August 6th, 2011
The advantages of owning your own business are obvious but so too are the risks.
A franchisee is taking less of a risk than starting his or her own business because they are operating under an established and proven business model and supplying or producing a tested brand name.
Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s name, trade marks and business system in return for an initial payment and further regular payments.
Each business outlet is owned and managed by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.
Advantages
1 it is your own business
2 someone else has already had the bright idea and tested it too
3 there will often be a familiar brand name which should have existing customer loyalty
4 there may be a national advertising campaign
5 some franchisors offer training in selling and other business skills
6 some franchisors may be able to help secure funding for your investment as well as discounted bulk buy supplies.
Disadvantages
1 it is not always easy to evaluate the quality of a franchise especially if it is relatively new
2 extensive enquiries may be required to ensure a franchise is strong
3 part of your annual profits will have to be paid to the franchisor by way of fee
4 the rights of the franchisor, for example to inspect your premises and records and dictate certain methods of operation, may seem restrictive
5 should the franchisor fail to maintain the brand name or meet other commitments there may be very little you can do about it.
The Costs
The franchisor receives an initial fee from the franchisee together with on-going management service fees. These will be based on a percentage of annual turnover or mark-ups on supplies and can vary enormously from business to business. In return, the franchisor has an obligation to support the franchise network with training, product development, advertising, promotional activities and a specialist range of management services.
Raising money to finance the purchase of a franchise is just like raising money to start any business. All of the major banks have specialist franchise departments. You may need to watch out for hidden costs of financing. These could arise if the franchisor obtains a commission on introducing you to a business providing finance or a leasing company for example. Of course these only represent true costs if you could have obtained the finance cheaper elsewhere.
Choosing a Franchise
There are many factors you may need to take into account when choosing a franchise. Consider the following:
1 your own strengths and weaknesses – make sure they are compatible with the franchise
2 thoroughly investigate the business you are planning to buy
3 research the local competition and make sure there is room for your business
4 give legal contracts careful consideration
5 last but not least, talk to us about the financial projections for the business – cash flow, working capital needs and profit projections will form the core of your business plan.
The Contract
The contract will form the basis of all franchise agreements. It should ensure that you run your business along the lines set out by the franchisor. The following areas should be covered:
1 the name and nature of the business
2 the geographical territory where the franchisee can use the name
3 how long the franchise will run
4 the fees (both initial and on-going) that will be charged
5 what happens if the franchisee wants to sell or either the franchisee or franchisor want to end the agreement
6 the terms of the relationship, specifically that the franchisor will provide training, advertising etc and that the franchisee will abide by the rules laid down by the franchisor.
Posted in Business Planning, Business start up, Business Types, finance, Franchise Specific, franchising, Legal, Miscellaneous, owning a company, Starting in Business, types of business | | Comments:
Comments Off
July 28th, 2011
Use of home as an office
Many people find themselves working from home, either as an employee dividing their working life between their employer’s office and working from home or the self employed using their home as the principle place of business.
In either case working at home ultimately increases some of the household costs and it’s not unreasonable to consider that the increase is largely the result of the employment or the business.
HMRC recognize the legitimacy of making such a claim and provided that you have set aside a fixed area in the house for work based activities then you will be able to claim a tax deduction to reflect these additional costs.
You do not need to dedicate an entire room for business, but there ought to be at least some fixed area within one room that is set aside for business or work based activities.
There is a general principle that tax deductible expenses should only occur because of the business itself, the term wholly and exclusively for the purpose of the business is often quoted, but in practice this is often very difficult when looking at household expenditure.
HM Revenue and Customs also recognize this difficulty and have introduced a flat £3 per week (£156 per annum) that can be claimed; this is often a practical solution to apply in a majority of cases.
But, if you are running a business and your home in the principle place of business, then the additional costs can be much higher.
For example you may have set aside an entire room as an office, even built a room in the loft or use the garage to store materials.
HMRC don’t offer a higher flat rate to reflect these circumstances but do permit a more specific calculation based on the proportion of the home used for business purposes.
The calculation is not difficult but can be time consuming.
The starting point is to add up the variable costs incurred in the year, this would include gas, electricity, heating oil, mortgage interest or rent, council tax and buildings insurance.
If you identify any costs that are specifically business they should be claimed in full and therefore excluded from the calculation, as should any costs that are specifically domestic.
It is worth explaining that some costs are of a capital nature and you must be careful when trying to include capital costs such as loft conversions, building an office extension or converting the garage in the claim for tax relief.
