1. I want to set up my own business as self-employed. What should I do?
If you want to start working as self-employed, you must register with HM Revenue & Customs (HMRC), but first make sure you have a national insurance number. After the registration, you will receive your unique taxpayer reference (UTR) and HMRC will set up the correct tax and national insurance contributions records. You should keep your UTR safe because you will need it when completing your self-assessment tax return.
2. How can I know whether I am employed or self-employed?
This depends upon what your contract says or what your working arrangements are. You can be employed and self-employed at the same time. When defining your employment status, you should refer to the following questions:
a) A self-employed person:
- Runs their own business and decides about the type and time of its work
- Bears responsibility for the success or failure of the business
- Has more than one customer at the same time
- Can hire people
- Takes care of the main equipment needed to perform business activities
b) An employed person:
- Has to perform the tasks imposed on their own
- Is told how, where and when to do their work
- Works within fixed hours
- Work for just one person at a time
- Is not in charge of the business nor takes responsibility for it, that is the employer’s task
- Is paid a regular wage or salary
3. When should I register for VAT?
You may need to register for VAT if you are doing business in the UK as an individual, a partnership, a company, an association, a charity, a local authority or any other organisation or group of people acting together under a specific name.
Registration for VAT is compulsory if your annual turnover exceeds £85,000 or you expect the turnover to be higher than that amount in the next 30 days. However, it may happen that your turnover has exceeded the registration threshold temporarily. In that case, you may apply for exception from registration. This applies for entrepreneurs supplying goods or services within the UK. If you take over a VAT registered business, your VAT taxable turnover over the last 12 months must be added to the turnover of the business you are taking over when checking if the registration threshold has been exceeded. And if you have received goods from other countries in the EU, registration for VAT is compulsory if the total value of the goods acquired has gone over £85,000 in the current year since 1 January.
Note that you cannot register for VAT if you sell only goods or services that are exempt from VAT or you are not in business according to the HMRC’s definition.
4. Can I register for VAT if my turnover is below the threshold for registration?
If you are doing business in the UK but your turnover is below the threshold for registration, you may register for VAT voluntarily.
5. Why would I want to voluntarily register for VAT?
You may find it beneficial to be able to charge VAT on your sales and claim back VAT on your purchases in various ways. By way of example, if there is a zero VAT rate for the items you sell but you buy standard-rated items, HMRC will give you a VAT refund. Note that if you voluntarily register for VAT, you have the same rights but also responsibilities as in the case of compulsory registration.
6. I want to close my business, what should I do?
If you need to close your business, you should plan it carefully. First of all, it is important that you inform HMRC of your intent. Only then will you be able to settle matters related to tax and national insurance. In some circumstances it is possible to extend the deadlines for payments or even to claim back some tax or national insurance.
7. How can I inform HMRC that I want to close my business?
- Self-employed and business partners can register online at www.hmrc.gov.uk
- Shareholders may still have to file company tax returns and pay corporation tax while closing the business. You will need to account for any capital gains made in the closing process through your company tax return.
- Employers must also submit a final full payment submission (FPS) when running their final payroll, in addition to the standard procedure. It is important that you pay all outstanding PAYE tax and national insurance deductions on a timely basis.
- VAT-registered businesses will need to deregister from VAT.
8. What is a company tax return?
A company tax return is a document which is filed for each accounting period by companies liable for corporation tax. A company must file a return annually, even if it has not made any profit.
9. What is capital gains tax?
Capital gains tax is a tax you pay when you make a profit by way of selling assets (e.g. shares or property). Your capital gains tax may be reduced by a tax-free allowance and some additional reliefs. There are also some circumstances under which no capital gains tax must be paid.
