A Step-By-Step Guide To Setting up a New Business In The UK
Posted 4 years ago by Tracy
Setting up a new business isn’t easy. Despite the sleepless nights and the blood, sweat, and tears that can go into creating a new business, hundreds of thousands are started in the UK every year. According to the Financial Times, nearly 660,000 companies were established in 2016).
Often, a new business brings its own share of risk, uncertainty, and opportunity, which is why it’s worth getting your business off to the right start.
This guide outlines the financial and reporting implications of running a business, from how to appraise your business idea at its inception to keeping track of your finances as you start bringing in customers.
Please note that this guide is for general information purposes only. For specific advice to your situation, please refer to your accountant, lawyer, or tax adviser.
Part 1 - Is Your Business Plan Viable?
Before you get started marketing your product, it’s worth taking a step back to see whether your idea has any legs to make it as a commercial product or service.
After all, you could have the greatest idea in the world, but if there’s no real demand for your product, it would be immensely difficult to market, or you don’t have the finances to get your product or service off the ground, then it might be worth reconsidering going into business in the first place.
One way to assess the viability of a business idea is to draw up a business plan. Not only will this help you formulate all of your ideas and plans in your own mind, but it will also be absolutely essential if you’re looking to secure external financing for your business idea (e.g. a bank loan).
Although there are many business plan templates available all over the internet, many of the resources you’ll likely need can be found at https://www.gov.uk/write-business-plan, which has business plan templates, examples of business plans, and information on how to start writing a business plan (via Start Up Donut).
Regardless of whether you’d prefer to use an existing template or create a business plan from scratch, your plan should at least cover some basic information, such as:
- What your product or service is;
- Who your customers and competitors are;
- How you’ll market your product or service;
- How the business will operate on a day-to-day basis;
- How the business is likely to perform financially (including forecasts) including if any financing is needed; and
- Some form of SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis.
Part 2 - Choose the Right Business Structure
Another important decision to make before starting up a new business is how to structure your business.
There are lots of reasons why choosing the right business structure is important. For instance, having a defined business structure helps:
- Outline who has control over your business and its day-to-day operations;
- Define how much liability you’re personally on the line for if anything goes wrong; and
- Manage your tax position efficiently.
With that in mind, below is a summary of three of the most common business structures, their advantages, and their drawbacks.
Sole trader
As a sole trader, there is no legal distinction between you, the individual, and your business.
A sole trader can keep any profits they make from their business, once the relevant amount of tax has been paid. The profits of a sole trader business are subject to personal income tax rates. For the tax year 2019/20, this is typically 20% on basic rate income, 40% on higher rate income (£50,001 to £150,000) and 45% on additional rate income (over £150,000).
Advantages of a sole trader structure
Aside from having complete control over your business, one of the key benefits of being a sole trader is that it’s one of the simplest ways to run a business.
Not only is it a relatively cheap way of starting a business, but the administrative burden on a sole trader is also much less than that of a company.
You will need to keep your business’ financial records, complete a self-assessment tax return every year, and you are subject to income tax and national insurance contributions on your business profits.
Drawbacks of a sole trader structure
While a sole trader structure is easy to set up, it does carry its share of risks.
As there is no distinction between the business and individual, the individual has unlimited liability should anything go wrong with the business, or if someone decides to sue you. As a result, all of your personal assets (such as your house, for example) are at risk.
It may also be harder to raise finance as a sole trader, and it may be more difficult to sell your business on to a buyer down the track.
Limited company
If you incorporate your business as a limited company, there is a legal distinction between you as an individual and the company that carries on your business.
A company can typically be limited by shares or by guarantee.
A company limited by shares must have at least one shareholder and one director. The director’s role is to run the company on behalf of the shareholder(s) typically with the aim to deliver a profit. You can either have different shareholders and directors, or an individual can assume both positions.
A company’s profits are subject to corporation tax. For the 2019/20 tax year, the main rate of corporation tax is 19%.
Advantages of a limited company
A limited company's liability is limited to the amount of the capital invested in it. This means that, unlike a sole trader structure, your personal finances shouldn’t be on the line should things go wrong.
Having a limited company can make it easier to secure financing, and it can be easier to sell a limited company.
Drawbacks of a limited company
There are costs involved with registering and incorporating a company with Companies House. However, the costs aren’t insurmountable, with registration fees with Companies House ranging from just £10 to £100.
A limited company also brings a higher administrative burden, as a limited company files annual accounts and financial reports with Companies House and should also file corporation tax returns with HMRC.
