Category: tax

I have previously blogged on how to Get Legal Clarity on what type of company you should form, and now James Quinn has kindly sent in a list of ten frequently asked questions (FAQs), when customers are setting up in business.

FAQs when considering the correct legal form for your business:

1.    Do I need to register a sole trader business and its name?
No, if you decide to establish as a sole trader then there is no requirement to register your business to bring it into existence, just start trading (the equivalent for companies is registration at Companies House).  However, you must inform HM Revenue & Customs of your self-employed status (information on the pros and cons of setting-up as a sole trader).

2.    How much does it cost?
The legal expenses involved in setting up a company are great – the cost of forming a standard limited company is low and the ongoing compliance costs are usually negligible.  The single largest expense of operating a company is accountants fees – companies are required to file accounts annually with Companies House.  Although technically you could prepare these accounts yourself, it would be inadvisable.

3.    Can I use my home address as the registered office of my company?
Yes, although this means that your home address will appear on the public register.

4.    Do I need more than one person to form a company?
No, you only need one person. Private limited companies can be formed with one director and one shareholder (who can be the same person).

5.    Will running my business as a sole trader gives me more flexibility?
Whilst it may be true that operating as a sole trader allows you to run your business more informally, that does not always equate to flexibility.  For example, operating as a company certainly allows you a great deal more flexibility when it comes to seeking investment or on the sale of your business.

6.   Does a company require a secretary?
No, since 8 April 2008 private limited companies no longer require a secretary (unless, exceptionally, their Articles of Association state otherwise).

7.    Do directors and shareholders have the same role?
This is not the case.  Directors are responsible for the ‘day to day’ running of the company; and shareholders ‘own’ the company and are primarily involved in major decisions concerning the company’s structure and constitution.  The directors and shareholders in smaller companies are often the same people, but it is important to remember that they have different roles and responsibilities depending on whether they are acting as a director or shareholder in relation to a particular decision.

8.    Is there a lot of paperwork associated with a company?
There is some additional paperwork compared to a sole trader business, such as filing an annual return and accounts (although all businesses should keep accounting records in any event).  A company also has to keep Company Registers of shareholders, directors, directors residential addresses, secretaries (if you have one) and charges but these are usually provided on formation and only require updating if there is a relevant change – for example if a director resigns.

9.    Do I need a Shareholders’ Agreement?
No, you are not legally obliged to enter into a shareholders’ agreement when forming a company.  However many businesses with more than one shareholder choose to do so in order to protect their investment in the company and to help resolve any disputes which may arise (Legal Clarity have published a free guide on shareholders agreements).

10.    Do I have to publicly disclose each director’s residential address?
No, since October 2009 directors, shareholders and other officers of the company may provide a ‘service address’ for the public register in place of their residential address.

You can get additional guidance from the Legal Clarity website:
What type of company?
A gentle introduction to private limited companies
Obligations after formation

On Tuesday I was invited to an HMRC partner conference and networking event at 100 Whitehall. The meeting actually took place in the Churchill room so was redolent of history.

The objective of the afternoon was to see how HMRC can work with partners to improve support for their SME (Small and Medium Sized Enterprises) customers.

The obvious question was why would they take this approach, and they were impressively frank and honest with their answers. It starts with their vision; “our customers will feel that the tax system is simple for them and even handed’.

Our Way
–    We will understand our customers and their needs
–    We will make it easy for customers to get things right
–    We are passionate in helping those who need it

I love the way they refer to tax payers as customers, and am amazed that they put in writing that they are passionate about helping them. This is not the kind of language one expects from a civil service department, and especially not the tax office. I suppose the real test is whether their customers see it the same way.

SME’s are a key customer group for HMRC. There are 4.8 million SME’ in the UK and they account for over 99% of all businesses in the country. They make up  over 50% of business turnover and employ some 14 million people. They collect or contribute over 40% of tax receipts.

The bottom line is that £6bn is lost from the Exchequer each year because of failure to take proper care in record-keeping. SME’s make up the bulk of that ‘tax gap’, but are often scared of, or unwilling to contact HMRC directly to address tax problems.  Whereas they are much more willing to talk to others such as the partners invited to the meeting. These ranged from business advisors, to professional bodies (such as the Federation of Master Builders), to accountants and even trade retailers such as Screwfix.

Stephen Banyard, HMRC’s Director of the Business Support Unit gave some fascinating information on the scale of their challenge:
– For instance £1.6 billion pounds of tax income is lost due to mistakes made by business.
– This despite the fact that HMRC receive 10 million phone calls a year from their customers.
– Seventy percent of companies use a tax agent to avoid dealing with the forms themselves.
The Tax deferral scheme introduced to help businesses make it through the recession has helped more than 242,000 companies, totalling nearly £4.23 billion.
– All tax related information will be moved onto the Business Link website,  but will allow content to be mashed-up on partners websites.

The key problem that HMRC face is the lack of record keeping from tax payers. To help address this they have partnered with Staples officer supplier. They have  produced jointly branded marketing materials which are displayed in Staples stores and on their website.

They are even sponsoring a Channel Five TV show starting on 10 March this year. The Business Inspector will be a troubleshooting series aiming to transform failing small companies, with the intention of to encourage good-record keeping.

Keeping records (pdf 57KB) Brings together the main record keeing guidance for easy reference by our customers and provides opportunity to mention the new penalties that maybe applicable.

Self-employed and partnerships

Form or record
A record of all sales and takings, including cash receipts. For example • till rolls • sales invoices • bank statements • paying-in slips • accounting records.
A record of all purchases and expenses, including cash purchases. For example: • receipts • purchase invoices • bank and credit card statements • cheque book stubs • accounting records.

Why
Allows you to quickly see what you are owed and accurately work out your total income. Allows you to quickly see what you have spent, how much you owe and what you can claim for tax purposes.

Further information
Self-employed: go to www.hmrc.gov.uk/sa/ rec-keep-self-emp.htm Partnerships: go to www.hmrc.gov.uk/sa/ rec-keep-part-partners.htm Phone Self Assessment Helpline 0845 900 0444