Starting Your own Business

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					Starting Your own Business

            Session 8
            Finance & Structure

   Some Accounting Basics
            Balance Sheet
            Profit & Loss
            Cash Flow
   Types of Business Entity
            Sole Trader
            Partnership
            Limited Company
   Tax Effect of Incorporation
   Business Name
   Choosing an Accountant
   Taxation
            VAT
            Income Tax
            National Insurance
            Corporation Tax
   Invoicing & Late Payment
The Balance Sheet

   The balance sheet is a statement of your company's relative
    wealth or financial position at a given point in time.
   Often referred to as a "snapshot" because it gives you a fairly
    clear picture of the business at that moment
   The balance sheet is not the whole story — you must also look at
    the information from each of the other financial statements (and at
    historical information as well) to get the most benefit from the data.
   Along with other financial information, balance sheet data is
    frequently analyzed and put into perspective through the
    construction of business and financial ratios.
   The balance sheet consists of three categories of items: assets,
    liabilities, and stockholders' or owners' equity.

   Assets (What the Business Owns)
   Assets are generally divided into two groups — current assets and
    fixed (long-term) assets.
   Current assets (cash and those that will be converted to cash
    within one year) appearing first.
   Fixed assets (those that will not be converted to cash within one
   Classes of Assets
    –   Current Assets
            Cash                         Short-term investments
            Accounts receivable          Inventories
            Prepaid expenses
            Fixed assets (those that will not be converted to cash within one year)
            Land              Buildings            Machinery and equipment
            (Less accumulated depreciation and amortization)
Liabilities & Equity

   Liabilities (what the Business Owes)
    –   Classes of Liability
            Current Liabilities
            Accounts payable          Income taxes currently payable
            Current portion of long-term debt
            $X
            Long-Term Liabilities
            Long-term debt
   Equity (What the owners stake is worth or what the
    Business owes to the owners)
            Share Capital
            Profits retained in the business
   Equity equals Assets minus Liabilities
Income Statement
   Balance sheet is a financial snapshot, giving you a picture of the
    business's assets and liabilities on a single day at the end of the
    accounting period,
   Income statement shows you a summary of the flow of
    transactions your business has had over the entire accounting
   The income statement shows you what happened during the
    period between balance sheets.
   The income statement, also referred to as a "profit and loss
    statement," "statement of incomes and losses," or "report of
    earnings," tells you or your investors:
     –   The income the business has earned in the accounting period
     –   The costs or expenses that were incurred by the business during the
     –   Your net profit — the difference between the costs and income for the
   Will be the basis on which Income Tax will be calculated
Do not worry about Balance Sheet
The Balance Sheet
Profit & Loss

   The Profit and loss is most important for tax
Profit & Loss
Basic Entries in System - Cashbook
Basic Entries in System - Sales
Basic Entries in System - Purchases
Cash Flow Statement & Projections

   Profit is a concept
   Cash is REALITY
   A healthy cash flow is an essential part of any successful
   Some business people claim that a healthy cash flow is even
    more important than your business's ability to deliver its goods or
     –   if you fail to satisfy a customer and lose that customer's business, you
         can always work harder to please the next customer.
     –   if you fail to have enough cash to pay your suppliers, creditors, or
         your employees, you're out of business!
   Proper management of your cash flow is most important step in
    making business successful.
Cash Flow

   Cash flow is the movement of money in and out of your business.
   The process in which your business uses cash to generate goods
    or services for the sale to your customers, collects the cash from
    the sales, and then completes this cycle all over again.
   Inflows.
     –   sale of your goods or services to your customers.
     –   If you extend credit to your customers and allow them to charge the
         sale of the goods or services to their account, then an inflow occurs
         as you collect on the customers' accounts.
     –   The proceeds from a bank loan is also a cash inflow.
   Outflows.
     –   paying expenses.
     –   purchase of retail inventory.
     –   purchases of raw materials and other components needed for the
         manufacturing of the final product. Purchasing fixed assets, paying
         back loans,
     –   paying accounts payable / creditors are also cash outflows.
Cash Flow

