying rent, business rates, and other costs such as maintenance and services. It is therefore vital that you have in place a lease which clearly states the responsibilities of yourself and your landlord.

A building valuation and survey are also essential.

Lease agreements are usually complex, and can involve long-term commitments, and you should consult a legal adviser as well as a surveyor or broker for advice.

Serviced offices

Renting serviced office space is an increasingly popular option. The arrangement is usually made on a short-term basis, but it can also be a long-term option.

The key advantages of serviced offices are more predictable costs, and a lower level of commitment. This allows you to give your business a ‘trial period’ of operation without outlaying a substantial commitment. Serviced offices may also include a range of services such as furnishings, kitchen, technical facilities, reception, cleaning and so on.

Buying your own premises

Buying a property outright can save on rental costs. However, most business owners will have to borrow money in order to buy the property, in which case it is important to factor in the interest that will be payable on the loan.

Building your own premises

You may also choose to design and build your own office space. Again, cost would be an important implication here, and you would need to consult a qualified professional and obtain the relevant planning permission.

If you are a start-up and would like to discuss any issue, contact Certax.

Working from home

Certax are happy to discuss all aspects of starting a business – not only the finance and tax issues.

If you intend to work from home, there are a number of questions you must first consider.

Is it justified?

The relaxed and comfortable atmosphere generated by your home environment may sound good for morale but it is also a key reason for you to question your motives. Make sure you’re not looking for an easy option, because this is not it.

Can you maintain the work/life distinction?

Working from home offers flexibility but it also requires true self-discipline and organisation. Making a mental and physical distinction between your home and your working life is essential, both to resist the distractions of the television or garden, and, at the other end of the scale, to prevent work from wholly consuming your life.

Creating a dedicated working area is essential, while separate telephone lines for home and business could help you to maintain the boundary between ‘work’ and ‘home’ time.

Do you have the right working environment?

Take the creation of your home office seriously. It should be comfortable, well-lit and properly equipped. Working at the kitchen table is rarely conducive to an efficient frame of mind. Bear in mind that you may need to revise your insurance policy to cover business equipment in the home.

Will others support you?

It is one thing to be disciplined yourself – you will also need the support of those around you: beware of constant family interruptions! As a practical tip, a ‘Do Not Disturb’ sign on the office door can work wonders.

Home working Do’s and Don’ts

  • Do establish a daily routine and stick to it
  • Do schedule the day’s tasks and meet your own deadlines
  • Don’t sleep late on working days
  • Don’t run to the refrigerator too often!

If you are a start-up and would like to discuss any issue, contact the team at Certax.

Insuring your business

We consider the types of insurance you may need when starting a new business. If you are starting, or have recently started a business we, at Certax, can provide you with any further information you require.

When starting a new business, you will no doubt recognise the need for insurance. It can provide compensation and peace of mind should things go wrong but can also represent a significant cost.

In this factsheet we consider the different types of insurance you need to consider.

Compulsory insurance

Employers’ liability
Employers’ liability insurance is compulsory to cover your employees. By law you must have at least £5 million of cover although a minimum of £10 million is now provided by most policies. You must display the certificate of insurance in the workplace. If your business is not a limited company, and you are the only employee or you only employ close family members, you do not need compulsory employers’ liability insurance. Limited companies with only one employee, where that employee also owns 50% or more of the company’s shares, have also been exempt from compulsory employers’ liability insurance.
Motor vehicles liability
Motor vehicles liability insurance is also compulsory and must cover third party insurance, this is the legal minimum.

Optional insurance

Other categories of insurance are optional and a decision as to whether or not you need cover under any given heading will depend on the nature of your business and an assessment of the risks.

