REcords, Tax & Reporting
Records, Tax & Reporting
You will need to stay on top of what taxes you need to pay and what tax returns you need to file at HMRC, and also other regular filing obligations at Companies House if you have a limited liability company or partnership.
Maintaining good accounts and records is good business practice that will help you manage this - realistically working with an accountant - and will also help you to manage operations and finances throughout the year.
Records & Accounts
Prepare an invoice template you can use for all sales, setting out your relevant business information, itemising what you are selling, breaking it down as needed and, if you are registered for VAT, setting out whether the amount payable includes VAT, and ideally setting out the VAT payable as a separate line item.
If you are registered for VAT, ask for VAT invoices from any suppliers you buy from, so you can deduct this from the amount you need to pay (see below).
Keep records of all invoices received and submitted.
Keep copies (electronic is fine) of all purchase and sales contracts for goods and services, and also key written correspondence (including email) concerning negotiation and management of each contract
Keep copies of all employment contracts.
- Keep records of major business decisions and the rationale behind them, with sign-off by authorised personnel (governance that becomes more important as your business grows).
- Keep written minutes of business meetings (internal and external).
- For limited liability companies: ensure you written records of board resolutions (directors' decisions) and shareholder resolutions.
Keep an inventory of all stock, materials, supplies, etc.
Keep records of all business expenses (accommodation, travel, transport/delivery, materials etc.), bank statements etc. separately from your personal records.
If you have employees: keep a record of all wages payments and ensure you file an annual payroll report with HMRC, and provide employees with an annual summary of their pay (P60).
If you have a limited company: as well as submitting your tax returns, you will need to file an annual accounts statement at Companies House.(see below)
Appoint an accountant to assist - to ensure you pay what you should but also benefit from whatever tax relief may be available (see below).
Consider installing accounting software to track your income and expenditure.
Try to keep contracts and key correspondence for 6 years after the contract ends (12 years for any contract executed as a deed), just in case a legal claim is made against you or you need to bring one against the other party.
All accounts information for tax returns should be kept for 5 years from the end of January following the tax year when the return was made.
Be careful with any records you have containing personal data of customers, employees or any other third parties. These records should be stored securely, and only kept for so long as you have a legitimate reason for using the personal data and should then be destroyed. See Data Protection for more information on this.
There are various business taxes you may need to pay, and it is worth understanding upfront what tax relief may be available for you or your investors.
Whatever trading structure you have, you will need to settle a final payment annual tax payment with HMRC in relation to your business income.
Sole trader: you need to pay personal income tax on your total income, including from your business: the more your business makes, the higher the tax band.
Limited liability company: the company will need to pay corporation tax (currently 19%) on its profits, and you will need to pay additional personal income tax on any salary or dividend payments you take as shareholder. (See Trading Structures for more on choosing the right model for your business, including other options such as partnership.)
Value Added Tax (VAT)
To be paid quarterly to HMRC on all goods and services you sell (usually 20% unless qualifying for a lower rate or complete exemption - 0% for digital downloads, for example).
This is done by signing up online by registering for VAT payment with HMRC.
You only have to register for VAT if your annual income hits £85,000, but you may it helpful to register even if below this threshold: some larger corporate customers may need a VAT registration number to get you on their payment system and it also looks more professional.
There are also 'flat rate' schemes available if you annual income is less than £150,000, where you pay a fixed % of your VAT-inclusive turnover each year instead of quarterly, with no need to refer to specific sales or account for VAT charged to your business when buying goods or services. The attraction is less paperwork and an ability to pay a lower % (up to around 16.5%) than the typical 20% rate you add on to the goods or services you sell - you keep any difference.
If you run your business from a physical shop or commercial premises, you will need to pay a tax each year to the relevant council for use of a building for non-domestic purposes. There are reduced rates for some small businesses, and no business rates are payable if the 'rateable value' of your premises is less than £12,000.
Digital Services Tax
Not one to worry about when you start out but if (when?) you hit the big-time with your digital/online services business and have revenues of £500M, you would have to pay a 2% tax from 2020 onwards.
You will need to deduct from employees' monthly wages and amount for their income tax and national insurance contributions and pay this directly to HMRC under the Pay As You Earn system.
if you are buying supplies from outside the UK, or perhaps selling to customers outside the UK, you may find certain tariffs apply and taxes need to be paid, depending on the nature of the goods on question. Seek external tax or legal advice if you are not sure.
Try to appoint an accountant who can also provide appropriate tax advice, and help with all tax relief that may be available. If you have a technology business, then there are specific types of tax relief you may be able to benefit from:
R&D tax credits: a reduced tax liability or cash reimbursement of a percentage of the costs you incur on carrying out qualifying technology research and development.
Patent box: when you commercialise your technology, if you have obtained patent protection, a reduced corporation tax rate of 10% on income derived from the patented technology.
There are also tax relief schemes that help indirectly by making it more attractive for investors to provide funding of one form or another:
SEIS (Seed Enterprise Investment Scheme): investors taking equity in new start-ups (providing 'Seed' funding) can claim large tax rebates of up to 50% on up to £100,000 investment. You can raise up to £150,000 of SEIS investment this way.
EIS (Enterprise Investment Scheme): this is a similar scheme on a larger scale for later stage Small & Medium Sized Enterprises. Investors can claim tax rebates of up to 30% on up to £1Million investment (maybe more). You can raise up to £5Million of EIS investment per year, up to a maximum of £12Million over the lifetime of your company.
VCT (Venture Capital Trust): if you invest money in a large investment fund (listed on the stock exchange) that in turn invests in start-ups, you can claim tax credits of up to 30% on income up to £200,000 per year.
It may be worth seeking advance assurance from HMRC that these schemes apply before issuing shares to investors.
See Funding for more information on potential financing routes and investors.
See above for reporting of VAT, income/corporation tax and employees PAYE to HMRC.
There are additional reporting obligations imposed on limited liability companies and limited liability partnerships. You will need to file at Companies House
Annual accounts statement
Annual confirmation statement: confirming name, registered number and office, directors and shareholders and any 'Persons of Significant Control' (direct or indirect) that can potentially influence business decisions and actions.
See Trading Structure for more information on the differences between sole trader, limited liability company and different partnerships.