Business Insight

Frequently Asked Questions to Accountants

Submitted by , 08/21/2018

Frequently Asked Questions to Accountants

1. What’s the best way to structure my business?

This is a very common question and one that is very important particularly if you are setting up a new business.  There is no one size fits all solution, every business is different and so you need to weigh up many factors before deciding which the best structure for your business is.

Firstly, the main options are:

  1. Register as self employed
  2. Setup a partnership with another person or multiple persons
  3. Setup a limited liability partnership
  4. Setup a limited company

There are pros and cons essentially to each option but the main things to consider are:

  1. What is the long term plan for my business? 
  2. Do I need limited liability in my business?
  3. Do I have other income from any other sources

The answers to these questions will help you decide which the best option to take is.  However, it is possible to start a business as self employed and then incorporate the business at a later date.  Trading as a limited company affords the directors of the business limited liability in case the business gets into trading difficulties so this is an important consideration.  Generally the costs for trading as a limited company are higher as there is more compliance work with filing to companies house and HMRC.  As a director you will also need to file a tax return also.

2. How do I know whether someone is an employee or is self employed?

When taking on a new worker for a business, it’s essential you establish what the right way to treat that individual is whether they are an “employee” or “self employed”.  Usually this is quite obvious but often it can require more consideration by the business.  What’s really important is that you decide this, not the individual themselves, as HMRC will want to see records to show how you arrived at the decision in case of any enquiry by HMRC.

Firstly, it’s up to the business to make sure it is treating the individual correctly.  If they are an employee then submissions need to be sent to HMRC through payroll software under the Real Time Information system.  This means you must report digitally to HMRC every time you pay the employee.  If they are self employed you should get an invoice from them for each payment and it is the self employed individual’s responsibility to pay the tax and national insurance on this in their own tax return.

Examples of self employment include the following:

  • Able to turn down work/accept work when they want
  • Employee their own people
  • Use their own equipment
  • Able to substitute someone in for them to do the work
  • Have a profit motive – work faster/more efficient then make more profit

There’s been some big high profile cases recently on this issue – for example Deliveroo drivers deemed self employed as they can substitute drivers, Uber drivers employed as they only use Uber tech, effectively they aren’t self employed.

It’s important to have an agreement in writing with the individual if they are employed by having an employee contract or a self employed contractor agreement.

If in doubt please contact us for any help with this.

3. When do I need to register for VAT?

The current threshold for VAT registration is £83,000 turnover per annum and it’s important to realise that this is on a cumulative basis, ie 12 months previous to the current month, and not based on the 12 months of your accounting year end.

Once you go over that threshold in 12 months you must register 30 days after the month in which you go over the threshold.

You can voluntarily register for VAT at any point but this is only of real benefit if you:

  • Have incurred significant capital expenditure
  • Have supplies that are mainly zero rated for example farming sales are mostly zero rated or
  • Your customers are registered for vat as this allows you to reclaim vat on your inputs and your customers are going to be unaffected as they can reclaim the vat

It is important once you are registered that you review your accounting system and records to ensure you can report your vat returns accurately and on time.
Also it is important to review the different schemes that are available once you are registered for vat and which one is best for you, these are:

  1. Accrual accounting scheme also known as standard vat scheme
  2. Cash accounting scheme – this can be good for businesses that get paid later on by customers so they only pay the vat on sales when they get paid and claim vat when they pay for their suppliers.  So it can be better for cashflow.
  3. Flat rate scheme – this scheme means the business gets a % on their sales vat in line which HMRC has a list of different industries and cannot reclaim input vat unless it is a capital item more than £2000.  You need to be careful here to get your calculations correct as it can work out worse for the business in certain circumstances
  4. Annual accounting scheme – This allows the business to make an annual vat return so can be much easier to administer

What expenses can I claim for my business?

Generally there are 2 main rules you must be aware of when claiming an tax deductible expense for your business:

  1. It must be wholly, exclusively for the purposes of the business – eg. You sell hats so buying the hats for resale from a supplier is clearly wholly, exclusively for the purposes of the business
  2. Duality of purpose – This means that where there is an element of personal use in the expenses eg. motor expenses where there is an element of personal use, you take a % of the expenses as being for personal use and claim the rest as a tax deductible expenses.

There are rules regarding specific types of expenses and trades so these are just 2 general rules to consider and if you are in any doubt always make sure to check first before incurring the expenditure.

What is capital expenditure v revenue expenditure

Generally expenditure for the business falls into two categories from a tax perspective and there are different rules for each :

  1. Capital expenditure
  2. Revenue expenditure

Capital expenditure

There is no definitive description of capital expenditure by HMRC as it is largely based on case law from various appeals by either the taxpayer or HMRC themselves.  Generally speaking though it is expenditure to acquire an asset or that which enhances the value of an asset.  It will typically be expenditure that is for longer term assets such as the purchase of plant and machinery or a building or factory for example.  It will usually be acquired by a finance option such as hire purchase or a loan. 

The business will not be able to deduct the costs of the asset upfront against their profits, instead it will be capitalised into the balance sheet of the business and the costs will be incurred through the depreciation of the asset of it’s useful life.

For tax purposes, currently there is an annual investment allowance of up to £200,000 per year for capital investment such as plant & machinery and the business can use this allowance up to this amount to offset against their tax deductible profits.  This does not cover buildings however, so it is important to review what the tax treatment before investing in capital equipment.  If the business uses up the £200,000 allowance in one year on capital expenditure, any excess attracts an allowance of 18% per year but there are different rules for motor cars so again it is important to review this before going ahead.

Revenue/operating expenditure

This is generally classed as day to day expenditure rather than any longer term expenditure. For example, buying a piece of machinery would be capital expenditure but after it is installed and running, any repairs to that machine would be operating expenses.

When is my tax deadline?

For self employed individuals, the deadline for tax returns is the 31st January after the tax year.  The tax year runs from 6 April to 5 April each year.

Tax payments for self employed are due on 31st July and 31st January each year.

For limited companies, corporation tax returns are due 12 months after the year end, but corporation tax payments are due 9 months after the year end.  For example, a company with a 31 March year end has to pay its corporation tax by 31 December.