Accounting & Tax
This is not Strictly a Technical Topic in the Working Free sense – which deals with professional areas within which you might wish to develop your (new) professional practice – but getting your accounting, financial management and tax set up correctly and administered efficiently all the time is so fundamental and so important that we include this Section.
Getting good advice
When starting out as an Independent, you should establish a working association with an accountancy Practice – and – ideally- with a Partner within that Practice.
- You are looking for specific expertise in working with Independent Professionals/ Contractors/ SMEs.
- The areas you need to talk about are set out in this Section – which you should absorb before approaching a professional adviser. Some are, of course, more relevant/ important than others.
- Accountants do this for a living! They want a satisfactory return out of working with you – and you need to recognise this. You can get best value out of this by doing some of the work yourself – which means getting set up well – so that what you are looking for is guidance, overviews and expertise and intervention at key times. (TIP: Find out what they know about IR35! This, (written March 2020) is messy and unsatisfactory legislation which you are advised to find out about as much as possible. Accountants, generally, uneasy about IR35 . You need to be happy that they have good expertise in this area.)
Managing the financial and accounting affairs of your own business is a bit like being a conductor of an orchestra – you do not need to play or be able to play every instrument in the band – but you do need to know what each instrument does, when and how. One bum note can spoil the whole tune!
Introduction from Working Free
Anyone NOT in full time employment on a payroll has special responsibilities to manage their own Accounting and Tax matters – if operating on an independent basis. The format you choose is important – in terms of your own financial management, your tax obligations and adhering to relevant legal requirements. (Even if you are a full-time employee on someone’s payroll, it is still important to be aware of accounting and tax matters but the scope to change anything is negligible.)
This Section does not cover Personal Financial Planning, Raising Money/ Financing. Matters around Business Planning are not specifically covered but will be referred to when handling Accounting and Tax matters.
Note & Wealth Warning
Information contained in this section is necessarily generic and in a readable format which may not contain all details on the subject matter. In all matters accounting and tax the devil is in the detail and you should ensure you take individual advice specific to your circumstances before acting.
To start with…
…visit and absorb what HMRC says about Accounting, Tax and setting up in business. www.gov.uk/working-for-yourself/overview .
Quoting from their website, this includes:-
- If you start working for yourself, you’re classeified as a sole trader – even if you haven’t yet told HM Revenue and Customs (HMRC).
- You’ll need to register as self-employed to make sure you pay the correct Income Tax and National Insurance.
- Check what counts as self-employed if you’re not sure about your status. (Note IR35)
- You must follow certain rules on running and naming your business.
- There are other business structures apart from being a sole trader. If you set up a limited company, you’re not classed as self-employed but as both an owner and employee of your company. You’ll follow different rules on tax and National Insurance
Choose a legal structure for your business
- Sole trader
- Limited company
- ‘Ordinary’ business partnership
- Limited partnership and limited liability partnership
- Change your business structure
This structure will define your legal responsibilities and actual and potential liabilities, such as:
- the paperwork you must fill in to get started
- the taxes you’ll have to manage and pay
- how you can personally take the profit your business makes
- your personal responsibilities if your business makes a loss
How do you choose?
This will be based on 3 main factors:-
- Risk and personal liability
- The ‘rules’ of the industry you operate in
- Taxation considerations
Risk and Personal Liability
As a sole trader you will be personally liable for any debt or claim made against you. This means that your house or other property may be at risk. As a partner in a partnership you will have ‘joint and several’ liability for partnership debts and claims. This means that you could be liable for 100% (not just your proportion) of any claim if your partner(s) cannot afford to pay their share.
In addition to insurances that have to take out, you should consider taking out insurances to give protection against claims.
Rules of the Industry
If you are acting as a subcontractor in certain industries or for certain clients they may insist that you operate through a Limited Company. If you subcontract as an individual your client bears the risk of a challenge by HMRC as to your ‘status’ – if HMRC successfully challenge that you are in fact an employee and not self employed then your client will incur unexpected taxation and national insurance charges. Read as much as you can about IR35.
- Sole Traders, partnerships and Limited Liability partnerships are taxed in a similar way. You are liable to Income Taxon your share of the taxable profit on an ‘arising’ basis. This means that you pay tax on your whole profit share regardless of how much of that profit you actually draw from the business. National Insurance rates are also different compared to a Limited Company.
