| Index »Setting Up In Business |
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| Setting Up In Business |
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| General |
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| If you are newly in business, or you are thinking of starting a business of your own, it is important to get it right from the start. Self employed people are taxed in a special way. You have more responsibility to manage your relationship with the tax office. You will have a tax bill to pay. The more you know, the better prepared you will be. You will be less likely to get the unpleasant shock of an unexpected tax bill later on.
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| Employment/Self Employment
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| It is not always straightforward to decide if you are self-employed or if you are really working for someone else as an employee. It is very important to get it right. Don't take someone else's word for it, check it out yourself! Problems can often arise over your status with the tax authorities. HM Revenue and Customs may question whether you are employed or self employed. Place a great emphasis on getting employment status correct. You may also find that you have a different status under tax law from that under employment law. It is also possible to be an employee for one job (eg, a part time job in a shop) and self-employed for other work (eg, as an actor). You must look at the conditions of each occupation separately.
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| There is greater flexibility for tax relief on expenses incurred in your work where you are self employed. But there can be a large tax bill if your classification is wrong. Employers are particularly at risk if they treat a worker as self employed when HM Revenue and Customs would view the individual as an employee. Employees can also be at risk, so it is important to be clear about your employment status and who is paying the tax. If you have any doubts it is best to take advice.
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| Employers in all businesses should review the employment status of their workers. Employment status is largely a question of fact, taking into account a range of issues. Looking at it from the worker's point of view:
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Financial risk and reward - do you quote a price for the job? If you get the job done quicker, do you get the extra profit? If you do a bad job or make a mistake, do you have to put it right at your own time and cost? |
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Whether you are part and parcel of an organisation |
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Who provides the tools and equipment |
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Can you substitute someone else to do the work |
| Self-employment means working for yourself. You are your own boss. You decide what you do each day and what you charge. You may employ people to work for you. You may have business partners to share the work with. Being self employed makes a big difference to your tax affairs. |
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| Some Of The Issues You Need To Consider When You Become Self Employed:
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| When you are setting up in business, there are many matters to consider: |
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| Cash Flow |
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| Cashflow is an important issue you need to consider. Cash is the oxygen that enables a business to survive and prosper and is the primary indicator of business health. While a business can survive for a short time without sales or profits, without cash it will not be able to continue. For this reason the inflow and outflow of cash need careful monitoring and management. effective cashflow management will help protect the financial security of your business.
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| Business Plan |
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| It is essential to have a realistic, working business plan when you're starting up a business. A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. It has many functions, from securing external funding to measuring success within your business.
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| Many people think of a business plan as a document used to secure external funding. This is important because potential investors, including banks, may invest in your idea, work with you or lend you money as a result of the strength of your plan. |
| There are many other benefits to creating and managing a realistic business plan - even if you just use it in-house. It can: |
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Help you spot potential pitfalls before they happen |
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Structure the financial side of your business efficiently |
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Focus your development efforts |
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Work as a measure of your success |
| The following people or institutions may request to see your business plan at some stage: |
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Banks |
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External |
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Grant providers |
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Anyone interested in buying your business |
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Potential partners |
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| Tax Rules |
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| People in business have more than income tax to think about. There are other taxes that you need to know about. You must also be aware that there are many Government rules and regulations in force that will affect you. These include tax rules- Income Tax, VAT (Please see the details of VAT in out VAT Section), National insurance, Health and employment law, Safety Regulations and Company Law etc. |
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| Books And Records |
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| You need to keep books and records for your business. These will show what happens in your business on a day to day basis. This means setting up a system to record what information is needed, and to keep the required documents. You are legally obliged by HM Revenue and Customs to keep business records including bank statements for 5 years after the deadline for filing your tax return for the period- So for 6 years approximately). You can be charged up to £3,000 for each failure to maintain or retain adequate records. (This figure may change in the future).HM Revenue and Customs can fine you if you do not keep proper books. These records form the basis for the preparation of prepare annual accounts. The information on these accounts is needed to fill in your annual tax return. |
| When you are in business, you buy things for your business. You need to know which expenses are really business expenses. You need to make good decisions about what expenses can be set against your income. And to keep the proof of these expenses so that you can claim them.You need to keep your business records and personal records separate. Most businesses find that it helps to have a separate business bank account. |
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A record of all your sales, with copies of any invoices you have issued |
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A record of all your business purchases and expenses |
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Invoices for all your business purchases and expenses, unless they are for very small amounts |
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Details of any amounts you personally pay into or take from the business |
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Copies of business bank statements |
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| Registering Your Business With The Tax Authorities |
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| It is important to register with HM Revenue and Customs when you become self-employed. It's important to let HMRC know that you're self-employed as soon as possible - even if you already fill in a tax return each year. |
| You will be subject to penalties if you do not do this unless you can demonstrate you had a reasonable excuse for not doing so. For income tax you must tell HM Revenue and Customs about your new business by 5 October following the tax year in which you start trading. From 13 October 2004, companies must tell HM Revenue and Customs within three months of first starting to trade, or receiving any taxable income. This also applies where a company has been dormant and starts to trade again. Penalties will apply if notification is late. If you do not, HM Revenue and Customs will charge a penalty. If you deliberately do not tell HM Revenue and Customs about your business income to avoid tax, you may even run the risk of committing a criminal offence. You may also have to register for VAT - when your turnover reaches £ 64000 (This figure generally changes every year). |
| BUSINESS RELATED: KEY ELEMENTS |
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| Business Rates |
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| Business rates have to be paid to the local authority on most business premises. These include shops, offices, warehouses and factories. In some cases, for example, in a property which contains a shop and a flat, or if you work from home, you may have to pay both business rates and council tax. Some types of business premises are exempt from rates, for example, agricultural land. |
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| Health And Safety |
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| As a self-employed person you have a duty to make sure that your business premises and working environment meet health and safety requirements.
If you employ people, you have a legal obligation to ensure a safe and healthy workplace. Employees have rights, and responsibilities for their own wellbeing and that of their colleagues. You need to carry out a risk assessment and do what's needed to take care of the health and safety of employees and visitors. This includes deciding how many first aiders are needed, and what kind of first aid equipment and facilities should be provided. First aiders have no statutory right to extra pay, but some employers do offer this. Employees must also take reasonable care over their own health and safety. |
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| Insurance |
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| Depending on the business and how you trade, you will be required by law to take out certain types of insurance. Other types of insurance are not compulsory but it is important to consider which ones are appropriate. The types of insurance you may need are:- |
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| Employer's Liability Insurance |
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| If you employ other people you must have this insurance. It provides cover for claims made by employees who are injured or become ill as a result of their employment |
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| Vehicles Insurance |
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| Vehicles used for business purposes must be insured even if already insured for private use. |
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| Public Liability Insurance |
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| This provides cover against claims by members of the public who have been injured or had property damaged as a result of carelessness at work by you or your employees. |
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| Business Premises Insurance |
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| Insurance will be necessary for the premises you work from, even if you work from home and there is already a policy. This is because the insurance will usually only cover residential use. |
| Contents, stock and materials insurance. This insurance will be necessary to cover the replacement costs of stock, materials and the contents of the premises even if is work is being done from home and there is already a home contents insurance policy. |
| Health and Accident Insurance. These will pay a regular income or lump sum if you are unable to work because of an accident or sickness. |
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