   Perfect World
    –   cash inflow (a cash sale) occurs when there is a cash outflow (pay an
   Real World
    –   Cash outflows never actually occur together.
    –   More often than not, cash inflows lag behind your cash outflows,
        leaving your business short of money.
    –   This money shortage is the cash flow gap. The cash flow gap
        represents an excessive outflow of cash that may not be covered by a
        cash inflow for weeks, months, or even years.
   Managing your cash flow allows you to narrow or completely close
    your cash flow gap.
    –   How much cash does my business have?
    –   How much cash does my business need to operate, and when is it
    –   Where does my business get its cash, and spend its cash?
    –   How do my income and expenses affect the amount of cash I need to
        expand my business?
Analysing Cash Flow
   Accounts receivable.
     –   sales that have not yet been collected in the form of cash. Created
         when you sell something to a customer who pays later
   Credit terms.
     –   Time limits you set for your customers' promise to pay for the
         merchandise or services purchased from your business.
   Credit policy.
     –   Blueprint you use when deciding to extend credit to a customer.
   Inventory.
     –   Supplies your business keeps on hand to meet the demands of
         customers. Excessive inventory hurts your cash flow by using up
         money that could be used for other cash outflows.
   Accounts payable and cash flow.
     –   Accounts payable are amounts you owe to your suppliers that are
         payable sometime within the near future
     –    Without payables and trade credit you'd have to pay for all goods and
         services at the time you purchase them.
What to do if business is strapped for cash?
   Manage the Crunch
    –   Talk to your bank.
            It is in your bank's best interest for you to grow and be successful.
            If you think your bank's not being accommodating enough, don't be afraid
             to look around.
            Five other banks that would love your business.
    –   Incentivize your customers.
            Offer an additional 2 percent off a future purchase for any customer who
             pays their bills within 10 days?
            2 percent discount should incentivise the customer to purchase from the
             company again.
    –   Sell and lease-back owned assets.
    –   Clear out excess inventory and unused equipment.
    –   Don't panic
            Virtually all successful companies are destined to go through a crunch at
             one point or another.
            Take a deep breath and assess the situation, then review all your options
             and make a plan.
            A clear focus can go a long way toward crunching the crunch.
Triage your Creditors

   Pile 1: People Who Get Paid on Time
    –   Creditors who are essential to the continuation of your business.
    –   Key employees or contractors.
    –   People who can easily sue you, or make your life legally miserable.
    –   Debts that you have personally guaranteed. Your lawyers and
   Pile 2: People Who Can Wait
    –   People who yell and scream a lot. If you have any spare cash at all
        after taking care of pile 1, get rid of the screamers. You will live
    –   People who historically have waited for their payments.
    –   People who haven't yet demanded payment.
            There are legal procedures which are required before County Court
   Pile 3: People Who Don't Get Paid
    –   People who don't have a legal obligation to get paid.
    –   People you can live without.
Invoicing & Late Payment

   Success depends on prompt payment
   Tips
    •   When negotiating the sale of your product or service you should
        ascertain your customer's internal procedures for processing invoices:
    •   To whom should me invoice be submitted?
    •   What references / description should it contain?
    •   How the currency should be detailed
    •   what the customer's accounting policy is on credit
    •   How long are they likely to hold onto it before processing it whether or
        not you have given extended credit?
    •   Whom you chase up in the event of delayed payment
    •   Do you need a purchase order?
    •   Is there a "preferred suppliers list"?
    •   The earlier you submit your invoice, the earlier you are more likely to
        get paid.
    •   Check when the customers invoice batching cycle runs and try to
        work with it.
Invoicing & Late Payment

   Remember from your own experiences of working within large
   if the bill is addressed to you personally, you usually had to get
    someone else to authorise it. This takes time, and sometimes the
    expenditure is queried despite the fact that the client has direct
    accountability for his or her own budget This means your bill will
    be held up whilst the matter is debated.
   Help yourself by addressing the bill to the right person in the
   If you are VAT registered you have to conform with the VAT
    regulations on invoicing.
   Show clearly whether you are giving extended credit, and what
    length of time this is.
   you can only chase outstanding debts when the expiry of your
    credit period has elapsed.
   Progress chase outstanding invoices regularly.
Invoicing & Late Payment

