Setting up as a business

[anksta]

So I've been freelancing for a little while now and I haven't really done anything except find some work and get paid for it, haven't paid taxes or sorted anything proper out, all the dole office know is that I went freelance from signing off a few months ago.

I haven't earned enough yet to need to pay tax, I checked it the other day and I'm still a month or 2 from the threshold but I have literally no idea how to go about these things.

Am I eligible for VAT exemption and things like that? What other benefits can I get from being all above board and whatnot?

I bought a new office chair today (off eBay though), could I have gotten that for cheaper or whatever?

Working from home just using a computer and nothing else really, I have no staff or anything like that it's literally just me tapping away through maybe 20 or 25 days a month.

What am I supposed to be doing?

 

[[TW]Fox]

It sounds like the best thing you can do is continue to work as a sole trader, and complete a self assessment form for tax each year.

VAT registration is probably not the best idea at this stage and is a seperate process anyway.

No, you cant 'get stuff for cheaper' but you can offset the cost of buying stuff for business purposes against your tax liability.

 

[anksta]

well that's what I mean.

I don't want to get to the end of the tax year and owe a massive bill, I'd much rather start paying it off as soon as I owe.

I don't really get what you mean offset the cost of buying stuff against my tax liability, isn't that the same thing as getting it for cheaper?

 

[UK-AL05]

You are meant to register as a sole trader, or limited company.

If you don't want to go through the hassle of a limited company, sole trader is very easy to do. I think there are forms and guides on hmrcs website, that allow you to sort that out. Its fairly easy.

Setting up a limited company is a bit more complicated, and you would probably require an accountant.

I'm not sure on this, but to be vat exempt I think you have to be set up as a limited company. You have to work out if its to you're advantage, as you will be charging vat on your products but allowed to claim back vat on your supplies.

 

[UK-AL05]

well that's what I mean.

I don't want to get to the end of the tax year and owe a massive bill, I'd much rather start paying it off as soon as I owe.

I don't really get what you mean offset the cost of buying stuff against my tax liability, isn't that the same thing as getting it for cheaper?

When your vat registered, you have to charge vat yourself. But then you can claim vat off the stuff you brought.

 

[Xelene]

I recommend a book, Business Startup 2011 by FT Press. It's £15 on Amazon. Go buy that, it's very good.

 

[[TW]Fox]

well that's what I mean.

I don't want to get to the end of the tax year and owe a massive bill, I'd much rather start paying it off as soon as I owe.

You can't do that, because you are self employed. You pay your tax in one go, when it's due, not through PAYE.

You work out how much tax you owe at the end of the tax year, set it aside, and pay it by the January in the following tax year.

I don't really get what you mean offset the cost of buying stuff against my tax liability, isn't that the same thing as getting it for cheaper?

Well no.

Simple terms.

You work for 1 year. During 1 year, you take in £20,000. But you dont pay tax on £20,000 because you've also spent £3000 on 'stuff' for the business. Therefore your profit is £17,000 and it's this £17,000 which you pay tax on.

VAT registration is probably a step too far at this stage. Probably the biggest downside of it is that you need to charge VAT on your products or services - so you effectively have to increase your prices by 20%.

 

[UK-AL05]

You can't do that, because you are self employed. You pay your tax in one go, when it's due, not through PAYE.

You work out how much tax you owe at the end of the tax year, set it aside, and pay it by the January in the following tax year.



Well no.

Simple terms.

You work for 1 year. During 1 year, you take in £20,000. But you dont pay tax on £20,000 because you've also spent £3000 on 'stuff' for the business. Therefore your profit is £17,000 and it's this £17,000 which you pay tax on.

VAT registration is probably a step too far at this stage. Probably the biggest downside of it is that you need to charge VAT on your products or services - so you effectively have to increase your prices by 20%.

No, thats corporation tax. Corporation tax is only paid on profits. VAT Tax is something different entirely, which is what I think he is talking about by getting something cheaper.

 

[[TW]Fox]

No, thats corporation tax. Corporation tax is only paid on profits. VAT Tax is something different entirely, which is what I think he is talking about.

I'm not talking about 'VAT Tax' (Value Added Tax Tax? new one ).

I'm talking about income tax.

Any legitimate expenses in you incur are taken off your income for tax purposes.

 

[UK-AL05]

I'm not talking about 'VAT Tax' (Value Added Tax Tax? new one ).

I'm talking about income tax.

Any legitimate expenses in you incur are taken off your income for tax purposes.

Depends if were talking about ltd company or self employed here. Same principle otherwise, they only tax the profits. Income - Expenditure = profit.

Only that profit is taxed. However if your vat registered, you can directly claim vat back off supplies.

 

[[TW]Fox]

We are talking about self employment as a sole trader, probably the best way forward initially. He fills a self assessment form, details his income, details his expenses, job done.

Stop confusing the issue with talk of corporate tax.

