Self Employment – Is It For You?
Given the current economic climate many people are looking towards self employment, whether going it alone or forming a partnership. This is a huge step and needs careful planning and consideration of all facts and potential pitfalls.
Initial considerations … can you afford it?
Being self-employed has many benefits including the flexibility of “being your own boss”, taking advantage of the financial rewards from your efforts and the sense of pride. However, it is essential to appreciate that you will not enjoy some of the security features of being employed, eg contract of employment, regular hours at work, pension scheme and a regular salary payment (but still with fixed outgoings). One of the major considerations at the outset is cash-flow. Can you afford to forego part of your income for a period of time?
Cash-flow should be planned on a worst case scenario. In most cases an injection of cash will be needed just to get the venture off the ground in terms of stock, equipment and marketing. Next you will need to consider the time that your customers will take to pay you. Meanwhile you will have suppliers and possibly staff wages to pay. By preparing a comprehensive cash-flow forecast you will identify the amount of finance (not forgetting working capital) that will be needed; this may be from personal resources and/or external financing.
You will need to put some cash to one side for marketing unless you have a ready made customer base. It is worth allocating resource for an internet presence, marketing materials and stationery.
There are two certainties in life … death and taxes. We will not dwell on the former, but you will need to think about your obligations to the tax man.
Once established you will need to notify the relevant authorities that you are trading (HMRC – Self Assessment, PAYE, VAT, Corporation Tax). The legal structure of the business will determine the relevant taxes, whether you are a sole-trader, form a partnership or incorporate into a limited liability company (or partnership).
If you take the sole trader route you will need to submit a Self Assessment tax return before 31st January every year. This is also timed with any outstanding tax for the previous year and a payment on account for the current year, with a further payment due in July. Any under or over payments will be adjusted the following year. This sudden dip in the cashflow catches many people out and comes as a bit of a shock. It is always worth remembering that a proportion of your takings should be set aside to pay your tax bill. In addition to income tax you will be required to pay National insurance; a standard weekly amount (£2.75 from April 2014) throughout the year (Class 2) plus an amount dependent upon profit due at the end of January (Class 4 ). Partnerships pay income tax and the amount is dependent upon the share of profits.
Limited companies pay Corporation Tax, due ten months after the year end. Usually a salary is taken throughout the year and Pay As You Earn (PAYE) and National Insurance is due at the same time as the payment. HM Revenue & Customs has recently introduced Real Time Information so these payments will be monitored and expected.
You will need to register for VAT if your turnover exceeds the threshold (£81,000 from April 2014).
To be able to submit tax returns and calculate the amount of tax payable, you will need to keep adequate accounting records. These will help to avoid paying too much tax and makes filling in your tax return much easier. These records will help you manage your business more efficiently and help it grow. Set up a system and keep it up to date regularly; do not wait until the year end when panic will set in. These records will need to be kept for up to six years. The list of records you will need to keep will depend upon the type of business you are operating, but would typically include invoices (sales and purchases), expense receipts, bank/credit card statements – these requirements are more stringent if you are registered for VAT.
You will also need to be mindful of other statutory and industry specific requirements such as health and safety, employment law and insurance.
We can help you no matter what stage you are at in setting up (or even thinking about setting up) your own business. Contact us.