   It is useful to put on the invoice (for your convenience) the contact
   Do not hesitate to contact the top financial person in the
    organisation if you are having trouble in receiving payment.
   Be polite, explain the circumstances and what you have done and
    ask them to investigate the delay.
   Your cash flow is considerably eased if you negotiate interim
    payments particularly on a large or long contract.
   If you are constantly having significant difficulties in getting
    payment from the one customer start questioning whether it
    remains viable for you to continue supplying your
    product or service.
   Sometimes you may have to make hard decisions for the
    benefit of your cash flow.
Exercise Time

   The Cash Flow Projection
Business Structures

         Sole Trader
         Limited Company
Sole Trader

   Typically, you are a self-employed person
   Submits an annual set of accounts to the Inland
   Pays National Insurance, although there are some
   You do not need to register your business name. I
   If you use a business name other than your own, your
    stationery must also have your own name and so must
    your premises.
   You are personally liable for all debts incurred by the
Sole Trader
   Most straightforward way to set up in business.
   Setting up in business as a sole trader is quick and easy and
    involves little of the form-filling associated with starting and
    running a limited company.
   Sole traders make their own business decisions and don't have to
    answer to anyone else.
   Sole traders are personally responsible for any losses the
    business makes.
   Difficult to get finance to fund your business.
   Once you're operational, you must keep a record of the business'
    income and outgoings.
   Despite the name, you don't have to be on your own: a sole trader
    can take on employees.
   Although sole traders are often taxed as self-employed, this isn't
    automatically the case even though you'll be working for yourself
    If you are self-employed, you must register with the Inland
    Revenue within three months of starting up
Pros & Cons of Sole Trader

   Pros of operating as a                       Cons of operating as a
    sole trader                                   sole trader
    –   Usually only a small amount of            –   Can become isolated
        capital is required to start the          –   probably have to work long hours
        business.                                 –   difficult to take time off.
    –   You are entitled to all the profits       –   The level of finance available
        that are made by the business.                can be limited,
                                                  –   may stifle the development of the
    –   You do not have to answer to
        anyone else and can keep
                                                  –   Businesses with greater access
        overall control of the business.
                                                      to funding may have an
    –   There is little bureaucracy                   advantage over you.
        involved so changes can be                –   You are solely responsible for
        made quickly.                                 any losses the business incurs,
    –   You have less paperwork to deal               ie you have unlimited liability.
        with regarding legislation and            –   There is no distinction between
        tax.                                          personal and business assets,

   Very similar to sole trader except there are two or more
    people involved.
   The big difference is that all the partners are "jointly
    and severally liable" for all the debts.
   If, for example, your partner disappears, you're liable
    for all, not half, the debts.
   No matter how friendly you are, you don't have a
    crystal ball and things may go wrong.
   It's often wiser to agree things at the beginning to avoid
    a bitter dispute later on.
   Consider having a solicitor draw up a proper
    partnership agreement.
Pros & Cons of Partnerships

   Pros of forming a                           Cons of forming a
    partnership                                  partnership
    –   No need to produce audited               –   There is unlimited liability and
                                                     each partner is personally
    –   Tax and National Insurance                   responsible for the debts of
        payments are generally lower
        than for a limited company
                                                     the partnership
    –   Increased capital available for          –   Problems can occur when
        investment                                   there are disagreements
    –   Shared management                            between partners
        responsibilities                         –   An individual can make a
    –   Shared risks and losses                      business decision without
    –   Partners can bring a variety of              informing the other partners
        different skills and experience to       –   Partnerships must be
        the business                                 dissolved on death,
    –   They are easy to set up as they              resignation or bankruptcy of
        are not incorporated or                      a partner
    –   Partnerships cannot be taken
        over by other businesses
Limited Liability Partnership

   Offers reduced personal responsibility for business debts.
   Members of a limited liability partnership (LLP) are protected from
    personal responsibility for business debts.
   Their 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.
   More expensive and complicated than setting up a partnership.
   You have to send a registration document (Form LLP2) to
    Companies House and pay a £95 fee.
   A solicitor or company formation agent can help you set up an LLP
   An LLP also brings a number of extra running costs.
     –   You have to make financial information about your business publicly
         available by sending a copy of its annual accounts to Companies
     –   You must also submit an annual return giving key details of the LLP
         and its members.
Pros & Cons of LLP