Public liability
Although strictly this is not compulsory you will almost certainly feel that you need cover under this heading. It covers claims for damages to third parties.
Property
You can think about limiting cover to specific risks such as fire and flood or providing more general cover. Consider the level of cover you would need for the premises (if you own the building), equipment and stock. If you rent your premises then you should check that the landlord has the appropriate cover.
Theft
If your business does not involve expensive items of equipment then you might decide to pass on this one at least initially. If you do decide to provide cover for theft then an insurer will require a reasonable minimum level of security.
Professional indemnity
This is only likely to be necessary if you give advice which could make you liable. It protects against any loss suffered by your customers as a result of negligent advice. In some professions it is compulsory – examples being the law, accountancy and financial services. However it is common in other sectors such as computer consultancy and publishing.
Business interruption
This covers compensation for lost profits and extra costs if your business is disrupted due to say a fire. It is also referred to as ‘consequential loss’ insurance.
Key man
A small business is often dependent on key members of staff. What would happen if they became seriously ill or died? Do you need to consider insurance cover to pay out in such a situation?
Specialised insurance
A whole host of different policies cover a range of specialist situations – for example engineering insurance and computer policies.

Working from home

If you are planning to start your new business from home then don’t assume that your normal household insurance will be enough. It will not usually cover business risks. It is possible to obtain special ‘working from home’ policies.

Shopping around

It may be stating the obvious but it is important to shop around to get the best deal. You should obtain several quotes and always be wary of cheap deals. A personal recommendation may be the best way to decide.

Level of cover

Again it may be stating the obvious but too much cover and your cash flow will suffer, too little and the consequences can be catastrophic.

Consider the level of cover you need. With buildings and equipment make sure you are covered for the full replacement cost.

If there is to be an excess on any policy make sure that it is set at a sensible level.

How we can help

If you are starting, or have recently started a business we, at Certax, can provide further help on insuring your business.

Limited liability partnerships

The key features of a Limited Liability Partnership are explained. At Certax, we can help you consider whether an LLP structure is appropriate for your business.

Most important features of LLPs

The key advantage of a LLP compared with a traditional partnership is that the members of the LLP (it is very important that they should not be called partners but members) are able to limit their personal liability if something goes wrong with the business, in much the same way as shareholders in a company have always been able to do. Of course anyone lending money to the LLP such as a bank may still require personal guarantees from the members, as they frequently do with directors/shareholders in a company.

Where business owners have wanted to limit their personal liability in the past, they have normally set up companies and any profits made by those companies are subject to corporation tax. Dividends paid by the companies can then be taken as income of the shareholders. LLPs are taxed quite differently in that the profits are treated as the personal income of the members as if they had run their business as a partnership. The taxation of companies and partnerships is very different but taxation should not be the main consideration in choosing a business vehicle. The Government introduced new rules which will change the tax status of some LLP members (see Changes ahead for some LLP members). We would be very pleased to discuss the impact of this in any particular case.

LLPs must produce and publish financial accounts with a similar level of detail to a similar sized limited company. In 2016 new legislation has been passed which allows LLPs to qualify as a micro entity which can be used for accounting periods beginning on or after 1 January 2016 with early adoption permissible for accounting periods beginning on or after 1 January 2015. LLPs must submit accounts and an annual return to the Registrar of Companies each year. This publication requirement is far more demanding than the position for non-incorporated partnerships and specific accounting rules may lead to different profits from those of a normal partnership. The filing deadline is nine months after the period end.

Setting up LLPs or converting an existing partnership

A LLP is set up by a legal incorporation process which involves sending certain documents to the Registrar of Companies (more details from Companies House at www.companieshouse.gov.uk along with the relevant fee. Although it is not legally necessary, every LLP should have a thorough and comprehensive members’ agreement in place and needs to have taken legal or professional advice about the issues that should be covered by this agreement. In the absence of a members’ agreement the law makes a number of assumptions about the LLP which may not reflect what the individual members intended should there be a dispute.

Existing partnerships can convert to a LLP by exactly the same process of incorporation and providing there are no changes in membership or in the way in which the partnership operates, there may well be no impact on the partnership’s tax position. Again care and advice needs to be taken before any decisions are made.

It is not possible for a limited company to convert into a LLP and there will be a significant legal and taxation impact where a LLP takes over the business of a company.

