As far as the taxman is concerned a business becomes liable and therefore should be registered as soon as you recieve the first client or begin actively seeking clients, (eg. via advertising).
To Register:
1. Phone 0845 154 515
2. Download the CWF1 form from the HMRC website.
This will register the business for:
1. National Insurance (NI)
2. Income Tax
It is at registration that the company details are taken, liability begins, as well as a Unique Taxable Reference (UTR) allocated. You will also recieve a "Starting In Business" Guide.
In running a business you will be subject to pay:
1. Class 2 and Class 4 National Insurance
2. Income Tax
Class 2 NI equates to £2.40 per week for self-employment and can be paid either quarterly or via Direct Debit. The only exceptions to this are available if the company profits expected are less than £5075 in the given tax year.
Class 4 NI is calculated based on the company profits, which for the current year is:
- 8% on profits between £50,715 to 43,875
- 1% on profits of £43,875 and above
Income Tax Rates break down as follows:
1. Personal Allowance - £6475
2. Basic Rate - 20% £1 to £37,400
3. Higher Rate - 40% £37,401 and above
4. From 6th April 2010 - 50% £150,000 and above
There are a number of records which need to be kept such as:
1. Business Expenses.
2. Value of stock on hand and work in progress.
3. Business Income.
4. Bank Documents.
5. Employee Wages.
6. Accounts taken for personal and family use.
*All cash flow should be recorded as accurately as possible!
When keeping business records there are 3 important notes to remember:
1. Set up a system.
2. Keep the system up to date.
3. Retain records for 5 years from the relevant statutory filing date.
There are a number of allowances for different aspects:
Capital Allowances:
These are available on assets which you expect to last a few years. The costs of these items can be written off against the company profits. Examples include:
1. Van or other vehicle.
2. Machinery or other equipment.
Annual Investment Allowance:
An AIA is the first £50,000 of expenditure on plant and machinery, (excluding cars and buildings). This can only be claimed in the year which the money is spent. In order to claim this you must be sure to document expenditure primarily:
1. What
2. When
3. How Much paid
If the figures aren't enough to contend with yet, theres VAT to consider:
You must register for VAT if:
- Taxable supplies exceed £68,000 in any 12 month period.
OR
- You expect taxable supploes to exceed the threshold in any 30 days.
You may also register for VAT voluntarily before you reach the threshold. There are some distinct advantages to this such as the company image, as well as claiming back the VAT on business costs. The primary disadvantage to this of course is you must charge VAT to your customers/clients.
The current rate of VAT is set at 17.5% as of 1st January 2010. There is also a reduced rate of 5% as well as 0% applicable to items such as staple food items and children's clothing.
So how is profit calculated?
- Turnover (takings) less Allowable Expenses = Net Profit less Allowances for vehicles and equipment (Capital Allowances) = Net Taxable Profit
And finally the Tax year:
- Begins 6th April
- Finishes 5th April the following year
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