   Pros of forming a limited                    Cons of forming a limited
    liability partnership                         liability partnership
    –   Retains the flexibility of a              –   Formation is more complex and
        partnership LLPs do not have to
                                                      costly than that of a partnership
        be dissolved on the resignation,
        death or bankruptcy of a member           –   Most limited liability partnerships
    –   There is limited personal liability           need to produce audited
        for members                                   accounts
    –   Tax and National Insurance                –   More administration overheads,
        contributions are lower than for a            eg informing Companies House
        limited company                               of changes to members and
    –   Increased capital available for               designated members
        investment                                –   Problems can occur when there
    –   Shared management                             is disagreements with other
        responsibilities Shared risks and             members
    –   Members can bring a variety of
        different skills and experience to
        the business
Limited Company

   Separate legal entity, distinct from you as an individual, even if
    you are a director.
   A company must have at least two officers (but there is no need
    for more than one shareholder).
     –   Two or more directors (one of whom may also act as company
     –   separate company secretary if there's only one director.
   Limited companies can offer some protection to the owners in that
    their liability to meet the company's debts is limited to the amount
    of their shares.
   However, you could lose this protection as it's normal practice now
    for banks to look for personal guarantees from you if the company
    needs to borrow.
    Limited companies must make an Annual Return to Companies
    House and send in Annual Accounts.
Pros & Cons of A Limited Company

   Pros of forming a limited                 Cons of forming a limited
    company                                    company
     –   Limited liability of the owners        –   A wide range of complex and
         of the business
                                                    detailed legislation must be
     –   Ability to raise finance by                complied with, which is not
         selling shares in the business
                                                    applicable to sole traders and
     –   Employees are able to own a                partnerships
         share in the business
                                                –   Compulsory disclosure of
     –   Suppliers are sometimes
         more willing to deal with a                company information
         limited company
     –   Can continue to trade if one
         of the members leaves
     –   The company name is
Tax effect of Incorporating a business

   The following simplified examples show the possible savings in
    Taxation and National Insurance by forming a limited company
    over operating an identical business as a sole trader in the tax
    year 2003-2004. You may have seen these figures in one of our
    online advertising campaigns.
   Assumptions
     –   All the examples assume that the company would pay its director /
         shareholder a level of remuneration which is low enough to escape
         PAYE and NIC liability,
     –   make up for this by paying the remainder of profits out as a dividend
         and are based on 03/04 tax year.
     –   They also assume that the individual involved has no other income.
Tax Comparison – Sole Trader v. Company

Sole Trader                           Limited Company                   £
                            £         Profit                            20,000
Profit                      20,000    Directors Remuneration            -4,615
Personal Allowance          -4,615    Employer C lass 1 NIC 's              0
Taxable Income              15,385    Taxable Profit                    15,385
Income Tax                            Corporation Tax
£1,960 @ 10%                    196   First £10,000 @ 0%                    0
                                      Marginal Rate @ 23.75%             1,279
Next £28,540 @ 22%           2,954
                                      Profit to be taken as dividends   14,106
National Insurance
                                      Add Back Remuneration              4,615
C lass 2 NIC 's @ £2 p.w.       104   Take home Income                  18,721
C lass 4 NIC 's @8%          1,231
Total Deductions             4,484
Take home Income            15,516

         Gain by Incorporating                               £ 3,205
Business Name

   Choosing a name is a long term decision
     –   Will be the same in 5 or 10 years
   The business name is your image and identity,
     –   Message to customers
     –   What is the product or service you are selling
     –   Why might people buy from you?
     –   Do you want a name which?
             describes exactly what you do, or
             creates an image, or
             means nothing in itself
     –   Do you want a logo?
   Aim is to have a business name that supports all the emotional
    and rational feelings about the product or service
   It conjures up a good feeling in the mind of the prospective
Business Name

