This article will give you some basic guidance for starting a business in the UK
Considering the fact that 99.9% of all the 5,82 million businesses registered in the UK are small and medium enterprises (SME), the level of business optimism is impressive. If you belong to those people who see Brexit as a new opportunity rather than a threat, you may consider opening your own new enterprise in Britain. This article will give you some basic guidance.
There are three distinct kinds of business entities you can register in the United Kingdom:
- Sole trader
- Limited company
Sole traders perform a kind of a one-man show. A single person registers as an entrepreneur and doesn’t have a working team of employees. Self-employed business people determine their own agenda and earn money with their own skills. This business type is the most popular in the UK. 3.5 million sole proprietorships constitute 59% of the total number of businesses. Moreover, even among the other listed types, the no-employee model takes the lead. 4.5 million of enterprises functioning in 2019 had no employees, and only 1.4 million employed someone.
Limited company is a legal entity separate from the person who runs and owns it, unlike sole proprietorship. Ltds usually have a director, legally responsible for running the business, and at least one shareholder. As far as liability is concerned, shareholder responsibility for company debt is limited to the amount invested in the company. 2 million of the registered actively trading companies make up 34% of all British businesses.
Partnership is the rarest form of business among British enterprises. There are only 405,000 partnerships in the UK which is 7% of all business entities. In this model, a few people cooperate to establish a startup. They have Joint and Several Liability regarding corporate losses and debts. Thus, if one partner engages in an activity which results in large debts, all partners, regardless of whether or not they had prior knowledge of the activities would be equally liable to cover any shortfall in funds from their personal assets. Profits are shared between partners according to the partnership agreement. A partner does not have to be an actual person. For example, a limited company counts as a ‘legal person’ and can also be a partner.
Nearly a fifth of all SMEs is operating in Construction. Other major business sectors are Wholesale and Retail Trade, as well as Repair. They account for 14% of all SME employment and just over a third of SME turnover.
Sole traders are taxed for both their personal tax liabilities and those incurred through work. Setting up your own business means you’ll have to register for Self Assessment and pay your own taxes. Newcomers to the business sphere can get some tax advice from numerous resources.
The tax for a limited company is managed separately to your personal liabilities. Limited companies pay corporation tax on their profits. The leftover profits are usually divided among their shareholders. Company directors are taxed on what they receive in remuneration. For taxation purposes, Ltds complete an annual tax return and send it to HMRC.
Business partnerships don’t pay tax as an entity. Instead, each partner pays tax on their share of partnership profits at current HMRC rates. This tax is calculated fully at income tax rates. Therefore, partnerships have much higher tax bills than company owners.
You’ll need to register your business for paying VAT and submitting VAT returns if it has a taxable turnover of over £85,000. 20% is the rate of VAT added to most goods and services. An additional benefit of this tax is that you can claim back the same 20% on the amounts you pay for goods, equipment and services that help you run your business. Hence, even if you don’t have a taxable turnover of £85,000, you might want to register for VAT anyway.
There’s no minimum capital requirement to start your own business in the UK. You’ll pay a certain fee at Companies House, but registering for tax is free. Most of the processes can be completed online, and they won’t usually take long.
The government website gives comprehensive information on all the registration details. There you can check which business type is right for you and find a step-by-step process guide.
The documents you’ll need to register your business include:
- National Insurance number (for sole traders and partners);
- Articles of Association, Memorandum of Association, statement of capital, Standard Industry Classification code, proof of identity for at least one director and at least one shareholder (for limited companies);
Registering your limited company with Companies House can be done online. It costs only £12 that can be paid by debit/credit card or Paypal account. The standard registration term is 24 hours. There are also postal registration routes and a ‘same day’ premium service provided at an increased fee.
Most companies register for Corporation Tax and PAYE as an employer at the same time as registering with Companies House. Even if you don’t do it at once, you must register within 3 months of starting to do business—this includes buying, selling, advertising, renting a property and employing someone—otherwise, you’ll get fined.
When registering, HMRC needs the following information:
- your company’s registration number
- the date you started to do business (your company’s first accounting period will start from this date)
- the date your annual accounts are made up to
Sole traders and partnerships need to be registered as self-employed.
- Firstly, they create a Government Gateway account.
- Next, register as self-employed for Self-Assessment tax. Choose your category – sole-trader, partnership or trust.
- Add the date you started trading, which is the day you started getting paid while working for yourself.
- Fill in some extra information, including your National Insurance number, home address, contact details and other information related to your new business model.
- You’ll be asked what sort of self-employed work you do. Specify it briefly.
- Check and submit.
- Once your application has been received, HMRC will send you a letter with a 10-digit Unique Taxpayer Reference (UTR), which you’ll use on tax payments. You can also add it to other taxes you’ll need to pay, such as VAT.
- Now you’re officially self-employed.
Make sure you register by 5 October in your business’s second tax year. You could be fined if you do not.
Finances & Insurance
Any business will need a separate business bank account. It is a must for a limited company as your business is legally separate from you. However, it is also preferred for other business types. It will save you a lot of time on sorting company expenses from the personal ones and preparing a tax report. Moreover, most lenders won’t consider you for business finance if they only have personal account information.
Having a separate business account also means that you can access features not available to personal customers. Like the knowledge and expertise of business banking managers, who can help you identify opportunities in the market and support your business growth. And many business accounts provide online tools that will enable you to better manage your business finances.
There are a number of insurance policies you need to consider when starting a business.
- Business cover for damage to equipment or any legal claims against you.
- Public liability will cover any mistake your business makes that could have injured a third person. Most shops, restaurants, hairdressers, builders, and tradesmen take out this insurance since they are in contact with members of the public daily.
- Employers’ liability insurance will protect employees if they’re injured because of an on-site accident or if they become ill due to their work conditions.
- Professional indemnity insurance is important if your business offers advice or professional services to other businesses, or if you deal with client data or intellectual property.
If you decide to employ people, you also have a duty to pay above minimum wage, prepare a contract of employment, and check the individual’s legal right to live and work in the UK. Check whether you need to automatically enroll your staff into a workplace pension scheme if you’re not sure what your pension responsibilities are.
As for the bookkeeping, you need to keep the records for each tax year for five years after the end of that tax year. These records include receipts or invoices registering both your income and related expenses.