Remember that normally any gain in the value of your main home is tax free; and you may jeopardize that exemption if you start including capital costs. You may also create a taxable benefit in kind if your employer (or own company) pays for the capital cost.
One other factor you may wish to consider – your local authority may consider your property partly as business premises where large areas are specifically set aside and assess the property partially to business rates – note that business rates are much higher than council tax!
Once you have established the costs to be included the next stage is to calculate the proportion of the house that is used for business purposes. The most obvious way to do this is calculate the total floor area and divide that by the floor area used by the business to establish a proportion for business use.
Once you have calculated the proportion it only needs to be reassessed when circumstances change.
Apply the proportion to the variable costs established above and add any specific business costs to determine the Use of Home.
Posted in Benefits, Benefits in kind, busines rates, business expenses, Business Types, Employment, expenses, Guidance notes, homeworking, P11D, P9D, Personal Tax, Starting in Business, use of home, working from home, Xebox | | Comments:
Comments Off
July 28th, 2011
To put your business on a proper footing with HM Revenue & Customs (HMRC) and other authorities, you need to make sure that it has the right legal structure. It’s worth thinking carefully about which structure best suits the way that you do business, as this will affect the tax and National Insurance that you pay, the records and accounts that you have to keep and your financial liability if the business runs into trouble.
There are several structures to choose from, depending on your situation.
Self-employment
To be a sole trader, a partner, or a member of a limited liability partnership as an individual rather than a company, you must be self-employed – and registered as such with HM Revenue & Customs (HMRC).
This does not mean that you can’t also do other work as an employee, but the work you do for your own business must be done on a self-employed basis.
If you are not sure whether your work counts as self-employment, ask yourself these questions:
- Do you present your clients with invoices for the work that you do for them?
- Do you carry out work for a number of clients?
- Are you responsible for the losses of your business as well as taking the profits?
- Can you hire other people on your own terms to do the work that you have taken on?
- Do you have control over what work has to be done, how the work has to be done and the time and place where the work has to be done?
- Have you invested your own money in your business or partnership?
- Do you provide any major items of equipment which are a fundamental requirement of the work you carry out?
- Do you have to correct unsatisfactory work in your own time and at your own expense?
If you can answer ‘yes’ to most of these questions then you are probably self-employed already, and should let HMRC know this immediately if you have not already done so.
You may be fined £100 if you fail to register within three months of becoming self-employed. There is no fee for registration.
If you answer ‘no’ to most of the questions above, you will normally be an employee.
Sole trader
Being a sole trader is the simplest way to run a business – it does not involve paying any registration fees, keeping records and accounts is straightforward, and you get to keep all the profits.
However, you are personally liable for any debts that your business runs up, which make this a risky option for businesses that need a lot of investment.
You need to register as self-employed with HM Revenue & Customs (HMRC) and will probably have to notify HMRC that you will have to submit Self Assessment Tax Returns
- As you are self-employed, your profits are taxed as income.
- You also need to pay fixed-rate Class 2 and Class 4 National Insurance contributions on your profits.
Class 2 is normally paid by direct debit and is a fixed weekly amount. Class 4 is variable and a percentage based on profits.
Partnership
In a partnership, two or more people share the risks, costs and responsibilities of being in business. Each partner is self-employed and takes a share of the profits. Usually, each partner shares in the decision-making and is personally responsible for any debts that the business runs up.
Unlike a limited company, a partnership has no legal existence distinct from the partners themselves. If one of the partners resigns, dies or goes bankrupt, the partnership must be dissolved – although the business can still continue.
A partnership is a relatively simple and flexible way for two or more people to own and run a business together. However, partners do not enjoy any protection if the business fails.
Each partner needs to register as self-employed and will be responsible for compiling Self Assessment Tax Return.
The partnership itself is also required to file a Self Assessment Tax return
It’s a good idea to draw up a written partnership agreement.
As partners are self-employed, they are taxed on their share of the profits. Each partner also needs to pay Class 2 and Class 4 National Insurance contributions.
Creditors can claim a partner’s personal assets to pay off any debts – even those debts caused by other partners. In England, Wales and Northern Ireland, partners are jointly liable for debts owed by the partnership and so are equally responsible for paying off the whole debt. They are not severally liable, which would mean each partner is responsible for paying off the entire debt.
Partners in Scotland are both jointly and severally liable.
However, if a partner leaves the partnership, the remaining partners may be liable for the entire debt of the partnership. Also, a creditor may choose to pursue any of the partners for the full debt owed in the case of insolvency.
Limited liability partnership
A limited liability partnership (LLP) is similar to an ordinary partnership – in that a number of individuals or limited companies share in the risks, costs, responsibilities and profits of the business.
