Below are some of the most commonly asked questions that tend to crop up when in discussions with new and existing clients.

This list is by no means exhaustive though. The topics below, and many others, are also covered in our blog, 'The 1st Edition'. 

(Q) Should I run my business as a sole trader or as a limited company?

(A) In the majority of cases, it will be preferable to run your business as a limited company. Some of the benefits of doing so include:

 * Limited Liability. If your business fails, your house and other assets are not at risk (unless you have  guaranteed any debts personally).

* Taxation savings. Over the last few years, legislation has changed almost yearly. For some of that period, the first £10,000 of a limited company’s profits were tax free. Although this provision is not currently in force, since April 2008, the Small Companies Corporation Tax Rate presently stands at 21%. A self employed person will pay a basic rate of Income Tax of 20%, plus 8% Class 4 National Insurance.
This, obviously represents a saving of 7% on every penny earned for a limited company.

* Image. The perception held by most people is that limited companies are larger entities, and this automatically gives increased credibility.

(Q) Should I register my business for VAT?

(A) There is no legal requirement to register for VAT, until the company’s turnover exceeds the registration threshold (currently £70,000).

You are required to register when you know your turnover is going to exceed  the threshold within the next 30 days. In other words, if you have turned over £68,000 by the end of month 8, and you know you are going to do at least £3,000 in month 9, then you must register immediately.

It is possible to register for VAT voluntarily, even if you are below the Registration Threshold. Reasons for doing so would include:

* In order to reclaim the VAT incurred on large initial capital outlays at business start up. (Equipment, vans etc).

* To reclaim VAT on ongoing purchases and expenses, thereby making them 15% cheaper. (See note below, however, re dealing with the public).

* To improve company image. If a company is not registered for VAT, then any potential large customers will realise that it’s turnover is below £70,000, and may refuse to deal with such a small company, on the grounds that it’s continuity cannot be assured.

When considering voluntary registration, you need to be aware of your customer base. If we are dealing mostly with business customers, then they will, in the main, be able to reclaim any VAT that we charge on our products and services. If, on the other hand, we mainly deal with the public, they are unable to make such a reclaim and our goods and services immediately become 15% more expensive. Alternatively, we can make our current prices VAT inclusive, and lose out on the extra profit. Either way, this will be a major factor in choosing whether or not to register for VAT before we actually need to.

(Q) What will I need to do about PAYE & National Insurance?

(A) As a self employed person, you will be required to pay Class 2 National Insurance, which can be paid weekly, monthly or quarterly. This is paid at the rate of £2.20 per week, and covers the taxpayer for profits up to £5,225. Anything over and above this is subject to Class 4 National Insurance, at 8%.
For limited companies, the majority of remuneration is taken by way of a dividend, which is not subject to National Insurance. However, to ensure a minimum contribution is paid, thereby ensuring future pension and other benefits, we recommend the payment of a small salary to each director (usually around £6,000). In order to minimise work (and therefore cost) this salary can be paid annually, as long as the recipients are also directors, and this is a service we provide to the majority of our smaller clients.

(Q) What about running a car through the business?

(A) However you run your car for business purposes, you will need to keep a record of your mileage. Even a brief note in a diary, next to the appointment details, is sufficient.
As a sole trader, all vehicle expenses are paid through the business, and the mileage records are used to determine what percentage of the travelling is personal use, which is then disallowed in the taxation calculation.
If any personal costs are incurred through a limited company, the vehicle will then be deemed to be a company car, and will be subject to personal taxation, as a benefit in kind, which we would wish to avoid, wherever possible.
In order to get around this, most businesses will operate what is known as the ‘Fixed Profits Car Scheme’, whereby the car is owned, and run, personally, and a set mileage rate is claimed back from the company. (Currently 40p per mile for the first 10,000 miles per year, and 25p per mile thereafter). This money is then used to fund the acquisition and running of the vehicle, and is totally tax free.

(Q) Can I pay my partner through the business?

(A) It used to be common practice to pay a spouse or partner a small wage, in order to utilise their tax free personal allowances, or lower rate tax banding (particularly if they have no other employment).
This loophole has been partially closed now, as any such salary must now be ‘earned’ by the person concerned, which can be difficult when they have a full time elsewhere. One way around this is to issue a number of shares to your partner, so that they are able to receive part of the dividend paid.
Under current legislation, a dividend is classed as investment income, rather than earned income, and, as such, there is no requirement to prove any involvement on the part of the partner.
Alternatively, if they do actually play a part in the business (such as bookkeeping, admin or company secretary) then a salary is permitted, as long as it is at a commercial rate.

It's also worth noting that we can pay our children through the business as well, provided they meet certain criteria, check out our blog post; 'Can We Employ The Kids In Our Family Business?'.

(Q) What costs can I claim against my profits to reduce my tax?

(A)  Generally speaking, as long as the expenses are incurred ‘wholly and exclusively’ in running the business, they can be claimed, including all advertising, stationery, rent, traveling to and from customers, business insurance etc.

Where a client operates from home, we are able to advise, on an individual basis, as to what additional costs may be claimed there, as well as making allowances for non financial costs, such as depreciation. The general principles, though, are covered in our blog post; 'Another Look At Claimimg Home Expenses'.

Certain industries (such as the film and television industry) have set rates that may be claimed for meals and / or accommodation, without producing supporting invoices, but, in general, where an invoice can be produced, for a specific job, it can be claimed. This only applies to yourself and your employees, not your friends, family or even customers / suppliers. (That’s classed as entertaining, and is disallowable).