   Brainstorm ideas with family, friends and business colleagues.
   Check that me name you intend using is not already being used
    by another business in the same market sector or your local
    business area,
   Check it does not have similarities with other unrelated
    businesses who have dubious reputations.
   Select a name that does not cause any sense of antipathy.
   Aim at least for a name that creates an initially neutral feeling until
    you have built up the image
   Avoid initials.
   Check that your name cannot be misconstrued, or have other
    connotations in another language.
   How does the name sound over me telephone?
   Does it convey the right image for you?
   Finally, do not make snap decisions on a name or logo
Prohibited Names

   There are regulations governing the use of some sensitive words
    in business or company names
    –   Names implying connection with the government, the Crown or local
        authority such as British, National, European, Royal;
    –   Titles like Society, Institute;
    –   Company names identical to any already registered.
   No Need to register name unless a limited Company,
   For Sole Traders & Partnerships
    –   All business documentation must contain
            the real name of the each sole trader or partner official
            address of the business.
            These details must also be prominently displayed on all business
   More information is available from Companies House.
    –   They publish guidance notes on a variety of legal issues, including
        "Sensitive Words and Expressions".
Choosing an Accountant

   Decide what you will do and what he will do
     –   Year End & Income Tax Returns
     –   Vat Returns
     –   Full Bookkeeping
     –   Advice on Loans, Tax Efficiency, Pensions
   Selection Criteria
     –   Size. You do not want a major firm if you are smalL
     –   Reputation. Do you have contacts who might recommend one?
     –   Proximity. You want to be able to meet face to face.
     –   Range of services.
     –   Experience in dealing with your sort of business.
     –   Fee structure and level
     –   Reception you get in telephone enquiries and face-to-face meetings.
     –   qualifications and experience.
     –   Communication Skill
   Shortlist, Visit, Choose and Maintain Contact

   VAT
   Income Tax
   National Insurance
   For VAT purposes sale of goods and services is defined in 4
            Zero rated - where goods or services are supplied at 0% VAT.
            Exempt - where goods are not subject to VAT.
            Domestic Fuel.
            Standard rated, everything not included above.
   VAT rate is determined by the goods and services supplied.
    –   Exempt from VAT (e.g. some insurance, health care services), you
        are required to register for 'exemption'.
            VAT must not be charged on any sales made and
            Cannot reclaim any VAT that has been charged on purchases.
    –   Zero-rated (e.g. books and newspapers, young children's dothing)
            0% VAT is added and shown on the sales invoice
            VAT reclaimed on purchases where VAT has been charged.
    –   'standard rated'
            add VAT at the prevailing rate (17.5%)on all sales invoices (known as
             output tax).
            reclaim VAT on purchases where VAT has been added (known as input
Registering for VAT
   Required to register
     –   the supplies (goods or services) made are subject to VAT
     –   the value of your sales exceeds or is about to exceed £56,000
   You have 30 days in which to notify Customs & Excise
   If you become liable to register consequences of failing to register
    for VAT are serious.
   Registration threshold is amended each year
   Contact your local Customs & Excise office to seek their advice.
   You can obtain a VAT Pack by contacting your local Customs &
    Excise Office (
   To register for VAT you must complete the registration form (Form
    VAT 1) and return this to your local Customs & Excise Office
             the date on which you intend to commence your business,
             or the date from which registration should start
   Once registered, you will receive a VAT registration number that
    must be shown on all sales invoices.
VAT Voluntary Registration

   You can apply for voluntary registration if your turnover is below
    the laid down limits.
     –   You can save money for your VAT registered clients.
     –   You can reclaim input tax (VAT on purchases) which you could not
         otherwise obtain
     –   Your clients may gain the impression you are bigger than you are.
   However,
     –   VAT returns have to be completed regularly, accurately and on time.
   The decision on whether or not to register voluntarily depends on
    whether or not your clients are VAT registered.
     –   If they are, you should be, since it saves money for a registered
         organisation to buy services from another registered organisation.
   If your clients are not VAT registered, then it is better for you not to
     –   You would have to charge VAT,
             Might either reduce your profit
             or make your price higher making you uncompetitive.
VAT Invoices