10. What are the advantages of being a sole trader?
- There are no formation costs
- Sole traders are not required by law to have annual accounts nor to file accounts for inspection. However annual accounts are necessary for tax returns
- Sole traders are unrestricted in the amount and purpose of borrowings
- Losses generated by a sole trader can be set against other income of the year or carried back to prior years
Tax make-up of a sole trader
- For a sole trader, tax is generally paid by instalments on January 31st in the tax year, and July 31st following the tax year
- For an ongoing business, tax for 2018-19 is payable: first payment on January 31st 2019, second payment on account on July 31st 2019, with any final due on January 31st 2020
- A sole trader will pay Class 2 NI of £2.85 (2017/18) or £2.95 (2018/19) a week and Class 4 NI, depending on their level of profits
- Profits are taxed at 40% on taxable income in excess of £35,000 and at 45% over £150,000.
11. Do I have to set up a limited company?
If you wish to trade and do not use a limited company, you will be personally liable for the debt of your business. If you have assets or savings, they are vulnerable to a claim made against you.
By trading through a limited company, you are literally placing a limit on your liability. That limit is the value of the company, including any money you may have invested in, loaned to or are owing to the company.
The company has a separate legal identity from its owners and directors and unless they sign a personal guarantee for its debts they are not liable for these.
There are a number of advantages in becoming a limited company, such as: –
- The main advantage is that you are likely to pay a lower rate of tax than a sole trader. The current corporation tax rate is 19%
- A limited company is a distinct entity from its owners. Everything from the company bank account to ownership of assets is purely company business and separate from the interests of the company’s shareholders
- Running your business as a limited company means you have the reassurance of ‘limited liability’. This means that assuming no fraud has taken place, you will not be personally liable for any financial losses made by your business
- People have more confidence in your business as they can check up on your company on the public records at Companies House
- You can give a share of the business to others e.g. family
- Because a limited company is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their sole trader counterparts
- If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure
- In some businesses, having a limited company can provide a more professional image
- Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar
12. Do I need to keep expense receipts?
HMRC require you to keep hold of all paperwork, including receipts as these form your business records. There are different timescales relating to different taxes, so we would advise holding onto everything for a minimum of 5 years from the 31st January filing date.
13. How can I make pension contributions?
You can either make personal pension contributions or employer contributions from your company and depending on your current circumstances each method could be advantageous to you from a tax perspective. Valhalla PCS LLP are not authorised to give any specific investment advice, so we cannot advise on which pension product(s) to choose, only the tax reliefs involved.
14. Can I pay my spouse/partner a salary?
You can pay your spouse/partner a salary, however, this can be difficult to justify to HMRC. If your spouse/partner was to be carrying out general administration duties, HMRC would not see this as taking more than a couple of hours per month paid at an appropriate hourly rate. If your spouse/partner was working through the business and generating income, then this would be an allowable expense.
15. Can I reclaim the cost of clothing as a business expense?
You can claim for the cost of clothing as an allowable business expense if it is protective clothing, a uniform or a costume (in the case of actors and entertainers). You cannot claim for everyday clothing as this is regarded as having a dual purpose. Even if you only wear it for work.
16. Can I claim for furniture and for the re-decoration of my home office?
Claiming furniture for your home office is an acceptable expense, however, there are certain criteria that would have to be met:
- It must be relevant and its cost not excessive for its purpose as office furniture – furniture up to a value of £300 is unlikely to be questioned in an HMRC investigation
- The personal use of the furniture must be insignificant – when measuring significance, the frequency of the furniture’s use for work purposes should be considered
- In the event of an investigation from the HMRC, you must be able to justify that the personal use is insignificant. If you are not confident that this justification can be met, we would advise that you do not claim for the furniture
17. Can I rent an office to work from?
If you wish to rent an office to work from that isn’t a room/office in your personal residence, then this is a possibility. However, it will be best to ensure that the requirement is necessary to the running of the business; the rental agreement is in your limited company / business name and ideally paid directly from the company or business bank account.
18. I want to build an office at the bottom of my garden which will be used as an office space. Can I claim this as an expense?
