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Laying Firm Foundations

Keeping track of money matters is vital when starting your own business. Matt Ryan FCCA, Director at IOC corporate members' Numbers Ltd, outlines five key steps towards a firm business foundation. 

1: Start with the right framework

“You may have heard of different types of business set-up such as sole trader, partnership, limited liability partnership (LLP) and limited company. Choosing between these needs some thought,” says Matt Ryan. “A limited company protects your personal financial exposure if anything goes wrong but it’s also more difficult to get money out of the company when you need it,” Matt continues. “If you are part of a partnership then you and your partner are both liable for all debts of the business, even if not your own. Sole trader is the way most tradespeople go when setting out, as it offers flexibility. Even as a sole trader though you would be best registering with the CIS (Construction Industry Scheme), which you’ll need to do if you’re working for other building companies.”

2:  Get started early with tax

“The slogan ‘Tax doesn’t have to be Taxing’ is true, providing you get started early with the systems and documentation you need,” says Numbers’ Matt Ryan -  “Registering at HMRC.gov.uk is really important. Search on the HMRC website for becoming self-employed. Log on and get yourself a tax account, which will give you a self-assessment tax number. If you don’t do this within three months of starting a business you can be fined, so start as you mean to go on. Depending on the work you do, you may also need to register with the Construction Industry Scheme. This way, if you are paid by a builder to do some work for them, then they will deduct the relevant income tax from for you.” 

If you choose to work through a limited company or LLP, you’ll also need to pay corporation tax and the registration for this will be set up automatically when you incorporate your business with Companies House, but you will still need to register personally.

3:  Banks and Books

These next two essentials go together. Set up a separate business bank account, so you can keep your business finances separate from your household finances. Even if you’re setting up as a sole trader, it’s best to keep things separate. “It’s also important in case the taxman ever wants to look through your financial records - you can prove your costs and income through your bank statements,” Matt adds. “There are lots of accounts packages such as QuickBooks, Sage and Xero. These allow you to link up with most bank accounts and allow you to issue invoices directly to your customer, as well as keeping track of payments due and giving you a picture of how your business is doing.”

4:  Cash and Costs

“One of the questions we get asked is how to account for cash jobs,” Numbers’ Matt Ryan reveals. “Today the penalties for not declaring income can be significant.  You should always put any income through your books even if it has been paid in cash.”

What costs can you recover as a business? “Materials and day-to-day tools and even your IOC membership subscription, can be offset against tax, alongside costs like insurance, stationery, telephone and broadband, bank charges, accountancy fees and renting a workshop if you need one,” says Matt. “You can claim 45p per mile on travel for work for the first 10,000 miles; the rate then reduces to 25p per mile. Alternatively, you can claim a proportion of your motor costs. There are also special annual allowances for larger one-off pieces of equipment such as a van or specialist piece of kit.” 

5:  Keep some money aside

Keeping some of what you earn to one side in your accounting means you don’t have to find additional money at the end of the tax year to pay your National Insurance and tax, says Matt. “If you work for private individuals then you want to keep about 25% of what you earn in reserve. This should cover you for paying Class 2 and Class 4 National Insurance and should help towards paying the basic rate of tax at 20% when you first start out. Get organised around these five basic essentials of running a business and you’ll start off with a firm foundation,” he advises. 

Numbers Ltd offers 10% off their services to IOC members. 




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