Part 2 of my guide to self employment will cover the steps which you need to take to register yourself as self-employed. If you’ve not done so already I would recommend reading Part 1 of the series which talks about what you need to consider before starting out on your business venture.

If you are certain that self employment is for you the next steps are to inform the relevant authorities that you are  now working for yourself:

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1) You have to inform HMRC when you begin self-employment. This is very easy and can be done online, this previous blog post has the information you need.

2) Do you need to register for VAT? If your turnover is expected to be above £77,000 per year you have to register for VAT. There are several schemes which you could use and they could actually save you money. It’s worth seeking advice before registering for VAT, below are 2 blog posts which explain how you could save money by registering for VAT:

• Should I Register for VAT?
• What is the Flat Rate Scheme?

3) It is advisable to find a bookkeeper or accountant to help you compile your accounts and help you look after your financial affairs. Whilst you will be paying for their services on a monthly basis, over the course of the year their help will be worth it’s weight in gold as they will help you save money, tax and deal with HMRC for you if needed. Reducing stress is a major bonus for any business owner

• Choosing Your Bookkeeper
• Should I Outsource?

4) Once you have chosen your bookkeeper/accountant the next thing you should do is send off form 64-8 to HMRC. This is a form which will register your bookkeeper/accountant as your agent, which means that they can talk directly to HMRC about your tax affairs. This is very advisable and will also cut down on the admin work you have to do. You’re paying for someone’s services, make sure you get you put that money to good use!

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The next blog in the series will look at how you can become more organised with your paperwork to help reduce the time that you spend on administration tasks. If there are any topics you would like covering, please let me know.

In a previous post I briefly mentioned that the Flat Rate Scheme (FRS) could simplify your VAT accounting and also save you some money along the way. With this short post I’ll aim to give you a better understanding of the scheme.

The simplest way to describe the FRS is: You pay a set percentage of your VAT inclusive turnover to HMRC, but you cannot claim VAT back on purchases. The percentage will differ from business to business.

There are some qualifying criteria that your business must meet:

• Your estimated VAT taxable turnover – excluding VAT – in the next year will be £150,000 or less.
• Once you join the scheme you can stay in it until your total business income is more than £230,000.

You cannot join the FRS if:

• You were in the scheme and left during the previous 12 months
• You are, or have been within the previous 24 months
  • Eligible to join an existing VAT group
  • Registered for VAT as a division of a larger business
• You use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme
• You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
• Your business is closely associated with another business

If your business provides a service and your purchases are minimal the FRS could be beneficial to you as you may possibly pay a lower amount of VAT than if you were registered under the standard scheme.

For example, if your business is a computer repair company the rate of VAT you would pay under the FRS would be 10.5% (9.5% in the first year as you are given a deduction). If your sales for the quarter were £20,000, the amount of VAT you would pay is £1,900 (£20,000 x 9.5%). Under the normal scheme you would have paid £4,000 less any VAT on purchases.

In this example if your purchases for the quarter are below £10,500 net (VAT – £10,500 x 20% = £2,100) you would be saving money by being part of the FRS .

The two major advantages of the FRS are:

• Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
• Certainty. You always know what percentage of your takings you will have to pay to HMRC.

As always with important decision like this take time to investigate if it would represent a significant saving to your business. If you are unsure always seek advice from someone!

 

Flat Rate Scheme for VAT

As with everything there are pros & cons about registering for VAT. If your annual turnover for the previous 12 months is above the compulsory threshold then you have to register for VAT, which is easy and can be done via the HMRC website.

If you are registered for VAT you are, in effect, an unpaid tax collector for HMRC as you have to charge the appropriate rate of VAT (currently 20%) on all of your sales. Every 3 months you will need to complete a VAT return and submit it to HMRC and pay the required VAT

But wait!

If you are VAT registered you can claim back the VAT on any purchases which you make during that same 3 month period. For example, if the VAT on your sales is £1,000 and the VAT on your purchases is £500 the end total which is payable to HMRC of £500.

If your turnover is under the compulsory threshold the only main reason that you would want to register is to improve your business’ image. By not charging VAT you are saying to your customers ‘My turnover is below £73,000′. This could make it difficult to portray yourself as a big & well established company.

If you are thinking of voluntarily registering for VAT you will need to weigh up if to increase your selling price (current price + vat) or absorb the cost of the VAT and keep the selling price the same. If you are selling to well established companies who are also VAT registered, the VAT increase won’t be a big issue for them as they can re-claim this VAT. But if your customers are the general public they may not be too happy if you suddenly increase your prices by 20%.

Registering for VAT could increase your net profit

If you buy goods for £10 gross you are able to reclaim £1.67 of that (£8.33+20%), which makes your cost price £8.33 per item. You then sell this item for £20, which then becomes £24 (£20.00+20%). The amount payable to HMRC is £2.33 per item (£4.00-1.67) leaving you with a net profit of £11.67 (£24 selling price, less £10 purchase price, less £2.33 VAT).

Let’s look at this if you weren’t VAT registered…

You would still buy the goods in at £10, but not be able to reclaim any VAT. The price you sell the goods on to your end customer will be £20, which only leaves you with £10 net profit. In this very simple example being registered for VAT has increased your profit per item by £1.67. Please bear in mind that we’ve not factored in your overheads for this example, but either way your net profit has increased.

 

There are also other schemes for VAT which can help with you cash flow (Cash Accounting Scheme) and make accounting for VAT easier and potentially save you a lot of money if you do not make many purchases (Flat Rate Scheme) i.e if you predominantly provide a service. If you are unsure always seek advice from someone who can help you make the best choice for your business.

 

Welcome to Part 2 of my guide, aimed at helping you start self-employment correctly. If you missed Part 1 you can read it here

So far you have registered with HMRC as self-employed, chosen your business name and (hopefully) not annoyed the neighbours if you intend to work from home. What next?

4. Do you need to register for VAT?

If you expect to have turnover of more than £73,000 you will need to register for VAT. The easiest way is by doing it online. If you are a business which primarily offers a service and does not make many purchases, if may be more beneficial for you to register for the Flat Rate Scheme (conditions apply). This can help simplify your accounting process as you pay a set percentage of your turnover as VAT. You can register for VAT voluntarily if you wish.

5. Do you need to register for PAYE?

If you intend to employ other people in your business you will need to make PAYE and NIC payments which will mean you have to operate a Pay As You Earn (PAYE) system. You can learn more about PAYE here

6. Set up a record keeping system

You must document and keep detailed records of all transaction that take place within your business. Even if it is just a folder to store your receipts and invoices in order. If anyone asks you ‘Show me proof of X,Y & Z’ you will be expected to produce the relevant documentation. This blog posting gives you some advice about how to keep your records in order

 

You’re now up and running as a self-employed sole trade. Come back for the final installment tomorrow to put the finishing touches to your business