FAQs Frequently asked questions
If you are unable to find what you are looking for on our website, or within our FAQs below, please do not hesitate to ask us a question online or contact us directly.
- I am a sole trader. Should I become a limited company?
- Our house has increased dramatically in value.
Will our children pay inheritance tax when we die?
- I am thinking about selling my company. Should I sell the shares
in the company or should the company sell the business and assets?
- I want to form a business – what type of structure should I have?
- What are the key issues in running my business?
- What accounting records should I keep?
- Should I computerise my accounting system?
- Should I register for VAT?
I am a sole trader. Should I become a limited company?
Up until now incorporation (forming a Limited company) has broadly been seen as a way to reduce income tax. Whether or not incorporation will be benefit you depends on your own earnings profile. Detailed calculations need to be done to work this out.
But you can get worthwhile tax savings. These will depend on your profit and what you need as take home pay. You also need to consider the following:
- The Government will be reviewing the tax system to consider “…the realities of today’s changing labour market.” This may mean further changes to the amount of tax paid whether you are self employed or a director shareholder of a limited company
- You also need to compare whether you would be better off keeping your business as a sole trader or transferring it into a company and ultimately selling that company
- Operating through a company is different commercially and has its own advantages and disadvantages compared to operating as a sole trader or partnership
More information? - Contact us
Our house has increased dramatically in value.
Will our children pay inheritance tax when we die?
There are some simple steps, which you could take now to save large amounts of money. It all depends on the value of your house and whether or not you also have significant investments.
One option is to leave in your will, assets up to £263,000 (the current value of the inheritance tax nil rate band), on the first death of either spouse, to your children or grandchildren. This only applies when your first spouse dies. The value of the saving currently is about £105,000.
But if all your assets are left to your surviving spouse then this saving is not possible.
You can also use other strategies like discretionary will trusts and take advantage of your remaining lifetime exemptions or using insurance products. For instance each year each spouse can give away £3,000 free of inheritance tax. There are also other lifetime exemptions that can be considered.
But any transfers made by you, above the level of the lifetime exemptions, in the seven years prior to your death (other than to your spouse), are added to the value of your estate on your death to calculate the inheritance tax due.
Inheritance tax is a complex area and you should always get expert advice from an accountant and solicitor. They will help make sure your wishes are met and you get the best possible inheritance tax savings too.
But you need to remember not to give away everything. You need to protect your financial security and independence in old age and not put yourself in a position where you have to rely on the goodwill of your children or others. Change happens. For example: what if your son or daughter gets divorced and the assets you gave them form part of the divorce settlement?
More information? - Contact us
I am thinking about selling my company. Should I sell the shares in the company or should the company sell the business and assets?
There are a whole host of issues here. Ultimately it is a case of talking with your accountant and working through your options under the various tax rules and tax reliefs, which could apply to you.
Selling the company
For instance if you sold the business then the company would probably pay tax on any capital gains as well as corporation tax on balancing charges on of the sale of plant and machinery.
Having paid the tax the company will then try and distribute the net of tax funds to you by way of salary, dividends or as liquidation distributions. Each have their own tax rules.
Alternatively the company might decide to acquire another business in which case roll-over relief for capital gains might be available which defers any capital gains tax payable.
Selling the shares
If you were to sell the shares then you would be hoping to get the more beneficial business asset taper relief, hopefully with a view to reducing the effective rate of capital gains tax to 10%.
However taper relief is complex and you cannot always get the best rate of taper relief. It depends on a number of factors such as:
- the number of shares you have held over the years
- your role in the company
- whether the company has owned any non-business assets, which exceeded 20% of variables such as the overall value of the company or the company’s income.
There is no straightforward answer.
Each case has to be looked at on its own merits taking into account both the tax profile of yourself as well as the company and the assets it owns.
More information? - Contact us
I want to form a business – what type of structure should I have?
There are four main choices for the legal form of your business.
1. Sole trader, you are self-employed, with no special legal structure.
2. A partnership, two or more self-employed people work together as partners and share the profits (or losses).
3. A limited company is a separate legal entity, distinct from its shareholders, directors and employees. Unlike a sole trader or partnership, it is not the same as the individuals who own or run it. For example, it can sue or be sued in its own name.
4. A limited company partnership has some of the advantages (and disadvantages) of both a company and a partnership. For example, it is a separate legal entity and can continue despite the resignation or death of some members.
Other legal forms can be used, for example, a co-operative belongs to the employees.
You can employ people whether you are a sole trader, partnership, limited company or limited liability partnership.
It is possible to change the legal form of your business after you have started trading. But any change will take time and money.
If you have registered for VAT, you will have to tell your local VAT office within 30 days of the change.
We can give you advice on other tax-related issues, feel free to Contact us.
What are the key issues in running my business?
You must keep constant track of five crucial areas if your business is to succeed.
1 Concentrate on winning and keeping customers.
- Continually improve your understanding of your customers and the competitive environment to refine your marketing plans and take advantage of new opportunities.
- Promote your business and your products.
2 Monitor your cashflow closely.
- Cashflow is the balance of all money flowing in and out of your business, with
the main inflow usually coming from sales.- The more warning there is of cashflow peaks and troughs, the more time you have to deal with them.
- You must know when to focus completely on sales and getting your invoices paid.
- Planning ahead will make it easier to arrange any additional funding you may need.
3 Make sure your employees are performing effectively and are overcoming any problems.
- Start by recruiting the right people.
- Lead and motivate your employees.
- Monitor your team’s performance by holding regular reviews.
- Discuss and resolve any problems and frustrations – otherwise employees will find other jobs.
4 Develop your selling skills.
- Make sure that you, and all employees who interact with customers,
have the right training, attitude and approach.5 Control your costs carefully.
- This is often the easiest way to improve your short-term profitability.
- Share knowledge and skills to avoid relying too heavily on one key employee.
More information? - Contact us
What accounting records should I keep?
The exact requirements will depend on the size and complexity of your business. There is a legal requirement to keep detailed accounting records for a company.
For the very smallest business, the absolute minimum accounting records would be:
- Bank statements, cheque books and paying-in books.
- Original invoices for all purchases and copy invoices for sales.
- PAYE records, even if the only employees are directors.
- VAT records if you are registered, including reconciliations of the amounts
paid.- Stock at year end.
- Fixed assets.
You should also consider keeping a petty cash book and, if you keep manual records, an analysed cashbook splitting payments and receipts into separate columns for each type of expense or income.
For businesses which are slightly larger, but nevertheless still use a manual book- keeping system, additional records might include three ledgers:
- Sales Ledger (or Sales Day Book).
- Purchase Ledger (or Purchase Day Book).
- Nominal Ledger.
If your accounts are computerised and you keep them up to date and reconciled to your bank account, compiling annual accounts should be relatively fast and simple.
More information? - Contact us
- The reports produced will depend on your software, but will probably be similar to the separate ledgers of a manual system.
- If you involve us in choosing and setting up the system, the necessary information should be readily available.
Should I computerise my accounting system?
A computerised system can automate routine tasks and save you time and money. The advantages include:
- Bookkeeping is simplified and automated. For example, you can enter an order and the software updates the stock and customer records and allows you to translate the order into a sales invoice.
- Bank reconciliations, VAT returns, monthly management accounts and other
accounting tasks can be completed quickly and accurately.- Some software supports electronic banking, and could save a lot of time.
- Most packages let you add a payroll module to automate the calculation and payment of wages.
Accounting software provides a wide range of up-to-the-minute management reports at the touch of a button.
- For example, aged debtor and creditor lists, the bank account balance, tax and VAT owed, balance sheet, profit and loss, stock values and performance against budget.
- Other useful calculations, such as job or project profitability assessments, can be produced, depending on your software.
The software makes it easier to prepare for your annual accounts, or your audit.
You can make further improvements by integrating different processes. For example, you could use the information contained in your ledgers to generate debt-chasing letters or customer mailshots automatically.
More information? - Contact us
Should I register for VAT?
The advantage of registering is that you can claim back VAT on business purchases. But if you suddenly add 17.5 per cent VAT to your prices, you may lose customers.
You must notify Customs and Excise, with 30 days of the end of the month, if your taxable sales in the last 12 months exceed £58,000.
- Exceptionally, if you expect sales to fall back below this level, you can ask Customs and Excise to let you remain unregistered. Otherwise, you will be registered immediately.
- You must also register if your sales during the next 30 days are expected to exceed £58,000 – eg if you set up a new company with customers ready to place orders totalling £58,000 or more.
Penalties for late notification can be as much as 15 per cent of the net tax due, although the authorities now have discretion on how they apply them to businesses with turnover of up to £150,000 a year.
You can opt to register for VAT if your sales are below the registration level. It should be worth registering (to claim back VAT on purchases) if:
- You make zero-rated supplies – because your customers will not have to pay VAT.
- Your customers are themselves VAT registered – because they may be able to claim back VAT you charge them.
Start-up businesses may register before they begin trading, in order to reclaim VAT on their pre-trading business expenses.
You have to give Customs and Excise evidence of your intention to start trading.
More information? - Contact us
PLEASE NOTE:
Whilst all due care and attention has been taken in the preparation of these questions and answers no liability can be accepted by BresnanWalsh for any omission or item contained therein.
No responsibility for loss occasioned to any person acting or refraining from acting as a result of this material in these questions and answers can be accepted by Bresnan Walsh. Specific advice should be sought from an appropriate professional before any course of action is implemented.
