Topic 1.4 Making the Start up effective Unit 21

What’s in this section? In this section the different Start Up and Legal Taxes for a new business are explained and discussed. It looks at naming the business, record keeping and the different taxes that a business may be liable for.

Objectives The students will:- Understand the need to establish a unique trading and business name, Understand the importance of a new business keeping careful and accurate records Understand the implications of VAT, National Insurance and Corporation tax

What’s in a name? The name of a new business should be different from any other business. You can not just use the name of an existing business especially one that carries a trademark. A company name must be unique and will be checked by Companies House. For a Sole Trader the name may not be the same as another company in the same area.

What’s in a name? The name may also promote the business. “Bad Service Company”, “The Bad Service Company” are names that should not be used (for obvious reasons) “Feel Safe Company”, “Ambitious”, names like this give customers then right impression. If a company is set up as a Sloe Trader there is no requirements in the name. If the business is set up as a Limited Company it must have “Limited” in the name.

Keeping Business Records & Taxes All businesses have to keep records as evidence of what has happened in the past, for example details of customers, products etc. It is good practice to keep a wide variety of records. Some records have to be kept by Law, these are mostly Taxes that have to be paid to Her Majesty’s Revenue and Customs. HMR&C expect businesses to keep tax records and also calculate how much tax she should pay. They can inspect Tax records.

Keeping Business Records & Taxes Businesses are also responsible for registering with HMR&C, this means that they have to tell HMR&C that they have to pay them. The Taxes are based on:- The amount of sales over a year, Weather or not the business employs staff, If the business is set up as a Sole Trader or Limited Company

Taxes on Small Business There are a variety of Taxes that a small business may have to pay. 1. VAT – Value Added Tax – 2. Income Tax 3. National Insurance 4. Corporation Tax

Task Find out what each of these taxes is and what it means to the business when they have to pay it.

VAT – Value Added Tax VAT is the tax on the value of sales of a business. A small business only has to pay VAT if its sales are more than £67,000 a year (Nov 2008) VAT is payable at 17.5%. So.....if sales are £100,000 then £17,500 is payable in VAT. When a business buys things it is charged VAT by its suppliers – it can claim this back if it is not registered for VAT. The VAT system is time consuming and paperwork heavy!

Income Tax A business is responsible for paying Income Tax in two ways 1. If it employs any workers it must take away the income tax due by those workers on their wages and pass it to HMR&C, this is called PAYE (pay as you earn) 2. If the business is a sole trader, the owner must pay tax on their earnings, their earnings are the difference between the sales revenue and the costs of the business

National Insurance Contributions (NIC’s) These are a type of tax linked to a n umber of government benefits such as the State Pension, and Incapacity Benefit. To get these and other benefits the employee has to have paid a certain amount of National Insurance Contributions. Businesses have to pay different types of NIC’s. If the business employs people it has to pay two types:- 1. It has to deduct the NIC’s for its employees as with income tax, 2. Employers NIC’s, calculated as a portion of the employees wages, they also have to pay the owners NIC’s, again as with Income tax.

Corporation Tax This tax is only paid by limited companies. Corporation Tax is a tax on the profits of a company. In contrast Sole Traders pay income tax on their profits.

And all that means ????? The tax issues are one of the factors that influence entrepreneurs about weather to set up as a sole trader or as a limited company. Some businesses start off as Sole Traders then decide when or if to change their type of ownership. Keeping accurate and detailed records of finances is a major cost and task to businesses – they often end up as unpaid Tax collectors for the government.

Review Questions Chapter 21: Start-up legal and tax issues 1What is meant by the term ‘VAT’? 2What is ‘income tax’? 3What is ‘corporation tax’? 4Explain how National Insurance contributions work. 5What is the role of HM Revenue and Customs? 6State two reasons why it is important for businesses to keep records for tax purposes. 7State two reasons why it is wise for businesses to keep records of their customers.

Review Questions Romano Tilson trained as a shoemaker and repairer. He had a dream of opening his own business. He was considering calling his business ‘Cobblers’ as this reflected what he did. Why might his friend have advised him to call his business ‘Sole Mate’ rather than ‘Cobblers’? As a shoe repairer, what sort of legal responsibilities might Romano have in running his business? Give two benefits of having a unique trading name to Romano.

Homework Unit 21 Homework