The difference is that liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. This means that members have some protection if the business runs into trouble.
Each member needs to register as self-employed
There must be a minimum of two designated members – the law places extra responsibilities on them. If the LLP reduces in number and there are fewer than two designated members then every member is deemed to be a designated member.
LLPs must register at Companies House.
It’s a good idea to draw up a written agreement between the members.
The LLP itself and each individual member must make annual self-assessment returns to HM Revenue & Customs (HMRC).
All LLPs must file accounts with Companies House.
Members of a partnership pay tax and National Insurance contributions on their share of the profits.
The profits of a member of an LLP are taxable as profits of a trade, profession or vocation and members remain self-employed and subject to Class 2 and Class 4 National Insurance contributions.
Limited liability companies
Limited companies exist in their own right. This means the company’s finances are separate from the personal finances of their owners.
Shareholders may be individuals or other companies. They are not responsible for the company’s debts unless they have given guarantees – for example, a bank loan. However, they may lose the money they have invested in the company if it fails.
Must be registered (incorporated) at Companies House.
Must have at least one director (two if it’s a plc) who may also be shareholders. Directors must be at least 16 years of age. At least one director must be an individual, rather than a company.
Private companies are not obliged to appoint a company secretary but if one is appointed this must be notified to Companies House. Plcs must have a qualified company secretary.
A director or board of directors make the management decisions.
Accounts must be filed with Companies House before the filing deadline to avoid a late filing penalty.
Accounts must be audited each year unless the company is exempt.
When you file your annual return for the first time a letter will be issued to the Registered Office containing the company’s authentication code and instructions for use of Companies House web filing services. You should follow the instructions in the letter.
Directors are responsible for notifying Companies House of changes in the structure and management of the business.
If a company has any taxable income or profits, it must tell HM Revenue & Customs (HMRC) that it exists and is liable to corporation tax.
Companies liable to corporation tax must make an annual return to HMRC.
Company directors are an office holder of the company and therefore regarded as an employed earner for National Insurance. As such, company directors must pay both income tax and Class 1 National Insurance contributions on their director’s earnings. However, while regular employees’ Class 1 NICs are calculated on their monthly or weekly earnings separately, directors’ NICs are calculated on an annual cumulative basis.
Shareholders are not personally responsible for the company’s debts, but directors may be asked to give personal guarantees of loans to the company.
Overview of legal structures
Sole trader
Advantages
independence, ease of set up and running, and all the profits go to you.
Disadvantages
lack of support, unlimited liability and you are personally responsible for any debts your business runs up.
Partnership
Advantages
ease of set up and running, and the range of skills and experience different partners can bring to the business.
Disadvantages
problems can occur when there are disagreements between partners, unlimited liability and you are personally responsible for any debts that the business runs up.
Limited liability partnership (LLP)
Advantages
retain the flexibility of a partnership, personal liability is limited. At least two members must be ‘designated members’ – the law places extra responsibilities on them.
Disadvantages
the formation is more complex and costly and problems can occur when there are disagreements between the members. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member.
Limited liability company
Advantages
your personal financial risk is restricted by how much you invest and any guarantees you give in order to obtain financing.
Disadvantages
this type of company brings a range of extra legal duties, including the maintenance of the company’s public records, eg for the purpose of the filing of accounts.
Posted in Business Planning, Business Types, company, Guidance notes, Legal, Limited Companies, Limited Liability Partnership, LLP, Partnership, Self employment, Sole Trader, Starting in Business, tax, types of business, Xebox | | Comments:
Comments Off
July 28th, 2011
Shares in a company represent ownership. When an individual buys shares in a company, they become one of the owners of the business. This entitles them to a share of the profits of the company – the dividends.
What are shares and why are they issued?
When an individual buys shares in your company, they become one of its owners.
Small companies issue shares in their company in return for a lump sum investment. This investment may either come from friends and family or, for businesses that are looking for capital to fund high growth, through formal equity funding finance.
These investors are willing to put up capital for a share in a growth business. The advantage of raising money in this way is that you don’t have to pay the money back or pay interest to the investors. Instead, shareholders are entitled to a share of the distributable profits of the company, known as dividends.
How are shares issued?
When you set up a company with share capital, you can decide on the level of share capital and the number of shares of a fixed nominal value.
A statement of capital and initial shareholdings must be delivered to Companies House as part of the incorporation of the company and this will set out:
The founders of the company must sign form IN01 and the memorandum of association and state the number of shares they want. These are then issued upon incorporation and are called subscriber shares.