Which businesses might want to use a LLP?

The types of business that LLPs were originally designed for were professional partnerships such as lawyers, surveyors and accountants. In many of these cases, though not all, they have not been able to operate through limited companies because of restrictions from their professional associations and the option of using a LLP offers some advantages.

However other businesses may also benefit from using LLPs, particularly new start-ups who might otherwise have formed limited companies.

What liability might members of a LLP have if something goes wrong?

Because LLPs are relatively new compared to other forms of businesses, there are no decisions yet by the courts where something has gone wrong. This is therefore a hard question to answer but it looks as if the following describes the position as most people understand it at present:

  • if, for example, a member of a LLP were to give bad advice to a client and the client suffered a loss as a result, the client may be able to take the LLP to court and be awarded appropriate compensation
  • in certain circumstances it could be possible that the member who actually gave the advice may also be required by a court to pay compensation to the client
  • it is however probable that any other members who were not directly involved in the advice will not have any personal liability. In a normal partnership it is quite possible that they would have had a personal liability.

It will still be essential for LLPs (and individual members) who might find themselves in this position to have suitable insurance cover.

The other area that needs to be considered is to do with what the law calls unlawful or insolvent trading. In just the same way as company directors can be prosecuted for these offences, members of a LLP can also be prosecuted (and can be disqualified from being a member of a LLP in the future).

A decision to use a LLP?

Increasing numbers of LLPs are being created, despite take up being relatively slow to begin with. Initially many LLPs were start ups but an increasing number of conversions are being made. Any decision to convert an existing partnership or to set up a new business using a LLP is a complex one, involving legal, accounting and tax issues.

Changes for some LLP members

The LLP is a unique entity as it combines limited liability for its members with the tax treatment of a traditional partnership. Individual members have historically been deemed to be self-employed and taxed on their respective profit shares.

With effect from 6 April 2014 the Government considers that deemed self-employed status is not appropriate in some cases. For example, individuals who would normally be regarded as employees in high-salaried professional areas such as the legal and financial services sectors have been benefitting from self-employed status for tax purposes which resulted in a loss of employment taxes payable.

The rules apply when an individual is a member of an LLP and three conditions are met. The conditions are:

  • There are arrangements in place under which the individual is to perform services for the LLP, in their capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of their performance of those services will be wholly, or substantially wholly, disguised salary. An amount is disguised salary if it is fixed or, if is variable, it is varied without reference to the overall profits of the LLP.
  • The mutual rights and duties of the members and the LLP and its members do not give the individual significant influence over the affairs of the LLP.
  • The individual’s contribution to the LLP is less than 25% of the disguised salary. The individual’s contribution is defined (broadly) as the amount of capital which they contributed to the LLP.

These rules took effect from 6 April 2014.

How we can help

We would be delighted to discuss Limited Liability Partnerships with you and demonstrate what the impact on your business would be. Please contact us at Certax for further information.

Choosing your accounting date

At Certax we can advise businesses about choosing the best and most tax-efficient accounting date. Here are some of the issues to consider.

Q. Can I select any date for my accounting year end?

A. Yes

The choice of a year end accounting date is for the business owner to decide.

Under the current year basis, the taxable profit for a particular tax year is determined by the accounts that end in that year.

Thus, for 2016–17 tax, accounting dates will vary between 6 April 2016 and 5 April 2017. So what is the best date to choose?

Sometimes, compelling commercial reasons relating to the nature of the trade will dictate the most appropriate accounting date. Otherwise (as in so many tax matters), there is no easy answer – it all depends on the particular circumstances. There are several basic considerations:

Overlap relief

The system is designed so that, over the life of a business, tax is paid on no more and no less than the cumulative profits of the business. However, unless your accounting date falls between 31 March and 5 April (inclusive), there will be some element of double counting, or overlap, in the first full tax year on the current year basis.

Overlap relief will be held in reserve for use when the business ceases (or on an interim change of accounting date). One concern is that, because of inflation, overlap relief will be worth less in future years than it is at present.

