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FAQ's

We’re always glad to have a meeting, without obligation, to see what we can do for you.

In the meantime though, you may have some questions about us, or about Start-ups.

Here are some frequently asked questions:

1. What is an audit?
2. Do my accounts need to be audited?

New start ups
Decisions to be made:

1. How do I trade?
2. Do I have to register for VAT?
3. VAT Flat Rate Scheme
4. VAT Is there any advantage of voluntarily registering for VAT before I have to?
5. VAT – are there any disadvantages of being VAT registered?
6. VAT – can I claim pre-registration expenses?
7. Do I have to register for PAYE (Pay As You Earn)?
8. How long do I need to keep my records for?
9. What records must I keep?
10. What expenses can I claim?
11. How do I keep my books and records?
12. Should I be self-employed or trade through a limited company?
13. How much tax do I have to pay?
14. When do I have to pay my tax?
15. What are the current tax rates?

 

What is an audit?
An audit provides an annual health check, which not only gives assurance to the company’s shareholders, but also to existing and prospective customers and suppliers, the banks and employees.

Our audit procedures enable us to advise and recommend system improvements, identify and make recommendations with respect to opportunities and threats that your business faces. In addition to this, the mere fact that external individuals come in and test systems and transactions acts as a deterent against internal theft and fraud. Hence audits often have a very positive effect on your business, in a proactive way.

Once the audit is completed a audit report will be included in the statutory accounts which will include a statement that the accounts show a true and fair view and that they have been prepared in accordance with relevant legislation, or a statement to the contrary if this is not the case.

 

Do my accounts need to be audited?
Most small companies do not have their accounts audited. Unless you are required to have an audit by another body e.g. Financial Services Authority (FSA) or Charities commission.

To qualify for audit exemption as a small company, the company must:

• Qualify as small,
• Have a turnover of not more than £6.5 million, and
• Have a balance sheet total of not more than £3.26 million.

 

How do I trade?

• Sole trader
• Partnership
• Limited liability partnership
• Limited company
• Public limited company
• Charity

 

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Do I have to register for VAT?
The current VAT registration threshold is £70,000. This means that when your turnover is about to exceed this, then you must register for VAT. You can choose to register prior to your turnover reaching this.

When you are registered, you will have to report your VAT output and input on a quarterly basis to HM Revenue and Customs and pay over any liaibility, by the end of the following month to which the quarter relates.

e.g. your VAT Quarter is January, February and March, you will have to file an online VAT Return Form and make an online payment of any liability by the end of April.

 

VAT Flat Rate Scheme
Using standard VAT accounting, the VAT you pay to HM Revenue & Customs (HMRC) or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.

The Flat Rate Scheme offers simplicity and in many cases tax saving.

Example - Flat Rate Scheme VAT £     Assume: Standard Rules       Sales (net) of £5,000 875.00 Purchase of £1,000 including VAT (148.94)     Net VAT payable 726.06     Flat Rate Scheme   Gross sales (£5,000 + VAT) = £5,875       Assuming a flat rate scheme percentage of 11% x £5,875 646.25

Additional information can be found at: -
http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#1

 

VAT Is there any advantage of voluntarily registering for VAT before I have to?
If your customers are VAT registered then it does not make any difference to them if you charge VAT, since they will recover this.

From a marketing perspective by not being VAT registered you are telling prospective clients that you are a small business – this may put them off using your services if they feel that you are inexperienced and/or would not be able to fulfil their order, due to lack of resources.

 

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VAT – are there any disadvantages of being VAT registered?
Yes – you have to prepare VAT Returns on a quarterly basis and if you are unable to do it yourself, then you will have to pay a bookkeeper or accountant to get it done on a quarterly basis.

Also, if you do not need to be VAT registered because your turnover is below the threshold, then by being VAT registered you are forced to increase your prices, since you have to add VAT on top. If your customers are not VAT registered then your price increase may make you non-competitive and so you may loose the business.

 

VAT – can I claim pre-registration expenses?
Yes – you can claim back VAT on any items of equipment and/or stock that are still in existence and use at the balance sheet date, which were purchased up to 4 years prior to registration and you can go back 6 months for services.

 

Do I have to register for PAYE (Pay As You Earn)?
if you are a sole trader or partnership and do NOT have any employees, then you do NOT have to register for PAYE.
In all other circumstances, including if you are a one man band limited company, then YES.