Family or friends
You may choose to issue shares to family or friends in return for making investment in your business, rather than accepting the offer of a loan from them. That way you’re not obliged to make repayments.
It is important to formalise any agreement with family members or friends as this can help you avoid or resolve any disputes that may arise in future.
Employees
Employee share ownership schemes offer employees a stake in the business, encouraging loyalty and helping you to retain key staff.
They also provide an incentive or reward for performance and can help recruitment.
Issued capital
A company need not issue all its capital at once. Issued capital is the nominal – rather than actual – value of the part of the share capital that has been issued to shareholders.
For example, a company that issues 500 shares at £1 each has an issued share capital of £500.
A Private limited company only needs to issue one share of any value, but Public limited companies (plcs) must have at least £50,000 worth of issued share capital before they are allowed to trade. Initially they must satisfy this requirement by means of shares in sterling or in euro shares (and not by a combination of the two).
Further shares can be issued in the company by the directors, subject to the rules set out in the Articles of Association, but typically by being authorised to do so by ordinary resolution of the company’s existing members.
An exception to this is that the directors of a private company incorporated under the Companies Act 2006, which will only have one class of shares, do not need any prior authorisation from the company to allot shares.
The directors set the price of these shares.
Limited companies must notify Companies House of any new shares issued.
Types of shares
A company may have many different types of shares that come with different conditions and rights.
There are four main types of shares:
-
Ordinary shares are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains, but also have the highest risk. Ordinary shareholders are the last to be paid if the company is wound up.
-
Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits. However, usually they have rights to their dividend ahead of ordinary shareholders if the business is in trouble. Also, where a business is wound up, they are likely to be repaid the par or nominal value of shares ahead of ordinary shareholders.
-
Cumulative preference shares give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has distributable profits.
-
Redeemable shares come with an agreement that the company can buy them back at a future date – this can be at a fixed date or at the choice of the business. A company cannot issue only redeemable shares.
Transfer of shares
In a private company, shares are usually transferred by private agreement between the seller and buyer, subject to the company’s rules and approval of the directors.
Certain taxes apply when you transfer or sell shares:
-
If you are transferring shares yourself using a paper stock transfer form Stamp Duty may be payable when the value is over certain limit
-
Any gains you have made on selling shares may be subject to Capital Gains Tax.
When a shareholder dies or becomes bankrupt, their shares and the rights associated with them must be given to a personal representative or executor.
Paying dividends and paying tax
A dividend is a part of the company’s profits that is given to shareholders.
Small companies often pay dividends after the annual accounts are prepared, or often where directors are also shareholders at regular times during the year.
The dividend is calculated per share, so the more shares you own, the more money you get.
Dividends attract income tax, but not National Insurance charges.
When paying dividends, the company must send a dividend voucher to the shareholder . This shows the amount of the dividend and the amount of tax credit. The tax credit indicates the amount of tax paid by the company on the shareholder’s behalf. Companies can pay dividends electronically if a shareholder agrees to it. Companies no longer need to send a dividend voucher in such cases
Dividends are paid after tax has been deducted at the basic rate. If you pay a higher rate of tax, you may be liable to pay additional tax on your dividend.
Making changes to share capital
Companies can alter their share capital through a number of routes.
Since 1 October 2008 private companies have been able to reduce share capital by means of a special resolution and a statement by the directors confirming the solvency of the company. The procedure is subject to any provision in the company’s articles prohibiting or restricting the reduction of capital. There is a fee of £10 for this procedure.
Issuing shares to a new shareholder
A company can issue shares to a new shareholder by authorising the directors to allot shares. The authority can be in the articles or given by an ordinary or elective resolution.
Allotment creates a right to be issued with the shares.
Changing the shares
A company can consolidate or subdivide its share capital if authorized to do so by the articles.
Consolidation is when the shares are put together and then divided into shares of larger amounts, e.g. 200 shares of £1 are consolidated to create 100 shares of £2.
Subdivision is when shares are divided into smaller amounts.
To consolidate or subdivide shares, a company must pass an ordinary resolution, then send the resolution and a completed form SH02 to Companies House within a month of the change.
Posted in Accounting and Bookkeeping, companies, company owners, Directors, Guidance notes, Legal, Limited Companies, owning a company, shareholding, shares, Starting in Business, Xebox | | Comments:
Comments Off
July 28th, 2011
Value Added Tax: An Introduction
VAT registered businesses act as unpaid tax collectors and are required to account both promptly and accurately for all the tax revenue collected by them.
The VAT system is policed by HMRC with heavy penalties for breaches of the legislation. Ignorance is not an acceptable excuse for not complying with the rules.