If privacy is of particular concern, it’s also worth noting that some company’s details, such as its annual accounts, are publicly available on Companies House.
Partnership
A partnership is a structure that’s commonly used when two or more people work together "in a business with a view to making a profit". A partner in a partnership doesn’t have to be an individual - a corporate entity (such as a limited company) can also be considered a partner.
In a partnership, each partner shares in the profits and losses of the business, and that share is taxed on each partner accordingly. Typically, a partnership agreement is put in place that outlines how things such as profits and losses are shared between the partners, and it’s worth seeking legal advice when creating such an agreement.
Advantages of a partnership
The advantages of a partnership are much the same as those for a sole trader, although it may be easier to raise finance for a business if there are multiple partners.
Drawbacks of a partnership
Much like a sole trader structure, in some partnerships the partners face unlimited liability for any losses or debts incurred by the business. However, there are other partnership structures, such as limited liability partnerships, which can mitigate this risk. An accountant can talk to you more about these types of partnership structures if you wish to find out more.
Managing a partnership can also become difficult if there are differences of opinion between partners or a partner wants to leave (which is why having a solid partnership agreement in place is highly recommended).
How do I know which structure is right for me?
If you don’t anticipate that your business will generate high profits, or you prefer the simplicity of a sole trader structure, then you may decide that being a sole trader is the right course of action for you. This may also make the most sense when you are just starting out.
Although a Limited Company does have a higher administration burden, this is offset by the limited liability, ability to manage your tax affairs more efficiently, and that it often looks more professional.
Ultimately, it’s best to carefully consider all the factors, including your unique requirements, the long-term goals of your business, and how much profit you expect to generate before coming to a decision. It’s also worth speaking to your tax adviser and accountant for their input, as they should be able to point you in the right direction.
Part 3 - Understand Your Tax and Reporting Obligations
Having a new business often brings various reporting and compliance requirements.
Certain reporting requirements are common across all businesses, while others are dependent on your business structure. A sole trader, for instance, does not have to file a corporation tax return.
Some of the government agencies you might interact with as a business owner and their common reporting requirements are outlined below.
Please note that the information below is only an overview of common filing and reporting requirements for businesses. For detailed information on specific reporting requirements, such as registering a business, filing tax returns and accounts in the first few years, or setting up payroll, speak to your accountant or tax adviser.
HM Revenue & Customs (HMRC)
Tax compliance and reporting are an important part of running a business, regardless of how it’s structured. What’s more, it pays to be on top of your tax affairs, as you may be subject to penalties if you file or pay your tax late.
Tax returns
The type of tax return you should file with HMRC generally depends on your business structure.
Sole trader
A sole trader should submit self-assessment tax returns to HMRC that outline the income and expenses of the business over the course of a tax year.
The deadline to submit a self-assessment tax return is 31 October following the end of the tax year for paper submissions, and 31 January following the end of the tax year for electronic submissions.
So, taking the 2019/20 tax year as an example, the tax year will run from 6 April 2019 to 5 April 2020. A paper self-assessment tax return should be filed by 31 October 2020, while an online return should be submitted by 31 January 2021.
Tax due from a self-assessment tax return is generally paid through payments on account. HMRC gives some helpful examples about payments on account on their website.
Partnership
Partners in a partnership have similar tax compliance obligations to those of a sole trader (assuming the partner is an individual).
Each partner should report the profits or losses allocated to them by the partnership in their own self-assessment tax return. The deadline to send this return is the same as for a sole trader (31 October or 31 January).
In addition to each partner’s own tax return, a partnership tax return (known as an SA800) should also be completed by the partnership. The submission deadline for the partnership tax return is the same as above (31 October or 31 January).
Limited company
While sole traders and individual partners are subject to personal income tax on their earnings, a limited company is subject to corporation tax.
Consequently, companies should complete a corporation tax return (known as a CT600) each year and submit this to HMRC.
The deadline to submit a corporation tax return is generally 12 months after the company’s accounting period end. So, a company with an accounting period end of 31 December 2019 should submit their CT600 to HMRC by 31 December 2020.
There's a separate deadline to pay your Corporation Tax bill, which is usually 9 months and one day after the end of the company's accounting period.
National Insurance Contributions (NIC)
Sole trader / partnership
Typically, sole traders and individual partners in a partnership are subject to class 2 and class 4 national insurance contributions (NIC). For the 2019/20 tax year, class 2 NIC usually apply if profits are £6,365 or more a year while class 4 NIC usually apply if profits are £8,632 or more a year.
