start-up legal and tax issues
Learning Objectives:
|
Specification:
|
4.3_start_up_legal_issues_activity.docx | |
File Size: | 39 kb |
File Type: | docx |
One thing that a business owner must do is choose a name for their business.
- This name must be different from the name of any other business
- Cannot choose the name of an established business that has a trademark (E.g. M&S)
- Company name must be unique - will be checked by Companies House
- If a sole trader, must not be the same as that of any other similar business in the local area
There are other things that a business owner should consider regarding the name as well.
- The name should promote the business (You would not want to call your business 'Bad Value' or 'Incompetent Cleaners'
- Many business names my incorporate the names of the founder(s) - e.g. M&S, John Lewis - doesn't always give information about the business
- A business might want to include what it does in the name
- It might want to use words that entice the customer
Whether or not the business will be run as a sole trader or private limited company will also affect the business name. If a business owner was a sole trader, they might call their business 'Crump's Crumpets' for example. However, if they were a private limited company, they might call their business 'Crump's Crumpet's Limited'. The word limited is often abbreviated to 'Ltd'. Using 'Ltd' is a warning to traders with a business that it has limited liability.
All businesses have to keep records. A record is evidence of what has happened in the past.
Key term: RECORDS - Evidence of what has happened in the past; records could be kept in paper form or in computer files.
A business should keep a record of the names, addresses, telephone numbers and email addresses of their customers. This can help with things like yearly maintenance check ups (depending on the type of business).
It is good business practice to keep a variety of different records, but there are some that a business must keep by law. One of the most important concerns tax. A business will be responsible for paying a number of different taxes. It is essential that these records are kept so that it can be proved they paid the right amount of tax. Taxes are paid to a government agency called Her Majesty's Revenue & Customs (HMRC).
Key term: HM REVENUES AND CUSTOMS - The government authorities in the UK responsible for collecting tax. All businesses must register themselves with the HMR&C.
To calculate the correct amount of tax, it is important to keep a record of every time you buy equipment, pay bills, receive invoices from suppliers, make payments and receive revenue from customers. Businesses are responsible for paying VAT and claiming it back in certain circumstances, so it is important to keep a record of what they have bought, from whom and when.
|
|
The income a business receives is also taxed. A business will have to pay income tax and National Insurance contributions, meaning they must keep a record of the income they receive. HMRC will also expect a business to complete forms to help calculate how much tax they should pay. These can be complicated and time-consuming to fill in. HMRC can chase a business if there are unpaid tax bills. Businesses are responsible for registering with HMRC and telling them that they have to pay tax. This is a complex system and a business has to tell the tax authorities separately for most of the different taxes they pay. The taxes that a business pays depends on:
- the amount of sales they have over a year
- whether or not they employ any workers
- whether they are a sole trader or a limited company
taxes on small businesses
Key term: VAT (VALUE ADDED TAX) - a tax on the value of sales; it is paid by businesses to government.
This is a tax on the value of sales of a business. A small business only has to pay VAT if its sales are more than £82,000 a year. If a business makes sales over this amount, they must pay VAT of 20%. This would be paid by customers in higher prices. A smaller business has the competitive advantage of not paying VAT. Businesses pay it on the value they have added in the production process. If a business buys equipment, they pay the supplier VAT but can claim it back. This is a complex system that small businesses can find difficult to manage. It is also very time-consuming.
|
|
Key term: INCOME TAX - a tax on the value of income earned by workers; this includes sole traders who have to pay income tax on their net earnings.
A business is responsible for paying income tax in 2 ways. First, if it employs workers, it must take away the income tax due by those workers on their wages and pass the money to HMRC - this is called the PAYE (Pay as you earn) system. Second, if businesses are sole traders, owners must pay income tax on their earnings. Their earnings are the difference between their sales revenues and the expenses of running the business.
|
|
Key term: NATIONAL INSURANCE CONTRIBUTIONS (NICs) - a tax on the earnings of workers; Employer's National Insurance contributions are paid by employers on the wages of their workers; employees and sole traders have to pay NICs on their earnings.
These are a type of tax linked to a number 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 NICs. Businesses have to pay different types of NICs. If the business employs any workers, it has to pay 2 types. First, as with income tax, it has to deduct NICs from the pay packet of its employees and pass this on to HMRC. Second, it has to pay employers NICs. This is calculated as a proportion of the wages of employees. In addition, if the business is a sole trader, the owner has to pay a flat rate NIC plus a percentage of net earnings.
Key term: CORPORATION TAX - a tax on the profits of limited companies.
This 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.
|
|
Tax is one of the factors that influence entrepreneurs about whether they become sole traders or set up as limited companies. Keeping proper financial records for tax is a major cost to businesses in terms of time and effort needed to do it properly. They often act as unpaid tax collectors for government. It is not surprising that many businesses do not like the tax authorities.