   When you are registered for VAT Invoicesmust show certain
     –   Invoice or identifying number
     –   Date of supply
     –   Your name, address and VAT registration number
     –   Your customer's name and address
     –   Description of the goods or services supplied
     –   For each supply, the net amount payable
     –   For each supply the rate of VAT and amount chargeable
     –   The gross total amount due, net of VAT
     –   The total amount of tax chargeable
   Many retailers do not issue VAT invoices as a matter of course,
    but must do so if requested
Special VAT Considerations

   HMC&E consider claims for recovery of VAT on items
    purchased up to six months before business start up.
   If you fail to register for VAT in due time liable for all
    the VAT that should have been charged on your sales.
   Cash Accounting
    –   Can Apply if turnover less than £700,000
    –   Useful if there are delays in payments
    –   Useful for high value added businesses – consultancy
   Flat Rate Scheme
    –   If input tax less than £150,000 & Output Tax < £185,000
    –   Pay flat rates on total turnover
   Bad Debt Relief
VAT Do’s and Don’ts
   DO keep a monthly record of your turnover - late registration can result in
    severe penalties
   DO notify your local VAT office when major changes take place - changes
    must be notified within thirty days
   DO retain records for the last six years - these could be demanded by law
   DO obtain and keep VAT invoices - these are your authority to claim back
    VAT on supplies made to you
   DO charge VAT on any equipment or vehicles (except motor cars) that
    you sell or part-exchange
   DON’T claim the VAT paid on the purchase of a motor car - it is not
    recoverable except in some very special cases
   DON’T claim the VAT paid on goods or services used for private
    purposes. Where there is an element of private use (e.g. telephone) an
    appropriate percentage should be claimed. Special arrangements apply
    to private use of petrol
   DON’T claim the VAT paid on entertainingDON'T forget to account for
    VAT on inter-company charges
   DON’T charge VAT on the transfer of a business as a going concern
    (make sure contracts incorporate appropriate VAT provisions)


    –   Chartered Accountants with useful tax centre
Self Employed Tax System

   Registering with the Inland Revenue
     –   If you start working for yourself, you must register with the Inland
         Revenue within the first three full months of self employment.
         Otherwise you may be liable to a penalty of £100. You may register
         by telephone or by using the form incorporated in leaflet P/SE/1
         (Thinking of working for yourself?)
   For self-employed, the tax rules are quite different from those that
    may have applied when you were an employee.
   Instead of tax (and national insurance) being deducted from your
    earnings at source, you must be prepared to receive a bill at some
    time in the future.
   This can be a nasty shock if you haven't put enough money aside.
IR 35

   Employed or Self Employed?
   The question as to whether someone is employed or self employed is not
    as straightforward as it might at first appear. Many people assume they
    are free to choose, but the Inland Revenue is increasingly emphasising
    that this is not the case.
   How do you decide?
   Although there is no clear-cut answer to this question, the Inland
    Revenue has published a leaflet (IR56 Employed or Self
    Employed?), which sets out a series of questions to test the
    particular circumstances of any working relationship. These cover
    areas such as:
     –   Ultimate control of the work
     –   Profit element, and risk of loss
     –   Provision of materials and equipment
     –   Integration with the employer's business
     –   The intention between the parties
     –   Usual conditions in the industry
Employed and Self-Employed Differences

   Note, however, these are matters of general employment law, and
    not specific tax legislation.
   What are the practical differences?
   Employees are
    –   taxed under the PAYE system
    –   are subject to Class 1 national insurance (NI) contributions.
    –   If the worker is an employee, the employer also has to pay Class 1
        NI, to which there is no upper limit.
    –   The employer also assumes responsibility for paying Statutory Sick
        Pay and Statutory Maternity Pay.
   Self employed workers are
    –   taxed under self assessment
    –   are allowed more scope in claiming expenses.
    –   pay Class 2 and Class 4 NI contributions, the combined
        burden of which is lower than Class 1 NI.
    –   Their 'employers' are not subject to NI.
Sole Trader Calculation of Taxable Profit

