Tips you should consider before becoming self employed
With over 430,000 new start-ups launched last year, a leading accountancy body says that potential entrepreneurs should be aware of all the facts before becoming self employed.
Given that over 60% of new companies cease trading within 5 years of launch, the ACCA has provided some handy tips to help new business owners get it right the first time.
Professor Robin Jarvis, ACCA’s head of small business unit, commented: “This huge drop-off rate can be attributed partly to a lack of knowledge and not being in possession of the hard facts of business life. Awareness of regulation and financial responsibility is half the battle when running a successful business.”
Here are the ACCA's general tips for potential entrepreneurs:
Financial systems – Having the correct credit management systems and payment procedures in place is essential to ensure the smooth running of any new business. Efficient cash flow is vital as expenditure is high, especially in the first year, and systems need to be in place to ensure that money is coming into the business, as well as going out.
Legislation – You will need to be aware of legislation that may have a direct effect on your business - employment and health and safety regulations for example. This information can be found on the Small Business Service website. You should also check Bytestart's extensive guides to business law and staff issues.
Professional advice – Experienced professional advice, like that of a chartered certified accountant, can bring essential financial management procedures to your business. Allowing you more time to develop your business without the worry, it will give you a sound head to seek advice from during these turbulent economic times. You can find a chartered certified accountant here.
Register as self-employed – You can register with HM Revenue & Customs on line, and the website will walk you through the process. Make sure you do register, because if you don’t you will face a fine. You can read our dedicated article on how to register as self employed.
Keep records – Keeping full and accurate records from the start will make it easier to work out what you owe in terms of tax and National Insurance. All records must be kept for six years – both business and private. Failure to keep records could lead to paying a fine or, worse still, paying too much tax. If you fail to keep adequate records, you can be fined up to £3,000.
The ACCA has also provided these tax-specific tips:
Capital allowances – If you buy equipment for your business, you may be able to claim tax relief in the form of capital allowances. These allowances are for equipment which you buy to keep and use in your business, such as vehicles, tools, computers and business furniture. Capital allowances do not cover things bought and sold as part of your trade, but you can claim these as business expenses.
VAT – If your business supplies goods or services exceeding £68,000 each year (2009/10 tax year), then you must register for value added tax (VAT). You will have to charge VAT on your sales and pay it on most purchases, but do not be daunted – a lot of the paperwork is the kind of thing a well-run business should be doing anyway.
National Insurance Contributions (NICs) – As a self-employed individual you will also be responsible for making your own contributions to National Insurance, this includes remitting your contributions to the taxman on a quarterly basis. It is important to take care of your National Insurance for two reasons: firstly, you may end up contributing too much, and secondly, you will lose out on state benefits that are related to the amount of National Insurance contributions you have made.
Tax Self Assessment – Being self-employed means taking responsibility for assessing and paying tax, which means completing and submitting your return. If you want to speed things up then you can submit a full tax return online – not only does this save on process time, but it automatically calculates your tax when you file your return online. Whether you submit your return online or offline, make sure you check your tax calculation once you have received it, as this will form the basis of your payment.
Tax Deadlines – If you are self-employed, you are usually required to make two payments ‘on account’ based on your profits for the previous year. The first, by 31 January, has to be paid before the end of the tax year, and the second, by 31 July, is after the end of the tax year. Any outstanding tax must then be paid by the following 31 January, with interest charged on any tax paid late. There will also be a five per cent surcharge on tax remaining unpaid after 28 February, and a further surcharge if the tax is still not paid after 31 July. Don’t panic yet though, because if you are having difficulties making payment you may be able to avoid surcharges by coming to an agreement with the taxman to pay off your bill in instalments.
