The new calendar year is often a time when people seek a fresh start and one way is to put into place the business idea that you’ve always had. You may have the product, may have researched your market and may have a plan to make money.
But, beware, because not every member of the ranks of the self employed will make a success of their venture, and if you are thinking about joining them there are some fundamental financial issues you should consider before setting out.
It is vital to plan carefully from the beginning and to plan realistic cash flow in particular.
Draw up a business plan and work out exactly how much you will need to get your venture off the ground. Most problems with start ups occur because they run out of money.
It is essential before you start the business to work out how much money you need to run and develop your business in the first couple of years. If trade is quiet early on, you’ll still need to live, and if you trade on credit you may have to wait for the cash to come in.
Financial help which might be available for start ups, visit www.business.wales.gov.uk/ for more information.
Whether you are setting up as a sole trader or a limited company, you have to notify HM Revenue & Customs within three months of becoming self-employed or you could be fined.
If you are self-employed, you are responsible for paying your own tax and national insurance contributions. If you set up as a sole trader, which means your business is owned and run by you alone, you will pay income tax through self-assessment. The submission of your tax return and the first payment is due on the 31 January following the end of the tax year. This could mean there will be up to 20 months before the completion of your first year and the payment of the tax, so make sure you are putting away enough to cover what you will owe. You will also have to pay national insurance contributions.
If you have set up as a limited company, which means your personal assets will be protected if the business runs into financial difficulties, you will have to file accounts and annual returns at Companies House and pay corporation tax each year.
Also, you must register for value added tax (VAT) if your turnover is more than the current registration threshold of £79,000. This applies whether you are a sole trader, limited company or partnership.
Insurance: you may need additional cover if you are running your business at home, as your household insurance is only designed to cover your personal effects.
Pensions: Think about how you will provide for retirement. An employed position often has other benefits such as pensions and life and health insurance, which will now become your responsibility.
Employing people: If decide to take on employees, find out about your legal responsibilities as an employer, including things like pay, tax and insurance, before you start employing staff. You’ll need to register as an employer with HMRC if you want to employ people, even if you’re a sole trader.
This may sound all very confusing, so unless your tax affairs are very simple or you have some accounting experience, it is probably a good move to engage the services of a professional accountant.
Ian Janes FCCA is a Director at Eye For Finance, Abergavenny based Financial Management Consultants and Accountants
[NB- The above feature contains general, not specific, advice. Individual circumstances may differ]