For the 2019/20 tax year, the rate for class 2 NIC is £3 a week. For class 4, it is 9% on profits between £8,632 and £50,000, and 2% on profits over £50,000.
Generally, class 2 and class 4 NIC are paid through self-assessment.
Limited company
If a company has any employees, it will be subject to class 1 employers NIC at 13.8%, while the employee will be subject to class 1 employees’ NIC at 12% on pay of £719 to £4,167 a month, and 2% on amounts over £4,167 a month. An employee’s class 1 NIC is deducted from their wages by their employer.
Value Added Tax (VAT)
A business must register for VAT if its VAT taxable turnover exceeds £85,000 (the current registration threshold). However, businesses can choose to voluntarily register for VAT even if they have turnover below the registration threshold. Most of the time you can register for VAT online or use a tax agent to register on your behalf.
Typically, businesses submit a VAT return to HMRC every three months.
It’s worth noting that most businesses registered for VAT will be subject to the Making Tax Digital for VAT regime, which came into effect on 1 April 2019. The regime adds new rules around digital record keeping and digital filing and requires businesses to have software that is compatible with the Making Tax Digital for VAT platform.
Find out more about Making Tax Digital for VAT, and how AccountsPortal can help clients on our Making Tax Digital page.
Companies House
A limited company should also file its annual accounts with Companies House. The deadline to file a company’s first set of accounts is usually 21 months after the date of registration with Companies House, while the deadline to file annual accounts is 9 months after the company’s financial year-end.
Part 4 - Keep Track of Your Numbers
A lot of new business owners fall into the trap of thinking that having a great business idea is enough to keep their business alive and thriving for years to come.
Sadly, the reality is that having a great idea is not enough to be successful. Other factors, from market awareness and branding to growing your customer base, are all crucial when keeping a business afloat.
The other backbone to any successful business is having a solid grip on the finances. Without knowing the basics, such as your profit margin, costs, and breakeven point, you can quickly find yourself on the wrong side of a sinking business.
With that in mind, the tips below should help keep your business’ finances in check.
Keep a handle on cash flows
You could have an amazing forecast when it comes to your accounting profits, but in truth, it’s the cash position that matters more to many business owners. After all, if you can’t pay your suppliers, employees, or your leasing costs, you’ll quickly find yourself in trouble.
There are ways to keep your cash flow under control - including managing your costs, trying to keep within your budget for expenses, and making sure that you get paid promptly from customers.
You can find further ideas on how to prevent issues arising with your business' cash flow here.
Monitor your performance
Although you should have an idea of how your business is likely to perform financially thanks to forecasts in your business plan, it’s worthwhile checking in regularly to see if your actual financial performance is meeting the projections of your initial forecasts.
From your sales forecast to your forecast for start-up costs, try to review your forecasts regularly against actual results. Then, if variances are spotted, try to explain why there is a discrepancy. Once the issue has been identified, then you can take steps to resolve it.
You should plan for an in-depth review on an annual basis, and regular reviews on a quarterly, or even monthly, basis.
The benefits of record keeping
While record keeping is one of the more tedious aspects of running a business, it’s a crucial job.
Not only do records help you track your business’ performance, but they’re essential from an accounting and tax point of view.
For example, according to gov.uk, a limited company must keep accounting records that include:
- all money received and spent by the company
- details of assets owned by the company
- debts the company owes or is owed
- stock the company owns at the end of the financial year
- the stocktakings you used to work out the stock figure
- all goods bought and sold
- who you bought and sold them to and from (unless you run a retail business)
Additionally, any other financial records or relevant documents that are needed to prepare and file a company’s accounts and tax return should be kept (for example, bank statements, invoices, and receipts).
In general, records should be kept for "6 years from the end of the last company financial year they relate to" although some records should be held for longer.
Different rules around record keeping apply to sole traders and partners in a partnership. For those types of businesses, you should keep records relating to all sales and income, business expenses, records relating to any personal income, as well as VAT and PAYE records (if applicable). These records can come in the form of receipts, bank statements, and sales invoices, to name a few.
Generally, a sole trader or partner in a partnership should keep records "for at least 5 years after the 31 January submission deadline of the relevant tax year." Further information is available at https://www.gov.uk/self-employed-records.
Online accounting software like AccountsPortal, offers all the accounting features you need for your small or start-up business, from real-time reporting and inventory tracking to raising invoices and real-time bank feeds. AccountsPortal works well for sole traders, partnerships and limited companies, start a free 30 day trial to see how.
Further Reading
2024 Spring Budget: What does it mean for small businesses?
A Guide to Sick Pay for the Self-employed or Company Directors