A guide to accounts and tax for new businesses

Choosing your business structure 

The first step in your exciting new journey is to decide which business structure is best for your start-up: 

Limited company – a formal structure registered with Companies House. A company is a separate entity to its owners, limiting liability. There are three classifications for company size – dependent on turnover, balance sheet total and average number of employees. They are: 

• Micro 
• Small 
• Medium 
• Large 

The accounting requirements and filing rules will depend on the size of your company. 

Sole trader – an easy to establish business structure. The owner is solely responsible and liable for any debts. 

Partnership – working in partnership means you and your business partners both take a share of the profits and liability. You should have a partnership agreement in place in case any disagreements arise. As well as general partnerships, there are also Limited Liability partnerships (LLP) and limited partnerships. 

Our guide to trading as a sole trader or limited company may be useful when deciding business structure. 

Register with HMRC 

Once you start trading, you must register with HM Revenue & Customs (HMRC). Your registration will be different depending on your business structure. 

Sole-traders and general partnerships will need to register with HMRC using the appropriate service. Limited liability partnerships and limited companies will need to register with Companies House as well. They are both required to file annual accounts each year. 

Once registered, HMRC will give your business a Unique Tax Reference (UTR). You will need this to file your tax return (self-assessment or company). 

You may also need to register for VAT or Pay As You Earn (PAYE) and the registration process can be relatively simple. 

Managing your accounts 

Bookkeeping 

Bookkeeping is the process of recording business transactions. The recording of these should be frequent and kept up to date. Once the financial year is complete, we use these 'books' to create accounts. 

Make sure your bookkeeping is complete and you reconcile your bank account. This means matching your bookkeeping records to your bank statements. 

Accounts 

You should start your accounting period on the first day of trade. This may be the first day you receive money for services or goods you are providing. 

If your business is a limited company, your first accounting year will start on the day you incorporate. The year will end 12 months later, at the end of the month. For example, incorporation on 12th March 2024 will set the company’s year-end as 31st March 2025. 

For unincorporated businesses, from 1st April 2024, their year-end will be in line with the tax year. 

You can prepare your accounts under the cash basis. This means that you report income and expenses in your accounts. The cash basis is the default accounting method from April 2024. What type of accounts you prepare will depend one your business structure and size. 

Plans, budgeting, forecasting and cashflow 

For your business to succeed it is important to put a strategy in place. Firstly, when you are starting a business it is important to think forward, set goals and make plans on how to achieve those goals. Goals should always be: 

Specific – clear direction and include who, what, when, where 
Measurable – use quantity, size, amount or duration so you can assess the performance 
Achievable – make sure it is attainable, you have the skills and attitude to succeed 
Relevant – ensure you goal meets your vision and longer term plan 
Timely – include a specific deadline or time period 

It is good to look back and review how your goals are going, whether this is annual or six-monthly. Look at what you set how to achieve, what actually happened and why. It may be that your goals changed, or you achieved some and not all. You can assess whether you are still on track to meet your goals or whether you need to something else to make it happen.  

Record keeping 

The best way to keep your records is to use online software, from the start it is important for you to embrace technology. It is likely that over the next few years you will need to comply with Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA). You can find more information on how long you need to keep your business records here. 

Navigating taxes 

Income tax for sole traders and partnerships 

Once you prepare your accounts, you, or your accountant, should have all you need to complete your tax return. You need to prepare a self-assessment tax return (SATR) and submit this to HMRC. Partners of the partnership will also need to complete a SATR. The usual deadline for submission on an online SATR is 31st January. 

Partnerships do not actually pay tax, it is the individual partners who pay tax on their share of profits. 

The income tax rate you pay will depend on the level of your earnings and which tax rate bracket you fall in to. 

The tax year runs to 5th April, and your tax return will be completed to this date. Where your accounting year does not match the tax year, you will need to consider the basis period rules. Your accountant will be able to explain these rules, and the changes, to you. 

Corporation tax for limited companies 

Once your company accounts are complete, you, or your accountant, can prepare your company tax return. You must submit the tax return to HMRC 12 months after the end of the accounting period. Businesses must pay the corporation tax nine months and one day after the end of the accounting period. The corporation tax rate payable will depend on the size of your company. 

National Insurance Contributions 

Individuals pay National Insurance Contributions (NIC) to qualify for certain benefits and the state pension. If you are aged 16 or over, self-employed and earning above the personal allowance or employed and earning above the ‘primary threshold’ you must pay NIC. 

There are four types of NIC: class 1, class 2, class 3, and class 4. You can find more information about each type and their rates in this article. 

Employed individuals pay class 1 NIC through their pay which is calculated and paid direct to HMRC by their employer.  

Self-employed individuals may be liable to both class 2 and class 4 NIC and this is paid along with their income tax through their tax return. 

Individuals not working, and wanting to complete their NI record so they are due a full state pension and other benefits can pay, class 3 NIC. 

VAT 

Whether you are just starting out or you have been trading for a while, it is important to consider whether you need to register for VAT.  

You must be aware of the two tests, including whether your annual turnover has exceeded the VAT threshold or whether you expect to exceed the threshold in the next 30 days. If you register late, you will have to pay VAT on sales since the date you should have registered. You may also need to pay a penalty. 

Once registered, you will need to submit regular VAT returns digitally and pay any VAT liability over to HMRC. It is important to understand VAT codes and a bookkeeper may be able to help with ensuring your reporting is correct. 

Payroll and employees 

If you are looking to recruit someone, or already have, you need to consider your responsibilities as an employer. If you decide to run the payroll yourself you must register for PAYE, calculate pay for employees and pay and report deductions to HMRC. As a busy business owner, you can efficiently outsource payroll to save time. 

Payroll can be simple, but it can get complicated when you need to think about sick and parental pay. 

Legal obligations and compliance 

As well as considering accounts and tax, you must also be aware of other compliance. This includes data protection, GDPR and health and safety. Seek help and advice where you need it. 

Onwards and upwards 

Now you are equipped with fundamentals, you are in the best position to grow and succeed. The journey may be rocky having a trusted professional to support you on the ride is essential. 

How we can help 

TaxAssist Accountants are experienced business advisors who can help you with your business from the start. By working with our teams from the first step we can build that important relationship with you to work together to achieve your goals. Let us take care of the compliance. Call TaxAssist Accountants today on 01233 771926 or use our online contact form. 

FAQs 

Do I need a business bank account? 

Sole traders do not have to have a business bank account, but it may be useful for keeping business and personal records separate. Partnerships and limited companies must have a business bank account in the business’ name. 

How do I do accounting for my business? 

Accounting for your business starts with the bookkeeping and record keeping. Make sure you are recording and keeping all business documentation in a cloud accounting package. When it comes to the end of the year, you need to start thinking about accounts and tax returns and instructing a good accountant to do these can be beneficial as they have all the knowledge and skills. 

How do I register my business? 

You can register your business with HMRC and Companies House online for most services, including self-assessment, VAT, PAYE and corporation tax. If you need assistance, speak to an experienced accountant who can ensure this is completed correctly. 

What is the difference between a sole trader and a limited company? 

Different business structures have pros and cons, which include ease of set up, filing requirements and liability. You can learn about the pros and cons and differences between a sole trader and limited company here. 

Can I claim expenses for my home office? 

If you are running your business from home, you can claim some of your home expenses against taxable income. This includes the simplified use of home claim which is a flat rate based on hours worked at home. Or you can claim a proportion of home expenses based on how much of your home is used and how often. Find more information click here. 

What should I do if I make a mistake on my tax return? 

If you make a mistake on your self-assessment tax return, you should speak to your accountant and you may want to discuss it with HMRC to determine whether you need to amend your tax return.  

If you do need to amend your tax return, and it is within 12 months of the self-assessment deadline you can change your tax return online. If you need to amend a tax return and this deadline has passed you must write to HMRC setting out the changes and implication to your tax liability. 

Date published 4 Mar 2024 | Last updated 4 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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