 

[UK-AL05]

We are talking about self employment as a sole trader, probably the best way forward initially. He fills a self assessment form, details his income, details his expenses, job done.

Stop confusing the issue with talk of corporate tax.

I just told you, When he said he wants to get things cheaper. He was talking about VAT. I told him about vat.

You started talking about something different entirely.

 

[[TW]Fox]

I just told you, When he said he wants to get things cheaper. He was talking about VAT. I told him about vat.

You started talking about something different entirely.

He can't 'get things cheaper' by claiming VAT back because he isn't VAT registered and he probably doesn't need to be at this stage. If he WAS registering for VAT he'd almost certainly be going for flat rate VAT, under which you don't reclaim back VAT on purchases, so again, no call for telling him about claiming VAT back - its just not relevent.

Therefore I explained he can offset the cost of buying the items against his tax liability, which effectively 'makes things cheaper'.

Lets keep it simple.

 

[anksta]

so sole trader is definitely the best way to go?

That way it's just paying the taxes on everything but my expenses?

If that's true though what's to stop me claiming my flat is my office and everything I buy is for the business? Food and stuff like that for my lunch?

 

[UK-AL05]

He can't 'get things cheaper' by claiming VAT back because he isn't VAT registered and he probably doesn't need to be at this stage.

Therefore I explained he can offset the cost of buying the items against his tax liability, which effectively 'makes things cheaper'.

Lets keep it simple.

I am keeping it simple, he mentioned vat in his post.
Yes sole trader is easiest way to go, however not necessarily the best way to go. Really depends on how much you are earning, and various other details.

Their are detailed guidelines for what can be classed as expenditure. Accountants are useful for that bit, they know it like the back of their hands.

I'm not sure about the lunch bit, I'm not really all to fussy about it. If it was a business meeting, and you was buying client lunch, you could class his as expenditure, but your own lunch, no.

 

[[TW]Fox]

so sole trader is definitely the best way to go?

That way it's just paying the taxes on everything but my expenses?

It depends really on your turnover and business type and who your customers are. If 99% of your work is to private individuals registering for VAT is best avoided until you are forced to, as you'll have to charge them all 20% VAT. If you deal mostly with business customers who are VAT registered (and dont pay flat rate VAT themselves) then this is far less of an issue.

If that's true though what's to stop me claiming my flat is my office and everything I buy is for the business? Food and stuff like that for my lunch?

It's all governed by a set of rules so complex people make huge amouts of money advising you on it. You can indeed have your flat as your office but you can only claim a proportion of the expenses involved in running the flat as business expenses - and that proportion is quite small.

 

[Westyfield2]

Accountant/Solicitor - Get One

I'm reading this thread and thinking it all sounds a bit complicated. If only there was someone you could pay to sort it out for you...

 

[UK-AL05]

I'm reading this thread and thinking it all sounds a bit complicated. If only there was someone you could pay to sort it out for you...

Depends, accountants are sometimes a massive opportunity cost, for the tax they save you, their fees can destroy the savings and incur cost. But if you are over a certain size, then defiantly useful and can save you money. I have an accountant in the family, so no problem for me =P

The easiest way is self employed, you can do it yourself, its fairly easy. If you want to get a little more complicated, than get a accountant.

HMRC has various guides for people like you, to fill in the self assessment. HMRC have made it pretty easy.

I'd also recommend doing your research, accountants are in for the business not because they like you, you have to know just enough to know whats going on.

 

[LOAM]

If you are self employed you need to register you status within 3 months of becoming self employed. You need to be paying class 2 NI contributions or you risk screwing future benefits.

A thread like this can only go so far, claiming expenses is fine providing you have the receipts to back them up. Be wary of claiming use of your house as without care you can get stung for capital gains tax should you sell it. That's not to say its not possible, just be carefully.

If you are in any doubt at all as to what you are doing, paying an accountant the £600 - £800 a year (tax deductible) will be more than worth it.

Open a business account with linked savings account. Move 30% of your months earnings to savings each month or when you draw. Come self assessment time you will have money to spare in there. Keep copies of every invoice raised and every expense paid.

 

[Kemik]

Depends, accountants are sometimes a massive opportunity cost, for the tax they save you, their fees can destroy the savings and incur cost. But if you are over a certain size, then defiantly useful and can save you money. I have an accountant in the family, so no problem for me =P

The easiest way is self employed, you can do it yourself, its fairly easy. If you want to get a little more complicated, than get a accountant.

HMRC has various guides for people like you, to fill in the self assessment. HMRC have made it pretty easy.

I'd also recommend doing your research, accountants are in for the business not because they like you, you have to know just enough to know whats going on.

I'd always recommend getting an accountant to review your self assessment/do your self assessment for you. They know about a lot of reliefs and rules that the average Joe doesn't.

/Disclaimer: I'm a tax advisor