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.
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.
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 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 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.
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.
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.
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.
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
independence, ease of set up and running, and all the profits go to you.
lack of support, unlimited liability and you are personally responsible for any debts your business runs up.
ease of set up and running, and the range of skills and experience different partners can bring to the business.
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)
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.
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
your personal financial risk is restricted by how much you invest and any guarantees you give in order to obtain financing.
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.
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.
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.
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.
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.
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.
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:
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.
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.