The key role of your Accountant

The key role of your accountant
by John Painter, formerly Chartered Accountant & Business Advisor, retired Partner of Haines Watts Worcester

Every business has to prepare accounts and file tax returns, whether it is for HM Revenue & Customs, or if you have a Limited Company or Limited Liability Partnership, for the Registrar of Companies too. It is therefore very important that you choose the right accountant and adviser for you. One that you feel that you can talk too, one that offers good advice and one that allows you to sleep at night knowing all of your statutory obligations have been met.


It is important that you find that person early on in your considerations to commence your own practice as the structure of the new business (the model that you need to adopt) needs to be set up to meet your goals and ambitions.


You may think that the cost in those early months of your business is something that you cannot afford, however it is much more expensive to correct things that go wrong. A good accountant will assist and advise on the other things that you need before you start business for your own benefit.


"...it is much more expensive to correct things that go wrong..." 
The Different Business Models 

The first thing that you will have to decide is what type of business you are going to have. There are four structures you should consider: Sole Trader, Unincorporated Partnership, Limited Company and Limited Liability Partnership.

Let us look at the merits and demerits of each of these structures:

Being a sole trader is the simplest of all of the structures. It means that you are conducting your business in your own name but you will need a business bank account to ensure you keep your personal funds and those of the business separate. Annually a set of accounts will be produced and you will be taxed on the profit, whether you have drawn the profit into your personal account of not.

Assuming that you are already earning from employment you will be taxed at your marginal tax rate, currently 40% or 45% dependent on your level of income from employment.

An unlimited partnership with a spouse is another way of working. Similar to a sole trader this allows you to split the profits between you and your spouse although you will have to be able to justify your spouse’s involvement. For example it may be that they are your secretary, taking phone calls, managing your appointment book, managing your accounts etc... 

If they do not share your technical expertise then it is difficult to say your spouse is say a consultant surgeon, but medical secretaries are very skilled and sought after, so the more qualified in that role your spouse is, then the more you can justify a more equal share of the profits.

As unincorporated businesses a sole trader and a partnership have unlimited liability for their debts, indeed in an unincorporated partnership you become jointly and severally liable for the debts. So if you partner enters into a financial arrangement in the name of the partnership and reneges on the repayments, then you will become liable to make the repayment.  

The underlying comment here is to be very careful who you go into partnership with and sometimes your spouse is not the right person.

This is where a Limited Liability Partnership (LLP) comes into play. The difference is given in the nature of the entity. A separate business bank account is required and you do need to have at least two members. 

Although it is a separate legal entity in the same way as a limited company, the members of an LLP are taxed as though it is an unincorporated partnership. This is clearly a disadvantage in many ways, especially when you are already a higher rate or top rate tax payer.  However there are reasons for choosing this structure if you have already established the partnership, or there is property that is within the partnership. There is little to change and transferring land and buildings from a partnership into an LLP does not attract Stamp Duty Land Tax.  

The fourth structure is that of a limited company. A limited company is a separate legal entity to the owners and in theory the liability of the shareholders is limited. I say in theory because there are times when it is not.

A bank is unlikely to lend money to a small limited company without asking for a personal guarantee from the directors or the owners, and many suppliers will also ask for a guarantee too. As a professional you will have some form of liability insurance, but if you were negligent then you are not able to hide behind the limited company screen. So, all in all, limited liability is there in name but not always in practice.

With a limited company the company (as a third party) pays corporation tax with no reference to the marginal rate of tax that you, the owner, pay. This means that whatever the profits of the business the tax rate is currently 19% (2019-20).

However, if you are employed by the company, taking money out by way of salary will mean that you will have to incur PAYE and National Insurance on what you draw and the company will also have to pay Employers National Insurance too (currently 13.8%). If you are earning more than £50,000 per annum from your main employment or over £58,656 from both employments then you can apply for a deferment of National Insurance, which will reduce the amount you pay personally, but that does not apply to the Employer’s portion.

There is, however, a way to reduce the liability for National Insurance and that is to draw dividends. This is where the structure of the limited company is very important.  

The owners of a limited company will own shares in the company and there will be a minimum of one share in issue. If you have 2 members (shareholders) there will be at least 2 shares in issue and so on. However it is possible for a member to own more than one share.  

If, for example, a new company was formed with 100 Ordinary Shares of £1 each issued, then we could have 100 people owning 1 share each or 1 person owning all 100 shares, but more likely somewhere in between. If my spouse and I were the two shareholders then it is quite likely that one of us will own 2 shares more than the other (51:49), rather than owning an equal number (50:50).  

