Accounts FAQ's
Please click on a question to view the answer.
Also of use: TAX RATES TABLES.
Question: Should I be a sole trader (or partnership) or a limited company?
Answer:
There are many factors to consider when making this decision.
From a tax and national insurance saving point of view it is quite a complex calculation, but as a rough rule of thumb if your individual profits are in excess of £20,000 then there are significant savings to be had by going limited.
There is more regulation involved with running a limited company – leading to extra costs – and this should be taken into consideration when looking into the tax and national insurance savings that can be achieved.
You do get the protection of limited liability, although it is possible for company directors to be pursued personally through the courts in some circumstances, but in practice you are less exposed to losing your personal wealth than a sole trader (or partnership).
Some people also feel that a limited company carries more kudos.
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Question: Do I need to file a self assessment Tax Return?
Answer:
Yes, if you are self employed or a company director.
You also need to file one if you have an untaxed source of income e.g. rent from a second property, and if you are a higher rate payer receiving company benefits e.g. company car and/or investment income.
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Question: Is rental income from a second property I own taxable?
Answer:
Yes, however there are a number of deductions available to reduce the taxable rental profit. If the property is mortgaged you can deduct the mortgage interest paid during the relevant tax year.
You can also deduct 10% of the rent received to allow for wear and tear. Additionally deductions can be made for repairs (not capital enhancements or improvements), insurance, cleaning, agent’s fees, property management fees, travel to and from the property etc.
So, if the property is substantially mortgaged the rental profit and tax bill can be fairly small.
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Question: Should I be VAT registered?
Answer:
If your business sells mainly to the public or other non-VAT registered businesses you should avoid registering until you are required to do so. The VAT registration threshold can be found here: rates and allowances.
Trading with other VAT registered businesses will normally provide the opportunity to gain from voluntarily registering for VAT. This is because your customers will be able to reclaim VAT and it is therefore irrelevant to them. Voluntary registration enables you to recover VAT paid on purchases which could prove beneficial.
There are also special rules for claiming VAT on purchases of goods and services prior to commencement of trade. Contact us for more information and guidance on VAT related issues.
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Question: Do I need an audit?
Answer:
Not unless your company has turnover of more than £6.5 million and net worth of more than £3.25 million or more than 50 employees.
Audit is an often misused term especially from financial institutions when assessing credit risk. What they usually mean is accounts prepared and signed off by a suitably qualified accountant.
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Question: Which records do I need to keep?
Answer:
Businesses must retain financial records for six years.
The better records you keep, the more your accountant can do for you to identify opportunities to save money. Accurate and complete records can be proven by reconciling to bank statements. This will help you identify any errors (everyone makes mistakes!) and correct them.
Common problems we have with record keeping include:
Incomplete set of bank statements. Leaving cheque book stubs blank. Not detailing cheques banked in the paying in book. Missing direct debits/regular monthly payments from records Losing supplier invoices.
We will recommend the most appropriate method of bookkeeping for your business depending on your skills and preferences. The important thing is that you understand what you are doing. The method can be ‘simplex d' type books to spreadsheets to Sage or Quickbooks software or internet accounting systems. We have expert knowledge in most systems available and will help you maintain your records accurately.
It is essential to maintain accurate records to keep track of your finances and money owed and is particularly important when VAT registered.
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Question: How do I pay myself from my limited company?
Answer:
As a director of a limited company, you are treated as an employee. As such, any remuneration should be withdrawn as a salary or dividend. There are usually tax benefits to paying yourself a combination of salary and dividend, depending on your personal circumstances, and we would discuss the different options with you.
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Question: What can I claim as a business expense?
Answer:
Allowable business expenses are those that are incurred 'wholly and exclusively' in the course of running your business. The following list will give you an idea of the type of expenses that can and can't be offset against tax:
- Wages and salaries for staff are allowed but not drawings for sole traders.
- Employers' National Insurance contributions can be offset against tax but sole traders can not claim for their own tax and national insurance payments.
- Loan or overdraft interest and hire purchase interest along with arrangement fees are allowable as are costs of renting equipment.
- Business insurance is allowable.
- Mortgage interest is allowable if it has been taken out to buy property for business use.
- All business premises costs such as heating, lighting, rent, rates, telephone, postage, advertising, insurance, special uniforms or protective clothing and repairs, are allowed. If you are running your business from home, you can claim for part of the expenses associated with this - get advice from your accountant about what is permissible.
- Stock for re-sale and materials purchased are allowed.
- Packing, postage or delivery costs are allowable.
- Printing, stationery, marketing and advertising are allowable.
- Travel, accommodation and subsistence expenses for trips or visits to undertake work are allowable, but travel to or from a fixed place of work on a day-to-day basis isn't.
- Car costs (including fuel) used for business purposes can be claimed and apportioned if the vehicle is used partly for business and partly for private use.
- Legal costs, bank charges and professional fees in connection with your business can be claimed.
- Membership subscriptions of business related organisations can be claimed for.
Entertaining of staff including an annual event to the value of £150 per head subject to conditions. Note that entertaining customers or suppliers is not allowed. Costs related operating a canteen are allowable if made available to all employees.
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