- A Limited Company pays corporation taxon its taxable profits. The rate of income tax and national insurance you pay is then determined by your ‘distribution policy’ i.e how you extract monies from the Company. A Limited Company allows you to control the timing of your income tax liabilities and in some cases reduce the marginal rate of tax you pay by efficient use of personal allowances and basic rate bands of tax. You can also involve family members to make use of their allowances.
If you incur a taxation loss there are different rules on how that loss can be relieved, dependant on the trading vehicle and your other circumstances.
It is not possible to give a generic answer as to which method of operation is the best for you, this will depend on many different factors, including the level of profitability and your personal and family circumstances.
- Employing staff for the first time
- Running a business partnership
- Set up a private limited company
- Set up as a sole trader
- Set up and run a limited liability partnership (LLP)
- Set up and run a limited partnership
- Setting up a social enterprise
- Business support on the phone and online
NOTE from Working Free
There is much mention of “self-employed” and “self-employment”, probably much more currently that in the past. This is a complex area from many perspectives, some covered elsewhere in this website. Care needs to be taken in choosing the right trading format. Mainly this is a business decision but, in recent years, it has become a Government/Political matter and also an HMRC one.
You do need a general understanding of the overall area, differentiating between those things you can handle yourself, those where you need guidance/ confirmation and those where you need to get someone one else to do it for you.
If you are OK with Spreadsheets – and your transactions are low in number (Ie; one fee invoice per month and half a dozen or less cost invoices) you can probably do it all yourself – as long as you can run a payroll – and account to HMRC for monthly PAYE and NI. If registered for VAT – and you ought to aim for this in terms of the size – now or in the future – of your professional Practice – you will need to complete and return your quarterly VAT Return. However, you might prefer to have this done for you – including your annual accounts and tax return – or, certainly, get your approach checked.
Anything beyond this, then you might outsource accounting support (for example see Sublime Accounting www.sublimeaccounting.co.uk ) or acquire some SME accounting software – see list aside
Some of the most popular SME accounting software systems are:-
Surveys available from:-
If your business is the right size and if you are knowledgeable enough, you can do the research, selection and implementation yourself – and if, of course, you can afford to sacrifice valuable charge out time to your clients……………… who may well not be there when you’ve got your new IT system up and running. Alternatively, you can pay someone to do it for you!
The links above to HMRC relate to start-ups and – usually – one person businesses. Many businesses expand beyond this point and, whilst most of the principles stay the same, some don’t and, certainly, the ways in which things work in practice can and do change.
Following this, is a comprehensive list of the areas that come into play or are likely to feature in managing the financial and accounting affairs of your professional practice/ small business. Some of them link to additional information. Those that don’t either don’t need to or, conversely, need to be approached through professional support.
You need to be careful in making judgements about what to do. Many decisions needing to be made will be on the fringes of your own knowledge and/or skill-sets or beyond.
- Basic Tax Rules
- Benefits in Kind
- Business Travel/ Subsistence/ Entertainment
- Capital Allowances (Annual Investment Allowance – AIA)
- Capital Allowances (General)
- Capital Allowances (Writing down)
- Capital Gains Tax
- Child Benefit Issues.
- Corporation Tax
- Distribution Policy for Limited Companies
- Income Tax
- Inheritance Tax
- Involving family – Shareholders/ Employees
- National Insurance and Rules
- Tax Residency and Domicile
- Taxable Profits
- Use of Home
- VAT – including Basic Rules
Managing the financial and accounting affairs of your own businesses is a bit like being a conductor of an orchestra – who do not need to play or be able to play every instrument in the band – but they do need to know what each bit does, when and how. One bum note spoils the whole tune!
Working Free Ltd cannot accept any responsibility for any loss or disadvantage that may arise out of reliance on any opinions, material or introductions made through this website and all those making use of these services should take appropriate business and legal advice and conduct appropriate due diligence before making any commitments. Information contained in this section is necessarily generic and in a readable format which does not contain all details on the subject matter. In all matters accounting and tax the devil is in the detail and you should ensure you take individual advice specific to your circumstances before acting.