The taxes you’ll pay on your earnings through a limited company are defined by how you’re taking money out of the business.
The business itself will pay corporation tax and then you as an individual will pay income tax. If you’re paid on payroll or you receive dividends, you declare this on your self-assessment return and pay tax in that way.
2. If I set up as a sole trader, does that mean that I can’t have a business name and I have to use my own name when doing my work?
As a sole trader, you can have a business name, but you need to be very clear that it’s you behind the business so that your customers and all suppliers know who they’re actually dealing with. So, on your invoices, you need to say, for example, “Joe Blog’s trading as…. whatever your business name is”.
3. At what point do I have to register and start charging for VAT?
You need to register for VAT when you hit the VAT threshold which at the moment (December 2018) is £85,000. This means that when your sales figure goes over £85,000 pounds for a 12-month rolling period you need to register with HMRC for VAT within 30 days of that happening.
4. What information do I need to include on my invoices to my customers?
There is some great guidance on this on HMRC’s website. It very clearly lists out what their expectations are. I’ve also written my own blog about this.
The main things you need include are:
- Your business name and address.
- Your customer’s business name and address.
- The date of the invoice.
- The actual supply date (which can be different to the date you are issuing the invoice).
- A list of the products or services that you have sold to the customer and the price of each of those things.
- The total amount that needs to be paid.
- The date that the invoice is due/needs to be paid by. This isn’t a legal requirement but you want to make sure that people are paying you within a certain timeframe. Standard terms are 30 days but depending on who your customer is, you might decide to tweak that. If they have a bad history for paying on time, you might want them to pay on receipt, within 14 days, or in advance with a deposit.
If you are VAT registered, there are additional things you need to include on your invoices. You can find out full details about this on HMRC’s website.
5. Is there an advantage to using accounting software and if so, which one should I use?
I would definitely recommend using accounting software. Lots of people start out writing invoices as Word documents and then keeping a list of them in a spreadsheet but this can easily become difficult to keep on top of. If you don’t use accounting software, the first thing you should make sure you do is to keep a list and sequentially order your invoices, starting from 1 and working upwards. This will help you keep track of the invoices that you’ve raised.
A risk of creating invoices in Word documents is that you can lose track of whose paid you for what. Particularly if you are frequently invoicing for the same amount. So, an accounting system can help you to stay on top of that.
You might have heard of something called ‘Making Tax Digital’. This is where HMRC are going to require you to start submitting tax returns online. They’re starting this by rolling out VAT returns for businesses that are over the VAT threshold. This means businesses of all types will need an accounting system in the future so, it’s worth getting one in place as soon as possible. As it will give you lots of time to practise and make sure you know how to use it for when you actually need to be using it.
Something that you can do with accounting software, is connect your bank feed. This means that all of your transactions will automatically be added into your accounting software. You can then match the transactions up to your invoices and receipts. It’s very clear and means you can’t miss anything.
In terms of software I’d recommend, the big names out there are QuickBooks, Free Agent, Xero and Sage One. A lot of them offer a 30-day free trial. So, you can try it out for a trial and just have a go at sending an invoice and see what you think about it.
6. What expenses can I repay myself from my business?
A sole trader and a partnership are both very similar in terms of which expenses you can claim for. There are different rules for limited companies. There is a great guide by FreeAgent that I refer to all the time for this, which I would recommend reading.
In general terms, if you’re spending money on something which is wholly and exclusively related to running your business, you should be able to claim it as an expense. So, if you are travelling to a meeting which is to do with your business, you can claim that mileage or the train fare. If you are buying some goods that you’re going to then sell on to your customers, then, of course, they’re a business expense, you can claim for those. If you’re paying for a co-working space, that’s a business expense, as it’s only for the sake of business.
The things that get tricky are meals. People often ask me about coffees and meals and there are different rules on things like this. If you’re a sole trader, it’s very difficult to claim meals as ‘subsistence’ because we all have to eat in life. So, it’s hard to justify that as a business expense unless you’re staying away from home overnight on business, in which case you can usually claim for reasonable costs.
As a limited company, you can occasionally claim some meals for your employees. But those meals have to be available for all of your employees so it’s tricky territory.
7. What tax returns will I need to complete?
If you’re a limited company, the limited company needs to prepare a corporation tax return at the end of its financial year. The dates of the financial year can be different to the tax year that sole traders and the rest of us are working to. But as an owner, a Director and a shareholder of a limited company, you will also need to prepare a self-assessment return for yourself, in addition to the corporation tax return.
Limited companies also need to submit their annual accounts to Companies House. You may want to ask an accountant to help you with this.
Self assessment tax returns
Self-assessment is relevant for everybody. If you’re in a partnership, the partnership needs to prepare a partnership return at the end of the year, which states what your profits are. These figures then feed into each partner’s self-assessment tax returns. If you’re a sole trader, your profits will feed into your self-assessment returns.
The financial year runs from 6th of April to the 5th of April each year. You file your self-assessment tax return on the 31st January the following year. For example, on the 5th of April ’18, you will have finished the financial year 2017-18. You then have until the 31st January 2019 to file your self-assessment tax return for the year 2017-18. So, there’s a bit of a lag. You have got quite a long time to do it.
How to get started
The first thing to do is to make sure you’ve registered with HMRC for self-assessment. If you’ve set up a limited company, they should have automatically registered you. If you have started working as a partnership or sole trader recently you need to register. HMRC will then send you login details for the Government Gateway website, which is where you submit your tax returns.