Yes, you have to add VAT to your sales invoices but if your clients are VAT registered they reclaim the VAT so they’re no worse off.
There are 5 financial administration steps for your new company which you need to get out of the way before you get out there and make money.
We’d recommend you use a company formation service (such as ours!) to set up your new company but once it’s formed there are five financial administration steps you need to get out of the way before you can settle down to the business of making profitable sales.
These steps may sound like a lot of work, perhaps because they all come at once, but they’re really very easy and the sooner they’re out of the way the better.
1. Open two company bank accounts and get a debit card
Your company is a separate legal entity from you and needs its own bank account. You can probably get a free banking deal for 12 or 18 months, but definitely get a debit card and put some money into the bank account (a loan to the company) which the company can spend.
The debit card acts as a very useful audit trail and makes bookkeeping easier (particularly if you lose the odd receipt). It also means that the company is spending its own money instead of you having to reclaim out-of-pocket expenses, which cuts out unnecessary administration and reduces (perhaps eliminates) the burden of P11D reporting.
If your bank won’t give you a debit card from day one then go to a different bank.
The second bank account is one you can use to save for tax payments such as VAT, PAYE and corporation tax.
By putting enough money aside for tax, your main bank account becomes a very good barometer for the health of your profits and success of your credit control.
2. If you’re B2B – register for VAT voluntarily
B2B businesses should, by and large, be indifferent to VAT and with good bookkeeping (see below) VAT simply is not a problem. Also, from a marketing point of view, a VAT registered business always come across as more professional and reliable than one that isn’t.
This is step 2 because you need to have a bank account before you can register for VAT.
By registering voluntarily for VAT you can reclaim the VAT suffered on the products and services you buy – stationery, IT kit, rent etc. You effectively get a 20% discount!
Yes, you have to add VAT to your sales invoices but if your clients are VAT registered they reclaim the VAT so they’re no worse off.
If you’re a B2C business you might want to delay VAT registration until your sales approach the level where you have to register – currently £90,000 in any twelve month period. However, delaying to the last minute can also cause problems because you’re painted into a corner of either having to register for VAT or limiting the annual sales of your business.
3. Register your new company as an employer – if only for yourself
Once you begin to hire staff, you need to register as an employer and run a payroll, but even if it’s just you at the moment you might want to register anyway.
Everyone in the UK is entitled a Personal Allowance – the amount you can earn before you start to pay tax. So there’s a lot to be said for registering your company as an employer and paying yourself through the payroll an amount that at least covers your Personal Allowance – currently £12,570.
This payroll cost should reduce your company’s profit and thereby reduce the amount of corporation tax you pay.
4. Register for online services with HMRC
When a company is set up HMRC are notified and you should start to register your new company for online services with HMRC. Start with Corporation Tax as HMRC already know the company exists and as you register for VAT and as an employer you should register for these services as well.
Being able to see online what your tax situation is makes dealing with tax a lot easier and, despite what you may think of the tax man, the online environment is pretty good and very helpful.
5. Hire a bookkeeper or learn yourself
Get your bookkeeping done properly, in the cloud, from day one. You’ll know where you stand financially and a competent bookkeeper will stay on top of the VAT and PAYE for you.
Good bookkeeping throughout the year will make the production of annual accounts for Companies House and your corporation tax return easier, cheaper and there will be fewer surprises.
If you don’t know much about accounts now is the time to learn and in any event make sure you’re getting monthly management accounts, cashflow and credit control information.
Develop good financial habits now and growing your business will be a whole lot easier in the months and years ahead. Ignore the numbers now and you could well go bust without really trying.
Five financial administration steps for your new company
At the outset, dealing with these financial issues can make it seem as if all you’ve done is open a never-ending stream of red tape and hassle.
In reality it’s not like that. Once you deal with these five steps you really can spend most of your time running your business and making money, which is why you formed the company in the first place.
Michael
Related links:
Bookkeeping for your business
Profit Margins: Make more money with every sale
Get paid quicker – 5 tips to improve your sales invoices
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