Whatsapp is where my non-small-child-related life happens these days.
Plans are made, photos are shared, advice given, births announced, even high drama can occur when friends flounce out of heated conversations. Seeing “XXX has left the conversation” has made me gasp out loud before and squeal “Noooo.”
It is my go to app when it seems to be day of wiping noses, floors, bums and surfaces on repeat and I need some grown up interaction.
One of the groups I’m in is with a handful of my uni girls. We’re all mums and, coincidentally, in the last few years we have all started our own businesses. (Big Up TropicFox, JennyMac and Purple Door Media)
Our chats are eye-wateringly honest and we cover lots of interesting ground so I was quite surprised when one day our chat turned to the very unsexy subject of tax.
What quickly transpired was that none of us really know our arse from our elbow when it comes to what best suits our companies’ needs in the tax department. And we didn’t even know what questions we should be asking.
And, after a quick Facebook strawpoll, I realised we were not alone.
So I met up with the brilliant Barefoot Accountant, Ele Stevens, to quiz her on the basics.
Hertfordshire-based Ele is a #MumBoss herself and set up Barefoot just over a year ago after working as an accountant for 20 years in industry. She specialises in working with creative people in creative industries.
She has a down-to-earth, approachable and jargon-free approach to finances and creates an environment where there is no such thing as a silly question or idea. Which is lucky.
Ele points out that, “Not knowing makes people feel silly. Lots of very intelligent people are clueless when it comes to finance and that’s where I can help. I let you get on with what you’re good at whilst I do the numbers so you don’t have to worry.”
“Burying your head in the sand is very common”, she says, “One client hands me a huge carrier bag of that year’s receipts and another won’t even open brown envelopes.”
Ok, so we are definitely not alone.
Here’s our very basic guide for freelancers and small business. Please do chat to an accountant before you get started.
What is a Sole Trader?
You. Not an employee. You work for yourself. You invoice your clients and complete a tax return.
What is a Limited Company?
A separate legal entity to you. It can be beneficial in certain circumstances as some large companies will only deal with limited companies. Whether or not it is beneficial to you will completely depend on your personal circumstances. In terms of liability, the company is limited to the funds within it, so it’s not your personal money.
Can Sole Traders and Limited Companies be VAT registered?
Why do you become VAT registered?
If your turnover exceeds £83k in any 12 month period then you have to be VAT registered by law.
What does it mean?
When you invoice for your services you add 20% VAT which is then paid to HMRC minus any recoverable VAT on expenses. This means you can claim VAT back that you have paid on goods purchased for work such as laptops etc
Can you be VAT registered even if you earn less than £83k?
Yes. If all your clients tend to be VAT registered and it won’t impact your prices then it can be worth it because you can reclaim the VAT on the purchases that you wouldn’t be able to claim otherwise.
Additionally, if you are selling goods that are zero-rated (i.e. with no VAT, like the majority of food items or books) you can also reclaim the VAT back on purchases without having to add VAT onto your invoices.
There is also a flat rate VAT scheme that you can opt for if you are VAT registered which would benefit a business with less than £150k turnover who makes less VAT purchases. It’s worth talking to an accountant about this as different industry sectors have reduced percentages.
At what salary should a Sole Trader consider changing to a Limited Company?
When you start paying 40% tax (£43k salary in 2016-2017) you could start thinking about it. There is more responsibility attached to being a company director and you will pay more in accountancy fees so do seek professional advice at this stage.
How long have I got before I make myself known to HMRC?
As a Sole Trader you need to register with HMRC within 3 months of starting to trade. You then need to complete a tax return by 31st January. You can do this from April 6th for the previous year and then be free from the worry.
As a Limited Company you need to register with Companies House before you start trading as a limited company and HMRC within 3 months. I would recommend having an accountant if you can afford it as it will save you money as they know the tax efficiencies you can benefit from. It also frees you up to run your company rather than researching all of that.
You may wish to register a dormant Limited Company with Companies House but trade as a sole trader. This protects your name and ensures it is available if/when you decide to incorporate
What about Childcare? Are their monetary benefits even for people that work for themselves?
Yes. If you are a limited company you can set up a childcare voucher scheme where you can pay approximately £243 of your childcare through your pre-taxed salary. Which means you are not being taxed on that £243.
Have a look at this Better Off Calculator and see what that would mean for you.
Mrs Yellow has heard a rumour that the government is GIVING AWAY FREE money. This isn’t true, is it?
Yes it is. If you are a Sole Trader or a Company Director you may be entitled to Working Tax Credits which can be very useful if you are setting up a business and are on a low income. They are salary-based and if you have a high earning partner you may not be eligible but it is worth checking out.
There are also Child Tax Credits which are different from child benefit. It is another top-up for low-income homes and is again based on your circumstances.
How do I know if I am eligible for these tax credits?
If it’s your first year in business you will need to provide HMRC with details of your previous year’s earnings plus what you expect to earn in the next financial year and why this might be different. If you massively miscalculate you will pay back any credit you have been overpaid but this will be judged the following year when your previous year’s accounts are submitted and processed.
If you are already up and running, if you submit your tax return in April you will have a good idea of what you are entitled to.
And what about Maternity Pay if you work for yourself?
As a Sole Trader you may be entitled to Maternity Allowance.
As a director of a Limited Company you may be entitled to Maternity Benefit.
Either speak to an accountant or the Department of Work and Pensions or apply online here.
How do you go about choosing the right accountant?
Whatever industry you are in, talk to colleagues and find out who they are using and who they are happy with. Get as many recommendations as possible.
I personally recommend using someone who is familiar with your sector as there are certain quirks with HMRC for certain industries. I have made creative industries my niche so I can keep on top of the changes in legislation and stop my head from exploding.
Large accountancy firms will probably have specialists per sector and some accountants don’t specialise at all.
And how do you know they’re good?
Check that they are qualified with an approved body. There are different levels of qualification and a simple guide can be found here .
Go with recommendations.
And find someone you feel comfortable with. You need to be able to ask silly questions and not feel silly.
It’s a really important relationship that can help you succeed and grow your business.
And, finally, any hacks that can make your life easier?
Use a cloud book-keeping system like XERO. It hooks up with your bank feeds, your accountant can access it remotely and once you have got your head round it, it makes life so much easier.
Also just get into the habit of writing everything down, preferably in a spreadsheet.
Keep every receipt and keep mileage logs if you drive. You will pay less tax as your expenses can be used against your tax.
Use an expenses tracker app too if you can. You scan your expenses receipts as you incur them and some even upload those to a cloud accounting system too.
You just need to find a way that works for you.
Who is your dream client?
Someone that does their tax return in April. It’s not only great for me, it means you can be smug for nearly a whole year and not have a panic in January. Oh, or Frank Turner.
So that is what we all need to do, AIM FOR APRIL and win 10 months of smugness to lord over our friends struggling with Dry January and Tax Returns on 31st January.
I’m really going to try and do this. No really, I am.
To get in touch with Ele, visit www.thebarefootaccountant.co.uk