We highlight below some of the areas that you need to consider. It is however important for you to seek specific professional advice appropriate to your circumstances.
Scope
A transaction is within the scope of VAT if:
- there is a supply of goods or services
- made in the UK
- by a taxable person
- in the course or furtherance of business.
Inputs and outputs
Businesses charge VAT on their sales. This is known as output VAT and the sales are referred to as outputs. Similarly VAT is charged on most goods and services purchased by the business. This is known as input VAT.
The output VAT is being collected from the customer by the business on behalf of HMRC and must be regularly paid over to them.
However the input VAT suffered on the goods and services purchased can be deducted from the amount of output tax owed. Please note that certain categories of input tax can never be reclaimed, such as that in respect of third party UK business entertainment and for most business cars.
Supplies
Taxable supplies are mainly either standard rated (20%) or zero rated (0%). The standard rate was 17.5% prior to 4 January 2011.
There is in addition a reduced rate of 5% which applies to a small number of certain specific taxable supplies.
There are certain supplies that are not taxable and these are known as exempt supplies.
There is an important distinction between exempt and zero rated supplies.
If your business is making only exempt supplies you cannot register for VAT and therefore cannot recover any input tax.
If your business is making zero rated supplies you should register for VAT as your supplies are taxable (but at 0%) and recovery of input tax is allowed.
Registration – is it necessary?
You are required to register for VAT if the value of your taxable supplies exceeds a set annual figure (£73,000 from 1 April 2011).
If you are making taxable supplies below the limit you can apply for voluntary registration. This would allow you to reclaim input VAT, which could result in a repayment of VAT if your business was principally making zero rated supplies.
If you have not yet started to make taxable supplies but intend to do so, you can apply for registration. In this way input tax on start up expenses can be recovered.
Taxable person
A taxable person is anyone who makes or intends to make taxable supplies and is required to be registered.
For the purpose of VAT registration a person includes:
If any individual carries on two or more businesses all the supplies made in those businesses will be added together in determining whether or not the individual is required to register for VAT.
Administration
Once registered you must make a quarterly return to HMRC showing amounts of output tax to be accounted for and of deductible input tax together with other statistical information. For businesses whose turnover is more than £100,000 (excluding VAT) returns must be filed online. In addition, smaller businesses which registered for VAT on or after 1 April 2010 have to file online, regardless of turnover. By April 2012 all other businesses will have to file online.
Returns must be completed within one month of the end of the period it covers, although generally an extra seven calendar days are allowed for online forms.
Electronic payment is also compulsory for those businesses filing online.
Businesses who make zero rated supplies and who receive repayments of VAT may find it beneficial to submit monthly returns.
Businesses with expected annual taxable supplies not exceeding £1,350,000 may apply to join the annual accounting scheme whereby they will make monthly or quarterly payments of VAT but will only have to complete one VAT return at the end of the year.
Record keeping
It is important that a VAT registered business maintains complete and up to date records. This includes details of all supplies, purchases and expenses.
In addition a VAT account should be maintained. This is a summary of output tax payable and input tax recoverable by the business. These records should be kept for six years.
Inspection of records
The maintenance of records and calculation of the liability is the responsibility of the registered person but HMRC will need to be able to check that the correct amount of VAT is being paid over. From time to time therefore a VAT officer may come and inspect the business records. This is known as a control visit.
The VAT officer will want to ensure that VAT is applied correctly and that the returns and other VAT records are properly written up.
However, you should not assume that in the absence of any errors being discovered, your business has been given a clean bill of health.
Offences and penalties
HMRC have wide powers to penalise businesses who ignore or incorrectly apply the VAT regulations. Penalties can be levied in respect of the following:
-
late returns/payments
-
late registration
-
errors in returns.
Cash accounting scheme
If your annual turnover does not exceed £1,350,000 you can account for VAT on the basis of the cash you pay and receive rather than on the basis of invoice dates.
Retail schemes
There are special schemes for retailers as it is impractical for most retailers to maintain all the records required of a registered trader.
Flat rate scheme
This is a scheme allowing smaller businesses to pay VAT as a percentage of their total business income. Therefore no specific claims to recover input tax need to be made. The aim of the scheme is to simplify the way small businesses account for VAT, but for some businesses it can also result in a reduction in the amount of VAT that is payable.
Posted in Business Tax, companies, Guidance notes, Input tax, Limited Companies, Limited Liability Partnership, LLP, Output tax, Partnership, Partnerships, Self employment, Sole Trader, Starting in Business, types of business, Value Added Tax, VAT | | Comments:
Comments Off