Bunching of terminal profits

The converse of the overlap situation is the ‘bunching’ effect of profits when a business ceases. The assessment for the final tax year will be based on the profits right back to the accounting date in the previous tax year. The earlier in the tax year the accounting date falls, the longer will be the period of account relating to the final assessment.

Thus a cessation date of, say, 31 December means that the final tax assessment will be based on a period varying in length between 9 months (5 April accounting date) and 21 months (6 April accounting date). This effect may be lessened to some extent by overlap relief, but the overall distortion is illustrated in the example set out below.

Partnerships

Partners are each deemed for tax to have an individual business so the points already mentioned for new businesses and those ceasing apply equally to partners joining or leaving a continuing partnership.

Pattern of profits

If profits do not vary significantly from one year to the next, the accounting date will not affect the assessable profit for each tax year.

Where profits show a trend, the rule of thumb is that (all other things being equal) it is beneficial to have an accounting date early in the tax year if profits are rising, and late in the year if profits are falling.

External factors

Of course, all other things are not equal, and in evaluating the advantages and disadvantages of particular accounting dates there are a number factors to be considered, including:

  • interest rate movements
  • the effects of inflation
  • changes in rates of tax
  • changes to the tax system

No one can say how these will change over time, and so, not surprisingly, businesses tend to be swayed by the short-term advantages, which have at least some degree of predictability.

Timing of payments on account

It is as well to remember that the date for the first payment on account falls just over two months before an accounting date of 5 April, but nearly ten months after an accounting date of 6 April. Thus, with an accounting date later in the tax year you could pay too much tax on account where profits are falling, and this is a further factor affecting cashflow.

Examples

On the following page, there are examples of the effects of the two extreme accounting dates (5 April and 6 April) in one situation where profits are rising consistently, and another where profits are falling consistently.

The figures relate to two businesses, which start on 6 April 2014 and cease on 31 December 2019, with profits derived from the accounts as follows:

 AB
Year ending 5/6 April 2016£50,000£95,000
“ 2017£60,000£85,000
“ 2018£70,000£80,000
“ 2019£80,000£70,000
“ 2020£90,000£60,000
Period ending 31 December 2020£75,000£35,000
Total£425,000£425,000

The assessable profits will be as follows (for the sake of simplicity the effect of the odd extra day in the first period has been ignored):

Business A (rising profits)

Tax yearAssessable profit (£)Difference (£)
 Year end 5 AprilYear end 6 April 
2015–1650,00050,000
2016–1760,00050,000(10,000)
2017–1870,00060,000(10,000)
2018–1980,00070,000(10,000)
2019–2090,00080,000(10,000)
2020–2175,000115,00040,000
Total425,000425,000

Business B (falling profits)

Tax yearAssessable profit (£)Difference (£)
 Year end 5 AprilYear end 6 April 
2015–1695,00095,000
2016–1785,00095,00010,000
2017–1880,00085,0005,000
2018–1970,00080,00010,000
2019–2060,00070,00010,000
2020–2135,000(35,000)
Total425,000425,000

Of course, the total assessable profits are the same in each case, and equal to the total profits derived from the accounts. The variations arise because of timing differences in the assessment of tax.

These assessment timing differences will obviously affect the tax payable on the normal payment dates of 31 January and 31 July each year. It is therefore vital to consider the implications of these cashflow differences in assessing the advantages and disadvantages of particular accounting dates.

Conclusion

Using a 5 April (31 March) accounting date leads to the simplest application of the current year basis of assessment. However, it does mean that the timetable for tax payments and returns is very tight, and there is therefore an increased risk of incurring penalties. Also there is now less time to allow for tax and business planning relating to tax issues.

If you expect your profits to show an overall upward trend, there are clearly cashflow advantages in having an accounting date at or shortly after the beginning of the tax year. In these circumstances, it is important to ensure that you make proper provision for the increased liability that will occur when the business ceases.

If you would like advice on choosing your accounting date, contact Certax.