   In calculating taxable profits you are entitled to claim deductions
    from your business income in respect of any expenses incurred for
    the purposes of trade
   When you buy equipment or motor vehicles, you will be entitled to
    deduct a proportion of the cost each year you own them and use
    them in your business.
   If you take stock for your own use, the disposal should be shown
    in the accounts at market value, and not at original cost.
   Tax is payable on the whole of the profits of a trade, and so
    payments for your own 'wages' are not deductible.
   if your spouse works in the business, the wages are an allowable
    deduction, provided they are actually paid and are a reasonable
    reward for what is done.
Sole Trader Allocation profit to tax years

   The aim of the system is that over the lifetime of your business the
    profits will be taxed in full, once, and once only.
   The general rule is that the tax for a particular tax year is based on
    the profits of the twelve months to your accounting date in that tax
   E.g. the tax for 2003/04 could be based on accounts for a year
    ending on various dates ranging from 6 April 2003 to 5 April 2004.
   You get more time for the tax to be worked out if your accounts
    end early in the tax year
   30 April is such a popular year-end for self-employed people.
How Sole Traders’ Tax is Collected
   Tax returns
     –   Tax returns for the year ending 5 Apr 2004 must be sent to the Inland
         Revenue by 31 Jan 2005 (the 'filing date').
     –   The return will include a self assessment of your liability to income tax
         and capital gains tax.
     –   If you don't want do calculations, send the tax return back by 30 Sep
     –   There are automatic penalties for late filing of tax returns.
   Payment of tax
     –   Payments on account of income tax and Class 4 NIC will be due on
         31 January 2004 and 31 July 2004.
     –   These interim payments are be based on one half of the total liability
         (less any tax deducted at source) for 2002/03.
     –   You have the right to reduce payments on account if you believe the
         income tax for 2003/04 will be lower.
     –   The balance of income tax for 2003/04 is due on 31 January 2005
         (along with the first interim payment for 2004/05).
   Interest and surcharges will be levied for late payment.
National Insurance

   The self-employed are subject to a two-tier system of national
    insurance contributions.
   Class 2 contributions are at a flat rate of £2 per week, payable
    against a quarterly bill or by direct debit from your bank account, if
    earnings exceed £4,095 per annum.
   Profits between £4,615 and £30,940 are subject to Class 4
    contributions at a rate of 8%.
   Profits in excess of £30,940 are liable to Class 4 contributions at
    the rate of 1% without any upper limit. Class 4 contributions are
    collected by the Inland Revenue and are payable at the same time
    as the instalments of income tax.
   Save for your tax
   It is essential that you make proper provision to ensure the
    availability of funds to pay income tax and Class 4 national
   Interest on unpaid tax is chargeable by the Inland Revenue, and is
    not deductible from business profits
Corporation Tax

   Corporation tax is a tax on a company's profits. The tax is
    calculated at the end of every financial accounting year and must
    be paid to the Inland Revenue within 9 months of your financial
    year end.
   A company is usually responsible for determining their own
    corporation tax which is submitted via a self-assessment form.
   This form must be submitted at within 12 months of your financial
    year end to avoid penalty.
   Corporation Tax Rates 2003/04
   Starting rate zero                       £0 - 10,000
   Marginal relief * (19/400)               £10,001 - 50,000
   Small companies rate                     19% £50,001 - 300,000
   Marginal relief ** (11/400)              £300,001 - 1,500,000
   Main rate 30%                            £1,500,000 or more
   * Marginal relief eases the transition from the starting rate to the
    higher rate
Records & Calculations
     –   You must keep a record of your income and expenditure: this will
         require you to keep bills, invoices, receipts, etc so that you can prove
         any figures that you state.
     –   You should keep all records for a period of 5 years after submitting
         your corporation tax figure to the Inland Revenue.
   Calculating Corporation Tax
     –   Using the table calculate your corporation tax by corresponding your
         profit figure with the relevant tax rate:
     –   for most small businesses, this figure is likely to be below £300,000
         and is therefore subject to 19% tax.
     –   It should be noted that profits below £10,000 (inclusive) are free from
         Corporation tax. If your profit is above this figure, the first £10,000 will
         not be subject to tax.
   The Inland Revenue have a Corporation Tax calculator that will
    give you an estimate of the tax that you need to pay.
   Late Payment Interest also applies