Your Helping Business

Tax

If you don’t get the accounting right yourself or you hire an accountant unfamiliar with small business operations then there is a high probability that you will pay too much tax, either as a Sole Trader or Limited Company.

The first thing to consider as a Sole Trader is whether your business income, when combined with any other personal and household income, will take you into the higher rate band – especially if you are carrying on your business alongside employment or receive pension income.

It’s all added together, and no distinction is made by the taxman between personal and business.

As a Limited Company however, things are different. First of all, for all small ‘personal’ businesses the rate of ‘corporation tax’ is around, sometimes lower than, the standard rate of personal tax. It’s not until your profit is into 7 figures that it really goes up.

A good accountant will find everything they possibly can to reduce your nominal profit and thereby your tax. So it’s actually a ‘good thing’ for your profit to be ‘low’ – unless of course you are looking for a loan or mortgage or have shareholders who expect a dividend payment. A good accountant will advise you on all this rather than just ‘doing the books’.

The secret to paying as little tax as possible is to keep meticulous records of everything!

Vehicle Tax Allowances

If you use your own vehicle it’s pretty simple. You ‘charge’ a fixed number of pence per mile as specified in the tax rules for all the mileage that is specifically ‘business’, such as visiting clients or attending training courses and other events. Yes, you have to keep a log, but there’s an app for that, provided you remember to switch it on!
You may one day be asked to provide the log so make sure it’s available if requested.

Note that if you do use a personal vehicle for business purposes (other than travelling to and from your business premises) then you must declare this to your motor insurance company; otherwise you will be ‘un-insured’ if you have an incident when you are out on business.

In the unlikely event you have a company owned vehicle that is used exclusively for business, then it’s simply a case of recording all the fuel and maintenance costs and charging them as an expense.

The problem arises when you have a company vehicle that you use for ‘personal mileage’ as well. What happens here is that you incur a penalty on your personal tax – your tax code changes and you pay more tax on your personal account. The same applies if you use a company mobile phone for personal calls.

It’s always best to use your own vehicle and your own phone and charge against your business for business use.

VAT

What about VAT?

To VAT or not to VAT, that is the question.

There are advantages and disadvantages to being ‘VAT Registered’ and any business can register for VAT at any time. It only becomes compulsory when your turnover reaches the current ‘threshold’.
So why should you register?

It’s likely your business turnover will be below the ‘threshold’ at which you are required to charge VAT, at least when you start. (The threshold is currently in the region of £85,000 p.a.) You can register below this level and the advantage is that you can claim back the VAT on all your business costs and expenses – which can be significant during the pre-launch phase.

The downside is that you have to charge VAT on your products and services whenever they are subject to VAT – which will increase the price to the purchaser.

As a rule of thumb and with many ‘exceptions’ any form of coaching or training is subject to VAT as are some forms of therapy. However, if a therapy is recognised as a form of ‘medical’ treatment then it is not subject to VAT.

Often, depending on the price you are charging, you can factor in the VAT, but the higher the price, then the higher the VAT. It all depends on your business and the market you are serving.

If however your output services (or a good proportion of them) are not subject to VAT so that you don’t have to charge VAT, then registering for VAT is a good option as you can claim back a significant amount of the money invested in costs and expenses.

It’s a myth that ‘doing the VAT’ every quarter is hard work and takes a lot of your time. It’s not, and it doesn’t, provided that you keep all your financial records on an ongoing basis.
One more thing on VAT. If you do charge VAT then it must be included in the price you quote to consumers or domestic customers, but it should be shown separately in the price you quote to business customers.

THE BIG SECRET

I’m going to reveal one of the most powerful reasons for having a Limited Company. It’s called the Directors’ Loan Account (DL).

During the pre-launch stage of your business you will undoubtedly invest a chunk, often a large one, of your own money into your personal training and developing your business and your offering.

For the majority of small personal businesses, it’s unlikely that you’ll get or even bother to apply for a business development loan. Most personal businesses are set up using personal money, such as a redundancy payment or some other ‘windfall’.

The loans and other ‘government funding’ available is really all about the potential your business has to create employment for others so there is very limited availability for personal businesses like coaching and therapy.

If you form a Limited Company, ALL the money you have invested for a period of up to two years before registering the company and starting trading can be, on paper, put into the DL account.

The effect of this is that the Company then owes you this money, along with any other personal money that you use to invest in or operate the business.

Now this is your personal money. It’s already been taxed, so you don’t have to pay tax on it again if you take it out of the DL account and you don’t have to declare it as income when the Company is fully operational and generating enough income to pay you back, and, it’s an expense against the Company and thus reduces the tax that the Company has to pay.