Start a business knowing tax, VAT, PAYE, N.I.

Andrew Shaw, tax partner at top twenty accountancy firm, Kingston Smith LLP, offers advice on putting the essential tax foundations in place when you start your business.

The first step is to consider the legal structure your business will take. This will define your own responsibilities to everyone who is associated with the business - customers, suppliers and employees.

The most appropriate structure depends on a host of issues and is one on which professional advice should be sought.

Tax and NI

Self-employed

• Register with HM Revenue & Customs (HMRC) by completing a form CWF 1, available from the HMRC website.

• Arrange to pay your Class 2 National Insurance contributions.

• Prepare annual accounts which will form the basis of the profits to be included on your personal Self Assessment Tax Return.

• Remember to set aside money to meet the tax bill. A sole trader is assessed for tax and national insurance on the whole of the business' profits each year, whether or not the money is drawn out of the business.

Employed

• Where you (perhaps with others) have formed a limited company, you will be an employee of the company. Your income from the company will be either by way of salary and/or dividends.

• For wages and salaries of any business paid to employees, arrangements will need to be made to account for the tax and national insurance liabilities to HMRC by way of a PAYE scheme - see below.

PAYE

• Where an employer takes on employees, irrespective of the legal structure of the entity, a PAYE scheme is required.

• This enables the employer to calculate and account for the tax and National Insurance liabilities that arise. PAYE has to be accounted for monthly and remitted to HMRC.

VAT

• Where a business' turnover exceeds £67,000 per annum, VAT registration is mandatory. This means you charge your customers/clients VAT (at 17.5%) on the value of the goods or services that you provide.

• You cannot charge this amount until you have your VAT registration number. You can reclaim the VAT you have been charged on your business purchases.

• There are various rules concerning the information that needs to appear on a VAT invoice. Details are available on the HMRC website.

• Every quarter HMRC will send you a form to enable you to account for your VAT.The difference between the VAT you have charged and the VAT you have incurred is remitted (or reclaimed) by the end of the month following the end of the quarter.

All businesses are required to maintain business records and accounts will be required by HMRC for tax purposes, as well as Companies House (in the case of a Limited Company or Limited Liability Partnership). The accounts of Limited Liability entities are thus on public record.

As a general rule, failure to comply with any statutory requirement meets with the imposition of penalties.

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By Andrew Shaw  on   Jul 12,2008

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Keywords

start-up   tax    VAT    PAYE    National Insurance      

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