So you’ve made the break from the 9-5 job and taken the huge leap of starting your own business. Booyah is the appropriate response to this I think (well it would have been if I was a 1990’s Hip Hop mogul). Yet, after the initial rush, the reality of the first 12 months is a real rollercoaster journey. Among the many challenges some of the most bewildering are the tax, accounting and administration issues. We have been talking about these with a lot of our clients recently, and thought it would be worth sharing 10 startup business accounting tips for you. This list is not exhaustive, but it covers some of the issues our clients have had on their minds this year. We have also added some useful links for further reading.
Structure is important
Getting the right structure for your business is important and it’s best to be clear about the right options at the start of your journey. Jumping straight for a Limited Company may not be the right move for your business, as the additional administrative and legal responsibilities could outweigh the potential benefits. On the flip side, operating as a sole trader may give your business image problems, as in some circumstances Limited Companies appear to have a more professional veneer.
A good starting point for considering the pros and cons of sole trader vs limited company can be found here and more detail on business structures on the Gov.UK website. The likelihood is, because of the complexity here, that a conversation with a professional in this area will more than pay for the cost. Do it sooner rather than later as structure has real consequences for your business.
Whatever your business structure our advice is get a separate business account set up from day 1 and respect it! What we mean by that is get all the business transactions going through this account and make sure your personnel expenses are not coming from it. It makes your administration so much easier and you will get more benefits from your cloud accounting software (more on that later). Additionally, it will help keep HMRC off your back by demonstrating division between your business and personal lives.
Whilst there is no legal requirement to have to do this, we recommend to all our clients that they implement this straight away. If they don’t, our experience is that they will struggle to get their heads out of the administration and won’t have the valuable real time information that other small business are using to drive growth.
Registering for VAT
The VAT registration threshold currently is £83,000 of income across any rolling 12 month period. However, there may be some good reasons to consider voluntary registration in certain circumstances. It is definitely worth pre planning your VAT registration. One consideration is will it have an impact on your pricing strategy?
Another issue to consider is the different types of VAT schemes available. It is important to understand what is most appropriate for your business. The best place to start here is on the Gov.UK website.
In addition, once you have registered, how are you going to comply with the administration? You want this plan in place before you register – don’t wait until you have a return due.
Once again, our advice here is plan in advance and face into VAT considerations sooner rather than later. Don’t wait until you are knocking on the threshold!
Understand your compliance requirements, particularly if you are limited company, right from the start. When do I need to have accounts done and who do they need to be filed with? When is the tax return due? Again the gov.uk website has a handy summary. Don’t forget about the annual Confirmation Statement that is due to Companies House. Being clear on the PAYE and VAT reporting cycles is also a good way to de-stress!
Clarity on your responsibilities allows you to make decisions about when you need help to meet the requirements in good time. You don’t want to rush into just choosing the first advisor you come across – we’ve blogged on this subject before!
Pay yourself in the most efficient way (thinking about limited company directors here)
With all the cashflow pressures on a start-up business, paying yourself can seem a long way down the priority list. However, planning for this in advance is crucial from a tax efficiency point of view. If you are a business owner with no other sources of income you should start with paying yourself a tax free salary of £671 per month (for the 16/17 tax year). Once you are ready, get this set up as an automatic payment from your company bank account and ensure you file the right PAYE documentation. From there you will need an appropriate dividend strategy based off the profits (hopefully?!) from your business. Needless to say this is a complicated area with a lot of variables!
Be careful about your drawings (again limited company directors)
Related to the above point keeping track of your drawings from the company is really important. This year HMRC have raised the rate of tax chargeable on overdrawn director loan accounts (see the definition here) to 32.5%. That costs you serious money! What’s the best way to keep track of this? See point 10 below!
Employees vs Contractors
Assess whether the contactors you work with are not employees in disguise. Getting it wrong is costly in terms of penalties and interest on unpaid National Insurance contributions, and its one of the first areas HMRC will look at when they audit your business. There are handy tools allowing you to make these assessments – see here. Once you are clear that a contractor really is a contactor, get an agreement in place documenting how the relationship will work. Then stick to it!
And if you are lucky enough to be able employ people…
Do it right from the start. Create employment contracts for both you and your employees protection. There are plenty of relatively low cost options if you want to do this yourself (they even have free trials). Click here for one option. You also want to think about getting a process in place to handle things like holiday approval and sickness.
Aligning your companies holiday year to your financial year is also a good tip to cut down on complicated adjustments required in the end of year accounts.
9 Thinking about applying for a mortgage?
Again, this could well be the farthest thing from your mind when you are in start-up mode. Yet planning well in advance if you are looking for a mortgage is important. As a business owner you will face restrictions particularly without much of a trading history. Consequently, we recommend talking to a mortgage advisor who can give you clarity on your options. Doing this before your accounts are prepared may influence your remuneration strategy.
We recommend doing this from the very beginning. Don’t put it off. Good cloud accounting software, used well, ensures your record keeping is pain free, you don’t lose information and it allows you to easily comply with VAT and Payroll, and other admin.
It is also a great source of real time information about your business. In particular for start-ups, there is valuable insight into your cashflow which most of your competitors are ignoring. We’ve blogged about Xero a lot, this is what we use at Chilli Accounting because we believe it’s the best, but there are other options. The key is get some software now. You can organise a free trial, subscriptions are monthly, and you can cancel at any time. Furthermore, it doesn’t cost the earth and the value you will get from using it will be substantial.
So there you go. 10 startup business accounting tips. Hopefully some or all of these give you something you can use in your business.