Whilst you could theoretically claim for an expense of this nature, it is certainly not something that we would advise is claimed and there are several things that should be considered before making a decision as to whether to proceed:
You could potentially lose out of the full benefit of Private Principle Residence relief (PPR) and thus suffer capital gains tax when your home is sold. If such an expense was to be claimed as a business expense, it should be furnished suitably as an office and so should not contain personal/leisure equipment – in the event of an HMRC investigation you may be required to justify it as an office space not just an improvement to your home
The cost should not be excessive, and any work carried out in its construction should be commercial.
19. I am thinking of buying a company car, what is the best option?
Generally, company cars are not tax efficient for owner managed companies i.e. where the recipient of the company car is also the sole shareholder, as the same person effectively ends up paying both the employee and employer taxes. Normally the only time a company car is tax efficient is if you are an employee of a company you do not hold shares in or if the car is particularly friendly to the environment i.e. low emissions.
20. How could expenses affect my tax bill?
Your business will incur various running costs. Allowable expenses are deducted from your gross turnover to calculate your taxable profit. Your accountant will be able to advise you whether the expense is an allowable deduction.
21. What costs could I claim as a business expense?
According to HMRC, a business expense refers to costs which are incurred wholly and exclusively for your business. As a limited company contractor operating outside of IR35, you may be able to claim costs if they fit this description.
See below for some examples of business expenses:
Accountancy Fees – As a limited company contractor you may wish to hire an accountant to take care of your personal and business taxation requirements. As this cost is directly related to the running of your business the cost could be claimed as a business expense. Other professional fees such as legal fees could also be claimed.
Business Travel – If you are required to travel for your business then you are able to claim the cost as a business expense. Contractors can claim mileage of 45p per mile for the first 10,000 miles travelled in a financial year and 25p per mile thereafter. This amount covers fuel and any wear and tear on your car. If you take a passenger in the car with you then you are able to claim an extra 5p per mile. If you travel via public transport you are able to claim the cost as an expense as long as you keep the receipt. Toll fees, congestion charges and parking costs are also able to be claimed as expenses.
Accommodation – If your business requires you to stay away from your permanent address then the cost could be claimed as an expense. You may also be able to claim for meals and a small amount per day for personal items.
Mobile Phone Bill – If you use your phone entirely for business related use then you are able to expense your entire phone bill. However, most contractors will use their phone for both business and personal use and in this case, only the minutes and texts that have been used for business purposes are able to be claimed.
Training Courses – If the training course in question is wholly and exclusively for business purposes then the cost could be claimed.
Stationery – Branded stationery such as letter heads, envelopes, pens and other items are able to be claimed as expenses if they are used solely for business use.
22. What costs cannot be claimed as an expense?
Costs that are not wholly and exclusively for the use of your business are not classed as business expenses. Some common examples of costs that you are not able to claim are most medical treatment costs, client entertainment, childcare, gym membership, parking fines and speeding tickets (even if they are incurred on business trips).
Claiming expenses through a limited company
As a limited company contractor, claiming expenses is incredibly simple. If you pay for the expense yourself then you will need to complete a bank transfer or write yourself a cheque from your limited company bank account to your personal account. If the expense cost is taken directly from the company bank account, then each amount must be recorded so that you can accurately calculate your profits.
Any expense you claim must follow HMRC’s guidelines, which means that all expenses claimed should be wholly and exclusively related to assets which apply to your role or profession.
Business expenses paid personally
If you incur a business expense and pay for the cost personally you can reimburse the amount from your limited company profits.
Business expenses paid directly from your company
If you pay for business expense costs directly from your limited company bank account, then each cost needs to be recorded as an expense. Certain expenses such as company pension contributions should always be made from the company bank account to avoid any further tax implications.
Recording your expenses
Whether you pay for an expense yourself or from your company bank account, if it is being claimed from the company in some way (and the company is receiving tax relief on the cost) then you must keep proof of purchase.
HMRC requires all expense receipts and invoices to be kept for a minimum of six years. The invoices/receipts should show an itemised breakdown of the purchases and separate the VAT if it is being reclaimed.