The UK is one of the most entrepreneurial countries in Europe. In 2016, nearly 660,000 new businesses were set up, however the three-year survival rate was last recorded at only 53.7 per cent, with London below average at 50.1 per cent, according to the Office for National Statistics.

Setting up a UK-based business is generally quick, cheap and easy. But whether you are a small business entrepreneur or a scalable start-up entrepreneur, the road ahead can be treacherous and there are common pitfalls which can be easily avoided. Because setting a business up is now so straightforward, many entrepreneurs fail to bring in a professional adviser early enough to avert costly mistakes.

There are some key considerations when embarking on an entrepreneurial venture, and it’s important to get a tax and business adviser in at the earliest opportunity.

Quick…register a company name!

It can be fairly common to find entrepreneurs that haven’t given this much thought and immediately purchase an off-the-shelf company through which to trade. Company ownership comes with significant red tape, Companies Act compliance as well as the need to consider HMRC related issues sooner than under self-employment (for example notifying HMRC of the commencement of trade).

An unincorporated business comes with various advantages, aside from not having to file company accounts, annual returns and suchlike. Where a business is expected to be loss-making in the early years, under s72, the losses can be carried back and offset against net income of the preceding three years. This will generate a tax repayment which can be a useful source of cash for the individual or funds for the business in its early stages. There is no such equivalent for companies. Given that it is common for businesses to be generating losses in the start-up phase, this can represent an attractive advantage for keeping trade outside a company structure.

Raising finance, finding your ‘Dragon’

If the vision is to be a scalable start-up entrepreneur, it is likely you will be looking for an investor to help you with some of the hefty start-up costs associated with manufacture, logistics and marketing. There are some fairly generous venture capital tax reliefs available to investors such as the EIS and SEIS schemes. Of course you will need to be offering share capital and so a limited company will be your only option here.
The availability of EIS/SEIS relief, together with a solid business plan, is a strong draw for investors. Many venture capital investors are sophisticated serial investors and will want to minimise their potential exposure as much as possible. They will probably expect the company to have taken good quality professional advice on the availability of tax relief, and to have obtained advance assurance from HMRC.

Under the SEIS scheme a business only qualifies if the trade is less than two years old. This might sound like a simple enough principle but it must not have been carried out for more than two years by either your company or any other person who then transferred it to your company. In addition, your company, or any qualifying subsidiary, mustn’t have carried on any other trade before you started the new trade. The misleading tagline can lead entrepreneurs into a false sense of security regarding the business’s qualification for SEIS relief.

The EIS landscape has evolved quite substantially of late, with greater limitations on which investments will qualify. In addition restrictions such as the no connection test are easy to fall foul of quite innocently where it is decided at a later date that an investor should be more heavily involved in the business and is appointed as director, for example.

Spent a fortune creating an innovative product?

The particularly (but not limited to) tech-savvy innovators will often be spending small fortunes developing products which they hope will be the next big thing and will, one day, change the world. It is thought that 9 in 10 of businesses eligible to claim R&D tax relief are not doing so. Tax credits can often be quite generous, but identifying where it is available and applying for advanced assurance can be an art. In addition, to qualify the business must be trading through a company.

The books, the books!

It’s really important that business owners ensure the affairs of the business and his/her own personal affairs are kept separate. It is all too common to find the owner using the business bank account as their personal bank account also, and this can become an expensive bookkeeping mess to sort out come filing date.

From April 2019, VAT-registered business will need to file VAT returns via bookkeeping software that is compatible with HMRC’s systems. Getting the bookkeeping approach and software right from day one in anticipation of future changes can reduce the number of headaches later on down the line.

Did we mention VAT?

The VAT registration threshold is currently set at £85,000. This means that a business does not typically need to register for VAT until its taxable supplies hit £85,000. There can be various benefits to early registration, like the ability to reclaim input VAT on start-up costs, but for businesses that do not go down this route and miss that they have exceeded the limit, can find they are lumbered with expensive penalties at inconvenient times.

There are various VAT schemes available to businesses that can ease compliance burdens such as the flat-rate scheme), but without a knowledgeable adviser, these opportunities can be missed.

Falling in love with your product

One of the biggest mistakes many business owners make is falling in love with their product or service. In doing so you neglect what the market demands and what your client if is looking for. Just because you believe you’ve got a good idea, doesn’t mean everyone else does. It’s really important to be realistic when starting out, do your market research, generate forecasts based on solid assumptions and conservative estimates, and be prudent in your spending. It’s incredible how quickly a £100,000 venture capital investment can dwindle if your eye is taken off the ball.

At the end of each month, reassess your spending and forecasts for the next 12 months. It is extremely common to run out of money quickly and go knocking on investors’ doors again. They will need to see a strong business case for injecting more money so you need to have gumption in your conviction.

So in conclusion…

There are so many traps you can fall into when setting out in business for the first time. Getting sound strategic and tax advice early doors can be the making of the business.

Androulla Soteri is tax development manager at MHA MacIntyre Hudson.