frequently asked questions

Click on a question below for our full answer:

1. Why use a chartered accountant?
   
2. I’m thinking of changing accountants but have heard this can be a complicated process. Is this true?
3. Do I need to find an accountant before I start my new business?
4. I have deliberately kept my turnover below £60,000 to avoid the hassle of VAT registration, but now the business is booming and I will go over the limit. What should I do?
5. What are the basic tax differences between being a limited company and a sole trader?
6. What will happen if my company's accounts and returns are not delivered on time?
7. I use my own car on company business. Is there anything I should be doing?
8. Can I deduct the salary I pay my spouse?

1. Why use a chartered accountant?
Advice from a chartered accountant can be invaluable. Legally, anyone can call themselves an ‘accountant’ without the necessary training and experience. However, before becoming a ‘chartered accountant’ and using the designatory letters ACA or FCA, all accountants must:

1. undertake a period of at least three years training with an organisation that is authorised by the Institute of Chartered Accountants.

2. pass tough examinations embracing financial management, auditing, business strategy, taxation and IT.
This training and experience also ensures that chartered accountants develop communication skills, business awareness and professional judgement and members are expected to maintain high standards of ethical and professional conduct.

All members must comply with the Institute’s scheme of Continuing Professional Development, thus ensuring that their knowledge and skills are kept up to date.

2. I’m thinking of changing accountants but have heard this can be a complicated process. Is this true?
Providing your tax and accounts are currently dealt with by a member of the Institute of Chartered Accountants, then it should be a fairly straightforward procedure. Guidelines state that all the necessary information relating to your affairs must be handed over by the previous accountant so that the new accountant is in a fully informed position to take over.

3. Do I need to find an accountant before I start my new business?
Before you set up your new business, you will need to decide what format it should be - will you operate as a sole trader, a partnership or a limited company? Each choice will have implications in respect of legal contracts, registering for VAT and the amount of credit your suppliers will allow your business.

Having decided on your format, you will also need to know what records you are legally bound to keep. This is important for the Tax Return you will be required to file with HM Revenue & Customs. If you don't get this right, you may face hefty penalties. Additionally, if you decide to employ staff you will need to know how to administer a pay roll including applying PAYE, national insurance rules and basic information such as maternity and paternity pay.

A chartered accountant will be able to advise you on all these issues and help you to set up your business correctly and effectively. And, having helped you right from the start, it will be much easier for your chartered accountant to prepare your year-end accounts, cashflow projections, etc, when the time comes.

4. I have deliberately kept my turnover below £60,000 to avoid the hassle of VAT registration, but now the business is booming and I will go over the limit. What should I do?
You have no choice but to register for VAT if at the end of any month, the taxable turnover of all business activities in the previous year is £61,000. HM Customs and Excise must be notified within 30 days. Once registered you must charge VAT on sales (called output tax). The VAT is normally at the standard rate of 17.5%, but there are also Zero Rate and a Reduced Rate (currently5%). Vat is charged on goods and services purchased (input tax). You must complete a form and will be given your own VAT number, which must be quoted on all sales invoices. All claims of input tax must include the supplier’s VAT number.

A VAT return must be completed quarterly, by the end of the following month, and on it you must state the total output tax, deduct the total input tax and pay the balance over to customers. If input tax exceeds output tax you receive a refund.
Penalties for getting it wrong are severe, and officials will periodically visit your business premises to inspect the records and check you are compliance.

5. What are the basic tax differences between being a limited company and a sole trader?
The total tax and National Insurance (NI) cost borne by a small limited company is likely to be lower than a comparable unincorporated business when the taxable profits exceed the rate at which income tax is levied at the highest rate (40%) - approximately £38,300 or sometimes even lower. A further advantage is that company profits do not attract NI.
Salaries of directors of companies are subject to income tax and NI, but dividends paid out of company profits do not attract NI, Dividends are treated as at 10% tax paid in the hands of recipients. If their total income exceeds£33,300 (after personal allowance) the excess is taxable.

So there may be good tax and NI reasons to incorporate your business. However, there are other factors to consider such as having to file accounts at the Registrar of Companies and an increase in paperwork. There may be capital gains tax implications when transferring assets (particularly goodwill) from an unincorporated business to a limited company.

6. What will happen if my company's accounts and returns are not delivered on time?
Failure to deliver documents on time is a criminal offence: directors risk a criminal record, a fine and disqualification. Also, the company will incur an automatic financial penalty if any accounts are delivered late. Your company could also be struck off the register if the record is not kept up to date.

7. I use my own car on company business. Is there anything I should be doing?
Yes, you should keep a detailed log of the mileage incurred for business travel. If your employer pays you a mileage allowance this will be tax free, so long as the amounts do not exceed Inland Revenue Authorised Rates. If your employer pays less than the Authorised Rates or pays nothing at all, you should be able to claim tax relief on the shortfall.

8. Can I deduct the salary I pay my spouse?
If your spouse is an employee (not a partner) in your business you can deduct their salary. You will need to operate Pay as You Earn and account for the tax and National Insurance Contributions. The Inland Revenue may ask you for evidence that you pay the wages to your spouse and that the amount is reasonable for the work they do.