Owning those 2 extra shares will mean that person will have control, as they own more than 50% and under company law can pass resolutions. There are certain resolutions that require a 75% majority which wouldn’t be possible even with the shareholdings at 51:49, but those resolutions are matters such as changing the name of the Company and agreeing to sell the Company.

Paying dividends is done on a per share basis. Thus if I have 51 shares and there is a dividend of £10 per share paid I will receive £510.  

The first £2,000 of dividends received by an individual each tax year are free of tax (currently). If you are a basic rate tax payer, then you will pay 7.5% up to the point it takes you into higher rates, when it goes up to 32.5% and there is also an additional rate of 38.1% for those earning over £150,000. This tax is paid by the recipient of the dividend.

A limited company is probably the most tax efficient way of owning a business if you don’t want all of the profits of the business out and are happy for them to accumulate. But if you are already earning in excess of £100,000 and the profits of the business are say a further £100,000 and you would like to take the post-tax profits as a dividend then there is 19% Corporation tax on the £100,000 (£19,000) as well as approximately £50,000 of dividends where you will pay 32.5% (£16,250) and £31,000 where you will pay 38.1% (£11,811). A total of £47,061 or 47% of the profit.

It is important to ensure that you have the correct business model for your new business venture and the model you will chose will be the one that suits your needs best. 

It is important that you use your accountant at this early stage. Commencing a business requires notifying HMRC within time specific deadlines. The accountant will know of these deadlines and will ensure that your business is set up in the correct way and all notifications have been made.  

"... it is important to ensure that you have the correct business model
 for your new business venture..." 
Forming a limited company

Forming a limited company is relatively easy with ready made companies available to be bought quite cheaply over the internet. There are specialist company formation agents and also solicitors and accountants that are quite capable of forming them too. The shareholding of the individual shareholders is quite important if the Company is going to give you the structure that you require and maybe the tax benefits you desire. For this reason, I would always recommend you speak to a solicitor or accountant.

I like to work with a solicitor having formed the company myself. I use specialist software and once the Company is formed, if there is a need for a shareholders agreement to be prepared, then I ask the solicitor to deal with that.

Once formed, you set an Accounting Reference Date and each year make accounts up to that date. The accounts are for the shareholders and HMRC and the format is governed by the Companies Act and Financial Reporting Standards.   

The copy that goes to HMRC must be in a particular format, ixbrl, and have to be submitted within a year of the Accounting Reference Date along with a Corporation Tax Return. These documents together show the calculation and amount of Corporation Tax that is payable.

In addition a copy of the annual accounts has to be filed with the Registrar of Companies. The Companies Acts allow for abridged accounts or accounts with reduced information to be filed with the Registrar which most micro and small companies take advantage of. Also, a limited company has to file an Annual Confirmation Statement where the Directors confirm that the information held at Companies House is correct. There is a fee (currently £13) that needs to be paid when filing this return.

Having a limited company also means that there are other forms that need to be filed, usually within a specified timescale and in particular formats. It has become a lot easier to file the information nowadays with online access to Companies House but the sort of information that you need to notify them about are matters such as a change in address of the Registered Office of the Company, changes in Directors or in their circumstances, and new shareholders (changes in shareholders are dealt with in the Annual Confirmation Statement.

Many of these reports and accounts also have to be filed if you are a Limited Liability Partnership, however a Limited Liability Partnership doesn’t have a Memorandum and Articles of Associate that govern the business. Instead they have a Members' Agreement that the Members sign.   

It is very similar to the Partnership Agreement that I refer to below but refers to Designated Members and members rather than partners. However a Limited Liability Partnership does need to have a Registered Office and has a registration number, rather like Limited Companies.

"...  I would always recommend you speak to a solicitor or accountant...."

Agreements

Unless you are a sole trader you will need to have various agreements with other parties involved.

In a partnership, a Partnership Agreement is essential. Without it, the partnership is governed by the Partnership Act of 1890. Getting out of a business relationship is harder than getting out of a marriage and the biggest problem that I often see is where a partnership has been set up with a Spouse and there is no partnership agreement. The marriage breaks down and a divorce is put in place, the business is then the source of the arguments and disputes.

A Limited Liability Partnership has a members’ agreement and a Limited Company has its articles of association. Both of these are statutory documents, and the latter has to be filed at Companies House. However a Members Agreement (like a well written Partnership Agreement) will detail what should happen if a Member dies or wishes to leave. The articles of association of a limited company does not do that. In which case a Shareholders Agreement is required for exactly the same reasons that I outlined a Partnership Agreement is necessary.