Once registered you would have to process your payroll on a monthly, fortnightly, weekly or yearly basis, whichever is appropriate. You would issue your employees with a payslip and pay them the net (after employees tax and national insurance). You would then have to pay the amount deducted from the employees, plus employers national insurance (currently 12.8% - which is calculated on gross salary) over to HM Revenue and Customs by 19th of the following month to which it relates.

At the end of the tax year ie 5th April, you will need to make a statutory declaration Employers Annual Return, summarising the total payments and deductions made to all employees during the year. You would also give each employee a P60 certificate, being their own individual summary.

 

How long do I need to keep my records for?
Seven years to be safe

 

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What records must I keep?
Your basic records will normally include:

1. a record of all your sales, with copies of any invoices you've issued
2. a record of all your business purchases and expenses
3. invoices for all your business purchases and expenses, unless they're for very small amounts
4. copies of business bank and credit card statements
5. cheque book stubs and paying-in book
6. till rolls or other form of electronic record of sales
7. record of stock on hand at the year end

 

What expenses can I claim?

• If you are a limited company, then the expense must be incurred ‘wholly, exclusively and necessarily’ for business purposes.
• If you are self-employed, then the expense need only be incurred ‘wholly and exclusively’ for business purposes.
  
  
• Can I claim the cost of using my car?
  Limited company – you may claim a mileage allowance – 40p for the first 10,000 miles and 25p per mile thereafter.
  
  Self-employed – yes you should keep record of all expenses and when you prepare your Tax Return you will need to disallow the percentage that relates to personal usage.
  
  
• Can I claim expenses for use of home as office?
  Yes – in the event of an inquiry, you would need to be able to prove this cost, which normally equates to the additional costs incurred by running your business from home e.g additional light and heat, telephone, rent etc.
  
  
• Can I claim for business Entertainment expenses?
  No – these are disallowable for tax purposes.
  
  
• What if an expense is used for business and personal usage?
  As with motor expenses above, you would include all the expenses and disallow the personal usage element.
  
  
• Pre-trading expenses – can these be claimed?
  Yes.

 

How do I keep my books and records?
You can use accounting software such as Quickbooks or Sage (we are professional advisers for both of these and can assist with setting up your file and providing you with training), Excel (we can provide you with a template) or a manual cashbook.

 

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Should I be self-employed or trade through a limited company?
There are many factors to consider:

Factor   Self-Employed   Limited Company       Liability Personally liable Limited       Status Potential customers may perceive you as small and risky Greater perception of a larger more established business       Taxable profits All profits are taxed at either the basic rate (20%) or higher rate (40%) and subject to national insurance at (8%) and (1%) respectively. Company profits are taxed at 21% on first £300,000 and 28% thereafter. If you do not need to extract all the profits, you could retain them within the company and avoid paying higher rate tax       Set-up Easy to set-up, all you have to do is complete Form CWF1 within 3 months of starting your business More costly, you need to incorporate a company and register it with Companies House and HM Revenue and Customs       Profit extraction All profits are taxed in full Profits can be retained in the company or paid out as dividends – this is a major advantage of companies over self-employment in that dividends are not subject to national insurance or additional tax (for lower rate tax payers)       Tax saving   Due to the fact that dividends are not subject to national insurance contributions, there is potential tax savings – see examples below       Accounts Simple accounts required purely to prepare personal Tax Return – do not need to submit the accounts with HM Revenue and Customs More complex statutory accounts need to be prepared and submitted to both Companies House and HM Revenue and Customs

 

LIMITED V SELF-EMPLOYED - Example 1: £60,000 taxable profit
£ Self-Employed tax 17,205 Limited Company tax 15,271     Tax Savings 1,934
Self Employed       Profit before tax   60,000       Less:     Personal allowance   (6,475) Taxable profit   53,525       Tax @ 20% 7,480 Tax@ 40% 6,450       Class 4 NIC @ 8% 3,053 Class 4 NIC @ 1% 97 Class 2 NIC @ £2.40 pw 125       Total Tax and NI   17,205       Net Income   42,795   Limited Company           Gross salary   15,000 Gross dividends   38,457       Total income   53,457             Gross income above HRTB       Gross income 53,457   Less: Lower rate band (43,875)         Dividend subject to HRT 9,582         HRT @ 32.50% 3,114   Less tax credit (958)         Additional tax payable 2,156               Dividend distribution 34,611 Net salary   12,274 Less: additional tax payable (2,156)       Net Income   44,729             SAVING   1,934	Assumption: £ Profit before tax 60,000 Gross salary 15,000   Tax and national insurance on PAYE income       Gross salary   15,000       Personal allowance (647L) (6,475)       Tax@ 20% (1,705) Employee NI 11% (1,021)       Net salary   12,274       Employee NI @ 12.8% 1,188   Corporation tax           £   Profit before tax     60,000         Less:       Gross salary   15,000   Employee NI   1,188                 16,188         Profit before tax     43,812         Tax payable @ 21%   (9,201)         Distributable profit     34,611         Tax credit     3,846 Gross dividend     38,457

 

 

 

 

 

 

LIMITED V SELF-EMPLOYED - Example 2: £38,000 taxable profit
£ Self-Employed tax 8,495 Limited Company tax 7,891     Tax Savings 604
Self Employed       Profit before tax   38,000       Less:     Personal allowance   (6,475) Taxable profit   31,525       Tax @ 20% 6,305 Tax@ 40%         Class 4 NIC @ 8% 2,065 Class 4 NIC @ 1%   Class 2 NIC @ £2.40 pw 125       Total Tax and NI   8,495       Net Income   29,505   Limited Company           Gross salary   12,000 Gross dividends   22,117       Total income   34,117             Gross income above HRTB       Gross income 34,117   Less: Lower rate band (43,875)         Dividend subject to HRT           HRT @ 32.50%     Less tax credit           Additional tax payable                 Dividend distribution 19,905 Net salary   10,204 Less: additional tax payable         Net Income   30,109             SAVING   604	Assumption: £ Profit before tax 38,000 Gross salary 12,000   Tax and national insurance on PAYE income       Gross salary   12,000       Personal allowance (647L) (6,475)       Tax@ 20% (1,105) Employee NI 11% (691)       Net salary   10,204       Employee NI @ 12.8% 804   Corporation tax           £   Profit before tax     38,000         Less:       Gross salary   12,000   Employee NI   804                 12,804         Profit before tax     25,196         Tax payable @ 21%   (5,291)         Distributable profit     19,905         Tax credit     2,212 Gross dividend     22,117

 

 

 

 

 

 

How much tax do I have to pay?
The current tax rates are as follows:

Income Tax Rates 2010/2011       Band Tax Rate       If your income exceeds £100,000 per annum, then your personal allowance of £6,475 is reduced by £1 for every £2 of income 0 - £6,475 0%     £6,476 - £43,875 20%     £43,876 - £150,000 40%     + £150,000 50%

 

Self-Employed National Insurance Rates 2010/2011       Band Class 4 NIC         0 - £5,715 0%     £5,716 - £43,875 8%     + £43,876 1%

 

Class 2 National Insurance Contributions are also payable by self-employed individuals at a rate of £2.40 per week. You would be exempt from Class 2 NIC if your income is below £5,075 per annum.

Other tax rates: http://www.hmrc.gov.uk/rates/index.htm

 

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When do I have to pay my tax?
Self-employed – tax is payable twice a year, 31st January and 31st July

Limited companies – tax is payable, 9 months and 1 day following the accounting year end.

 

What are the current tax rates?

2010 / 2011 Tax Rates

Income Tax       Personal Allowance £6,475     Where income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of additional income. e.g. If income is £105,000, then the allowance will be reduced by £2,500 to £3,975.       2010 - 11 Personal Allowance: 0% 0 - £6,475 Basic rate: 20% £6,475 - £43,875 Higher rate: 40% £43,875 - £150,000 Additional rate: 50% Over £150,000     * If your non-saving income is above this limit, then the 10% starting rate for saving will not apply     The higher rate tax band therefore commences for income in excess of £43,875     National Insurance Lower Band £   Upper Band £   Rate %           Class 1 - primary (paid by employees)   5,720 0   5,720 43,888 11   43,889 + 1         Class 1 - secondary (paid by employers)   5,720 0   5,721 40,040 12.8   40,041 + 1         Class 2 - paid by self employed     £2.40 per week         Class 4 - paid by self employed 0 5,715 0   5,715 43,875 8   43,876 + 1   Corporation Tax 0   300,000   21     300,001 + 28               * A marginal rate of tax is payable between £300,000 and £1,500,000   Capital Gains Tax 0   10,100   0     10,101 + 18   Inheritance Tax 0   325,000   0     325,001 + 40

 

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