Understanding your finances is vital if you want to achieve success your new business. It’s important for staying on top of your cashflow, paying your taxes, securing funding and planning for growth.
Accounting can be overwhelming for new business start-ups. Using an accountant to look after your finances can put your business on the road to success.
Do start-ups need accountants?
Accountants are typically a business owners’ most trusted adviser.
They can support you in developing your business idea and raising finance, as well as helping you select your business trading structure. You have various options and an accountant can help you select the option that is best for you.
Business owners have lots of regulations to comply with and an accountant can assist. One of the key ones is paying the right amount of tax to avoid penalties. An accountant can help you do that as well as alerting you to any tax saving opportunities.
Selecting an accountant who understands the market you’re operating in can be highly beneficial. They can keep track of your progress and advise on financial growth strategies.
Business structure: impact on your accounts
Choosing the right trading structure is important for taking advantage of tax saving opportunities and/or protecting yourself from the risks that can be involved in starting a new business.
Your main options are sole trader, partnership, limited liability partnership or limited company.
For sole traders, the business owner and the business is treated as one legal entity which means you take on all the risks and all the responsibility for the business’ debts.
A partnership is similar to a sole trader but it’s for more than one person. Each partner is individually taxed on their share of the profits and pays Income Tax and National Insurance.
A Limited Liability Partnership (LLP) is taxed in the same way as a partnership, but partners limit their personal risk by capping their liability at the maximum of their contribution into the LLP. An LLP is also required to file accounts with Companies House.
A limited company is legally separate from shareholders and directors, so you are not personally liable for any losses made by the business. Limited companies often encourage more confidence amongst suppliers and customers.
Limited companies must comply with much more paperwork than sole traders and partnerships. This includes registering with Companies House, filing company accounts and paying Corporation Tax. Limited company directors can make tax savings by planning their remuneration.
Limited companies are required to file annual accounts with Companies House. For this, they must follow financial reporting standards (FRS). For small companies, there’s FR105 and FR1021a.
For most small businesses FRS 105 is sufficient. FRS 105 is for businesses that qualify as a micro-entity and choose to apply the micro-entities regime. They must meet at least two of following:
- Turnover of no more than £632,000
- Balance sheet of no more than £316,000
- No more than 10 employees
In some circumstances, FRS 1021a might be required. It requires more disclosures in the financial statements than FR105 and could be needed if a business is applying for funding.
An accountant can help you file your accounts using the correct financial reporting standard.
What accountants can offer business start-ups
There are various useful services that accountants can provide to startups. These include:
A business plan is a document that outlines your business’ objectives, market potential, financial forecasts and marketing and sales strategies. You need a business plan if you want to secure a loan or investment.
A good accountant will understand exactly what information should be included in a business plan and how it should be presented. This will increase your chances of success when seeking funding for your start-up.
Bookkeeping is the recording of financial transactions made by a business. It’s an essential task because it helps you track how much money is coming into your start-up company and how much you’re spending.
Effective bookkeeping means you can monitor your cashflow, so you know you have enough money to pay for things like stock, suppliers and taxes.
Self-employed individuals and most limited company directors need to declare their income to HM Revenue & Customs (HMRC) in an annual Self Assessment tax return. You may be able to reduce your tax bill by deducting certain business expenses. This means you need to be organised with your bookkeeping.
It is possible to do your own bookkeeping, but this can be risky as you need to be 100% accurate with your records. Mistakes can lead to penalties from HMRC.
Using an external bookkeeping service can save you time and money as it reduces the chances of human error, improves your efficiency and allow you to focus on growing your business.
The types and amount of tax you pay differ depending on the legal structure. An accountant can help to ensure you comply with the appropriate tax rules and take advantage of any tax saving opportunities.
Areas of tax an accountant can help start-ups with include:
While salary is a reward for effort, shareholders in a company are entitled to a reward for investment. After paying your directors remuneration, any surplus funds can be drawn as dividends. These can only be paid from profits after corporation tax, so you do need to have reasonable interim/ management accounts available in order to decide whether or not the company can legally declare a dividend.
- Extracting profit as a dividend can lead to tax advantages.
Dividends must be declared on tax returns so it’s important to keep accurate records of how much is paid to shareholders. If you fail to comply, you could face an investigation by HMRC which results in the need to pay financial penalties.
Dividends need careful planning to maximise the tax advantages and comply with regulations. An accountant can provide expert advice on how to do so.
National Insurance (NI) is paid by employers, employees and self-employed individuals.
Your employees will fit under a certain category, known as ‘classes,’ for their National Insurance Contributions (NICs). You need to understand these classes to calculate how much you must pay.
As a self-employed individual, you must pay National Insurance if your profits are £6,725 or more a year. This is in respect of the 2022/23 tax year.
If your start-up business employs staff, Tax Assist Accountants can connect you with the Employmentor employment law service to ensure you comply with NIC regulations.
An accountant can help self-employed individuals understand their NI obligations and provide a bookkeeping service, so you track your cashflow to ensure you have enough money to pay your bills.
When your business’ turnover reaches a certain level, you are required to register for value added tax (VAT). There might also be tax saving advantages for registering earlier than that.
An accountant can advise on your best options and prepare the VAT returns that VAT-registered businesses must file.
Submitting VAT returns and payments late or with errors can lead to penalties. Employing an accountant will ensure you don’t miss deadlines or make errors.
Once your start-up business begins to employ staff, you have more rules to comply with. These requirements can feel confusing and time consuming. An accountant will free you up from the day-to-day tasks needed when employing staff.
When you take on employees, you need to comply with payroll regulations including operating PAYE. An accountant can oversee your payroll processes, costs, calculations and deadlines.
There are several other employment rules covering areas such as employment contracts, parental leave and dismissal. Many new employers lack the knowledge to effectively navigate what can seem like a legal minefield.
TaxAssist Accountants can put you in touch with the Employmentor employment law service. It provides direct contact to employment law experts and resources to help you comply with regulations.
Under auto enrolment regulations, employers are required to automatically enrol certain staff into a workplace pension scheme and make contributions towards it. If you fail to comply, you may face a fine.
Using an accountant to administer your workplace pension scheme will ensure your business meets its legal obligations.
Many start-ups first register as a sole trader and then decide to switch to incorporating as a limited company. There are various reasons they might do this such as lowering their tax bill or protecting their brand name as the business grows.
Extra responsibilities come into play when moving from a sole trader to a limited company so it’s important you understand the implications. An accountant can talk you through it and help you make the switch.
Need an accountant for your start-up?
Date published 25 Feb 2022 | Last updated 25 Feb 2022This 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.