There is a lot to think of when you make the leap from working in a large professional office, (or your background may be in industry), to setting up on your own.
Your leap may be from choice or something you unexpectedly have to face. You are used to being provided with all the equipment needed to perform your former duties, a mobile (or smartphone), an email account and a laptop, each of which miraculously synchronises with the others, you don’t know how, and you have possibly never thought to ask, it just happens.
Insurance; that is something you need for your car, that is if you don’t have a company car, and when you have a ‘taxing’ question, well, you just call a colleague on the internal telephone list or intranet.
For whatever reason you are considering setting up on your own account, the following pages are intended as an aide-mémoire of some of the things you should consider. We hope you find them useful.
- Your Business Structure
Are you setting up on your own or are you setting up jointly with others, or do you think you will introduce business associates in the future? Whichever it is you will need to think about your own business structure, after all, if you cannot get it right for yourself, how will you advise your clients of the future?
Once decided, just as it is important to set out your terms with clients, do write an agreement between you and your partners or shareholders, just in case things do not go as planned and in readiness for the day when you can close up those tax books for the last time and head off into retirement.
Given your exam knowledge and subsequent practical experience, these structures should be very familiar to you, and as this is not a technical reference, the comments on each are just an overview.
- Limited company
Requires a formal set up and annual accounts need to be drawn up in accordance with the Companies Act, and you will need to file an annual Return as well as the filing requirement of H M Revenue and Customs. Generally you will only need to pay tax once a year unless you fall into the payment on account regime. It is easy to introduce new shareholders; however it might be harder to raise working capital than with other structures, in the early years.
- Sole practitioner - unincorporated
The simplest of structures, no Companies Act requirements, no formal set up and no Annual Return to file and no filing fee to pay for. Tax will be a big factor to consider as you get into the payment on account regime and pay your taxes twice a year. So if this is your preference do try and put some money away to meet that first tax bill, exactly as you will be expecting your clients to do!
Again, no formal set up requirements, save for your own partnership agreement! However, you will have an extra Partnership Return to file!
- Limited Liability Partnership
A popular, recently new alternative to those structures above, and as regards the formalities, these are very similar to an ordinary partnership, but as always, check how the operational requirements may affect you.
- Setting up an Alternate
If you are setting up with others, thinking of what might happen if you are unable to work for any reason will probably only be a passing paragraph in your Partnership or shareholders agreement, but if you are setting up on your own, either as a Sole Trader or a Limited Company what will happen to your business if you are unable to work.
That may be your own priority to protect your business, but more importantly who will advise your clients, they may have accounts submission deadlines, tax payments that need calculating before paying or other pressing issueYour professional obligation is to look after your clients.
You will need to ensure that should you find it necessary to call on your alternate, that they have the capacity to take on your clients. Setting up an arrangement with a firm that has employees may be preferable to having an agreement with another Sole Trader, as, in the event you are unable to work at all, it may be easier for the alternate to accommodate the immediate requirement to service the needs of your clients.
- Use of VAT schemes
Cash flow will be a major consideration to choosing the Cash Accounting Scheme, if you expect to fall within the income limits, as you only have to pay over the Output tax charged on fees invoiced when you have been paid by your client, avoiding the situation of paying out cash before you have received it and you obtain instant bad debt relief should a client be unable to pay for whatever reason.
Another consideration is the Annual Accounting Scheme. You only have to complete one return and payments are made by direct debit smoothing out payments, though by not completing quarterly returns could lead you to fall behind with your own book keeping so making quarterly returns could might be a good discipline to keep you up-to-date.
Lastly, when looking at the mainstream VAT schemes, there is the Flat Rate Scheme, something to consider if you believe you will have limited input tax to recover. There are terms and conditions with all these schemes, but then, unless you specialise in an area of tax that doesn’t include VAT, you’ll know all about them and can apply them to your circumstances! In the event your own skill set is rusty on VAT it could be worth a meeting with a specialist.
For information regarding setting up a new business please click here.