In the second part of our two article series, Adam Bernstein examines further structuring options for tradespeople to consider when starting a new business.
Starting up and running a business can be incredibly rewarding, but finding the right form to trade under while meeting regulatory requirements can be off-putting. Last issue we looked at sole traderships and limited companies, but there is also the option of operating as a partnership.
Despite being an alternative, partnerships are only suitable for those with colleagues they get on well with. They are similar to a sole tradership in that it allows a business to run without the formalities of a company.
By definition of being in business with others, it’s critical that there’s a partnership document to determine ownership of the business, how profits (and losses) are divided up, and what happens if a partner wants to leave. Each partner needs to register with HMRC as self-employed. Furthermore, one partner will be responsible for sending the partnership return to HMRC.
It’s important to note that partners are equally liable for any debts the business has, including those that another partner has incurred.
The tax rates listed for the sole tradership [Ed: see p62 of HVP March] will apply to each partner individually.
Limited liability partnership
A variation on a theme is the limited liability partnership (LLP). Introduced in 2000, they are used by those who want the flexibility of a partnership (in terms of tax and membership), while limiting each member’s liability to whatever they’ve invested in the partnership. LLPs are registered at Companies House and carry more onerous reporting obligations than standard partnerships. They also need a members’ agreement noting the share of the profit each member should receive.
While there can be any number of partners in an LLP, at least two have to be responsible for filing annual accounts. The tax advantages are not the same as for an incorporated business. This means that each partner’s share of profit is taxed as income and each has to register with HMRC as self-employed; there is no ability to structure income to avoid paying tax.
The tax rates listed for the sole tradership apply to each partner individually.
With the forms of business outlined, there are matters such tax and VAT to consider.
As it stands at present, if turnover is more than £85,000, registering for VAT is compulsory. If unregistered, but likely to breach that limit at any point over the next 12 months, the firm must register at www.gov.uk/vat-registration.
VAT is only reclaimable by businesses, so thought should be given to whether to register for VAT as prices will effectively rise by 20%. But firms providing services to business clients may want to register; while they’ll charge VAT, which clients can recover, the business can recover VAT on its purchases.
There are VAT accounting schemes that may make administration easier. The cash accounting scheme means firms only pay and reclaim VAT on the cash which has actually flown through the business. The Flat Rate Scheme offers much less administrative complexity – businesses generally cannot reclaim VAT but, in exchange, pay a lower rate – a percentage of turnover – of VAT instead of the 20% they charge.
A fly in the ointment is HMRC’s Making Tax Digital which, from April 2019, will require VAT to be reported online automatically and records to be kept in a certain way. More detail can be found on the gov.uk website.
Taking on employees
Taking on staff places obligations on employers such as observing anti-discrimination legislation, ensuring someone has the right to work in the UK, that staff are paid correctly, and are protected. A good solicitor and advice from acas.org.uk, a government organisation, will help as will searching the government’s own website at www.gov.uk/browse/employing-people.
It’s worth noting that having staff means dealing with PAYE. HMRC has guidance on the subject, which also involves complying with national minimum wage legislation. See www.gov.uk/topic/business-tax/paye.
Construction Industry Scheme
And then there’s the Construction Industry Scheme where contractors deduct money from a subcontractor’s payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance. Contractors must register for the scheme, but subcontractors don’t have to – deductions are taken from their payments at a higher rate if they’re not registered. See www.gov.uk/what-you-must-do-as-a-cis-contractor.
Business bank account
A sole trader can keep business and personal monies together as both are taxed as one. But it’s better to keep business records and finances separate from personal affairs as firms are obliged to keep clear and accurate records of all business transactions.
Business banks accounts can be low cost, or close to free. Many high street banks will give start-ups 12-24 months of free banking.
But there’s more to banking than cost – service, facilities, and availability of credit and branch locations are important too.
Lastly, the world is litigious, and businesses need protection in the form of public liability insurance; employer’s liability insurance with a minimum of £5m of cover; and professional indemnity insurance to protect against being sued for poor work or advice.
There’s also a need to insure premises and equipment, and some income protection insurance which pays out on a defined illness.
There’s more to be said on this which can be read at www.gocompare.com/business-insurance/business-insurance-explained.
Whichever route is taken, it’s imperative that it’s chosen for the right reasons. Tax is important but shouldn’t be the main driver – it’s just as important to consider the extra costs, administration, and asset protection that follow from being incorporated versus the flexibility and freedom that comes with being a sole trader.
Taking good advice should be at the core of the decision-making process.
To read the first article in this series, please click here.