Insurance

As you will be well aware you need to have your insurance for the work that is carried out, but is that all?  

Apart from some form of indemnity insurance you will need to have Office insurance. This is to cover the contents of your consulting suite, if applicable, but also to give you Employers and Public Liability insurance. With the advent of Cyber Crime, adding some Cyber insurance is also a very good option.

From a personal point of view if you have the limited company as your sole source of income then you may well need to consider providing for life cover for yourself, or more importantly critical illness cover. And cross-shareholder insurance if your co-shareholder is not a spouse so that you can pay out the value of their shares to their estate should they die.


Stationery

The information that needs to be given on stationery is set out in the companies’ acts and generally applies to all business structures. It also applies to electronic communications and websites too. 

The information that must be shown is the correct Company name, including "Limited" if you are a limited company, the company registered number and registered office address, and the country the Company is registered in (England and Wales, Scotland or Northern Ireland).  Should you wish to show the Directors’ names, then you would need to list all of the Directors. 


Data Registration

Whatever the format of your business you will be holding personal data of your patients, so it will be necessary for you to register with the Information Commissioners Office (ICO). There is an annual fee currently that is £40 if classed as a micro organisation, and £60 for small and medium sized organisations. To be a micro organisation you will need to have turnover (fees) of less than £632,000 and no more than 10 employees and this will cover most start-ups.

Also you will need to report Data Breaches to the Information Commissioner under the General Data Protection Regulations (GDPR). These breaches can be dealt with on a criminal law basis if they are considered to be serious enough.


Business Bank Account

One thing that you must do is open a business bank account and keep the business money separate from your own. Should HMRC chose to look at the business records you will not want to give them the opportunity to look at your personal bank account. Business bank accounts are generally more expensive to run than personal accounts but they are necessary.


Keeping Accounting Records

Good record keeping is essential if you are to enjoy working in your business and growing it. Records can be kept manual or electronically (either on a spreadsheet or on specialist accounting software). Your accountant will advise what is best for you. Some software, especially hosted software can often link with your diary system or your database for the patient management system that you use.  

Most hosted software also has links that allow you to import data from your bank as well as having simple links for invoicing. In the next few years, HMRC are going to insist that your records are kept using a product that allows for seamless integration from the initial entry through to the final accounts and returns submitted. This is known as Making Tax Digital and is already in use for VAT registered businesses with a turnover in excess of £85,000 per annum. 


"...it will be necessary for you to register with the Information Commissioners Office (ICO)..."

IR35 Considerations

Many readers will have heard about IR35, HMRC’s rules for dealing with personal service companies. It is also known as “off payroll working”. This is where a company will engage with the service provider's company as a sub-contractor, but in every other respect the service provider acts as an employee. The service provider has regular hours, a clearly defined work area, is guaranteed payment and I have even heard of a situation where they were included on the annual holiday chart.

Originally set up for contractors in the design and IT industries, at one point Government departments were the biggest employers of service providers using limited companies, and their use has spread into many industries as their use allows for some tax efficient savings to be made.

In 2017 significant changes to the tax treatment of contractors working in the public sector were introduced and it is widely accepted that these changes will be introduced to the private sector in the next year or so. It is more important than ever therefore to get the contract between you the service provider and the “employer” right if you are effectively working through an agency or an umbrella company that deals with the end user for you.

As I have already mentioned the rules are changing and there is currently a review in place with the expectation that the changes will be brought in in April 2020. It is therefore imperative that you consult your accountant to see how this will affect you and ask them to keep you informed of the changes you may need to make as the new guidance becomes clearer.



Conclusion

None of us want to have any problems with HM Customs & Excise and all will want to pay the correct taxes at the correct time. We all want to sleep in our beds knowing that our obligations as business owners have been met. However most people don’t have the skills to understand all of the legislation that is applicable and equally I don’t have the skills that you have. That is why we use specialists. As a General Practitioner accountant I have people with specialist skills around, tax specialists in business tax or personal tax, highly qualified accountants who can ensure that the accounts are in the correct form and comply with the legislation, and also people who understand cloud accounting software and how it will improve your record keeping and the information that you need to ensure that your business is successful.

Why wouldn't you engage the services of an accountant?

"...why wouldn’t you engage an accountant...?"

To contact the author directly, please E-mail:  JHPainter@hwca.com
Share by: