The prospect of having to keep financial records and produce company accounts can be really daunting for some business owners, but this process doesn’t have to be an ordeal. Every business owner is legally required to keep financial records for six years, but the type of accounts you must produce depends on the legal structure of your business.
If you run a sole trader or partnership then there are minimal bookkeeping, accounting and filing requirements. That means the costs associated with accounting are typically lower than a limited company as you may be able to meet your accounting obligations yourself using a spreadsheet or simple accounting software.
It’s incredibly important that you keep a record of all your business’s income and expenditure from the outset so you can file and pay your taxes accurately and on time. You should also keep all your receipts and invoices to help you complete your annual self assessment tax return. If you employ people then you also have to keep a record of everything you have paid them, including wages expenses and benefits.
The accounting requirements for limited companies are more demanding. You must produce statutory accounts at the end of the business’s financial year that includes:
- A balance sheet
- Profit and loss account
- Account notes
- Director’s report
The accounts have to be filed at Companies House and sent to the company’s shareholders and HMRC. You must also complete a company tax return that must be filed with HMRC and paid every year. Limited companies are also legally required to have a separate business bank account.
Due to the complexity and the time it takes to prepare these accounts, the vast majority of limited company directors hire a small business accountant to prepare and file their accounts on their behalf. That ensures they are of the required standard but does add to the business’s costs.
Setting Up a Business Tax Account
You’ll certainly have no shortage of things to do when starting your business, but one of the most important tasks you must remember to do is to register your business (sole trader or partnership) with HMRC for tax purposes.
The simplest way to register your business is to visit the HMRC website. Once you’ve registered, you’ll receive a 10-digit unique taxpayer reference that you’ll need whenever you contact HMRC. If you are setting up a limited company then you have to register with Companies House instead.
All business owners are responsible for submitting their own tax returns and ensuring all taxes are paid when they’re due. Sole traders and those in partnerships pay taxes on business profits by submitting a self assessment tax return.
As the owner/director of a limited company, you have to register for and complete a self assessment tax return and register to pay corporation tax on business profits. You must register for corporation tax within 3 months of starting to do business.
All businesses that have an annual turnover of more than £85,000 must also register to pay VAT. In some cases, you may decide to register for VAT even if your income doesn’t exceed the threshold. That’s because having a VAT number could add credibility to your business.
If you operate as a sole trader or partnership then you’ll pay Class 2 and Class 4 National Insurance contributions through your self assessment tax return, but you are not affected by PAYE. You will only need to register for PAYE if you have employees. If you run a limited company then you are treated as an employee and have to file PAYE and National Insurance information in real time.
When you set up a business, there are certain policies you are required by law to put in place. That will depend on the type of business you run and the industry you operate in. There are also a number of policies that although optional, could provide invaluable protection for all your hard work.
If you employ any person other than an immediate family member then you are legally required to put employers’ liability insurance in place. That even includes workers you employ on a short-term or casual basis. Employers’ liability insurance provides cover against the cost of a compensation claim arising from an employee who becomes ill or suffers an injury through their work. Failure to put employers’ liability insurance in place could lead to a fine of £2,500 for every day you’re not covered.
Many small business owners also choose to take out public liability insurance, particularly if customers regularly visit their premises. Public liability insurance will protect your business against the cost of a compensation claim from a third party who is injured or whose property is damaged by your business activities. Although public liability insurance is not a legal requirement, it could prevent the closure of your business if a claim is made.
Professional indemnity insurance is another policy many businesses decide to put in place. If your business provides a professional service or advice to clients, this policy would protect you against claims from clients who are dissatisfied with the service or advice you have provided. Although it’s not a legal requirement, professional indemnity insurance is mandatory for members of some professional bodies and is required by regulators in certain industries.
If you are part of a recognized profession then you should check what policies they insist or recommend you hold. Other more general policies you may wish to consider include product liability cover, buildings insurance for your premises, goods in transit insurance and plant and business equipment cover.
When you start your own business, you’ll face a number of tough challenges and decisions, some of which you may not feel equipped to make. Using a professional adviser or even accessing some of the free support available could save you time and help to avoid a costly mistake.
There are a number of national providers of free business support available online. The Companies House website provides guidance and all the forms you’ll need to set up and run a limited company. It also provides detailed information about your filing obligations and advice on maintaining company records.
The HMRC website contains a wealth of information on all aspects of the filing and payment of tax for sole traders, partnerships and limited companies. That includes everything from VAT and PAYE to corporation tax and self assessment tax returns.
There are also a number of regional providers of free business support. Those starting a business in Scotland can seek assistance and advice from Business Gateway, those in Wales can turn to Business Wales, while business owners in Northern Ireland can access the Invest Northern Ireland website.
Many business owners choose to access paid-for support services. One of the most common is a small business accountant. Although you don’t need an accountant to set up your business, filing end of year accounts is more complicated. Small business accountants can take care of the filing for you and handle your VAT and PAYE obligations. The time they save you could outweigh the costs.
A number of entrepreneurs also access the support provided by a business mentor. They are usually successful entrepreneurs who may have specific experience in your industry. While some business mentors charge, others may provide their assistance for free.
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