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Setting up a new business - #3 Accounting, Tax, Banking

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Choosing a Small Business Accountant

Accountants top the league when businesspeople turn to someone for advice - and not just to talk finance. More than two thirds of businesspeople (69%) say they ask their accountants about general business issues - ahead of banks (30%), solicitors (26%), the government or colleagues.

Of all the advisers you are likely to encounter when running a small business, a good accountant is perhaps the most valuable one to have. If your accounts are in order and you are up-to-date with payments, you are far likely to be more able to concentrate on building the business. There is nothing more stressful than feeling behind or not in a position of trust with your accountant, so here are some basic tips on choosing an accountant.

• Top 10 tips for choosing a small business accountant

Taxation Issues

As a small business - depending on your legal status (sole trader or limited company), and whether you have employees or not, you will need to pay a variety of business taxes, claim allowances and keep up to date with your paperwork. The administration side of running a small businesses need not become a burden, the key is to keep accurate and up-to-date records of all your finances, and any form filling that is required will not be an uphill task.

Corporation tax is the tax on the profits of a limited company. The tax is determined at the end of each company's financial year and is due for payment to the Inland Revenue within 9 months of the year end.

• What is Corporation Tax?

Value Added Tax (VAT) is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution. Most business-related goods and services will therefore be subject to VAT. There are several UK VAT rates, the standard rate being 17.5%. You may also be eligible to join the Flat Rate VAT scheme which was created to make VAT calculations simpler.

• Overview of Value Added Tax - VAT

National Insurance is also payable on income at rates dependent on your company's legal status. If you have employees, you will be liable to pay employers and employees national insurance contributions.

Self Employed people are liable to pay Class 2 and Class 4 National Insurance Contributions (NIC's), whereas directors of Limited Companies will pay Class 1 NIC's on their salaries.

• National Insurance Guide

Of course, there are always current taxation issues, particularly where small businesses are concerned. Although many of these issues may not affect you or your company, we particularly recommend you read up on Section 660 and IR35 developments.

The IR35 rules were invented primarily to stop limited company directors (particularly freelancers working on client sites) from drawing income in the form of a small salary and large dividends from their limited companies, where ordinarily they would be paid a standard salary for performing the same role if they were not working via their own limited company.

• IR35

The Section 660 rule, has been UK legislation since the 1990's. Its primary aim was to prevent people passing across assets and income to family members in an effort to reduce their tax liabilities, whilst intending to reclaim those assets at a later date. However, this rule was not, until recently, applied to company dividend payments. The current status of Section 660 is unclear, due to ongoing litigation.

• Overview of Section 660

Small Business Banking

Choosing a bank for your small business is an important stage in the startup process. There are several key things to consider - such as transaction and borrowing costs, what facilities the bank offers, and the type of relationship you want from a bank. Here are some suggestions which may help you decide which bank would best suit your needs.

1. You must set up a business account if you're starting up as a Limited Company, Partnership or any other key business structure. Sole Traders can use their own personal accounts (or via a new account - John Smith trading as XYZ).

2. Don't necessarily choose a business bank account simply because you are a personal banking customer. You may well feel more comfortable with a bank you already know personally, but they may not offer the best deal for your business.

3. Make sure you compare several business bank account offerings - don't necessarily open a business account at your local bank, simply because it may be more convenient.

4. Naturally, only go for banks that have a strong background - names you will have heard of, or even internet banking brands which are owned and operated by the big players.

5. Bank Charges - a key point to consider is how much it will cost you to have a business bank account. You may have a large number of monthly transactions to process, for example, so ensure you know exactly what charges will be levied on your account before signing up. Many major banks provide "free" banking for set periods to new businesses, so this may also be of interest.

6. Online Banking - this is an increasingly important service, and most banks now provide an internet service so you can check the status of your account day or night. At Bytestart, and our previous businesses, this is an essential service. Rather than ringing the bank to check if a payment has been made to your account, you can do this yourself in a fraction of the time.

7. Interest - although the major banks have improved their interest rates on business current accounts in recent years at the request of the Government, they do vary wildly. Some high street names pay virtually nil interest if your account is in credit, but there is always a trade-off between free transaction costs and interest rates, so do consider the overall benefits each account would provide to your business.

8. Small Business Team - go for a bank which has a specialised small business unit. The setup process should be simpler, and dedicated teams will be used to dealing with all types of small business and their specific needs. Some businesses will require regular contact with their bankers, so you should go with a team you feel you can build a good personal relationship with.

For more information, read our small business banking guides.

• On to Part 4 - Credit Control Issues

Posted January 4, 2006