The Questions Most Asked by Small Business Owners

We have compiled a list of the top six questions most frequently put to our panel of business adviser experts.

1. Should I be self employed or a sole trader?

Whether you trade as a sole trader or as a limited company is a key decision when starting a business. If the decision is to start as a sole trader, it is prudent to review the situation after the business has become established. Basically, a limited company provides opportunities for saving tax but it involves a higher level of bureaucracy which you must either undertake yourself or pay others to do so on your behalf. Limited liability might also be advisable if the business venture is particularly high risk.

Forming a limited company has a number of implications, particularly in terms of taxation of profits. There are a small number of ways you can take money out of a limited company – dividends out of profits, a salary which is subject to Pay As You Earn (PAYE) and National Insurance Contributions (NIC) or by repaying a directors loan account which is in credit. A sole trader on the other hand can take money out of the business as frequently as they like, provided it does not leave the business short of funding.

The forms required will also be different. A limited company will be required to file a corporation tax return with HMRC and annual accounts in the proscribed legal format must be prepared and delivered to Companies House. The accounts filed must comply with the statutory requirements. You would need to be aware of the deadlines for completion and submission of the company’s returns as there are penalties for late filing. A sole trader on the other hand needs to prepare the “Self Employment” return as part of their annual Tax Return. This requires a profit and loss account and balance sheet but if the turnover (sales) is less than £15,000 the requirements are simplified.

Finally, the payments of tax are different. Corporation Tax (for a company) is paid 9 months after the end of the financial year whereas payments of Income Tax and Class 4 National Insurance Contributions are made twice a year –on 31 July and 31st January, based on a payments on account system.

Being a limited company has other advantages too. For example, it makes it easier to transfer a share of the business to a new investor. A limited company format is probably appropriate where a venture is high risk. When selling a business run by a limited company there may be a choice of (a) selling the shares (generally no VAT consequences other than a block on input tax relief on purchases directly related to the (exempt) sale of the shares) or (b) the sale of a business by the company (which may be a tax-free transfer of a going concern if all the conditions are met).

2. How do I deal with excessive sick leave?

The question for consideration here is whether or not this is a conduct, or a capability issue and you need to check your contract to see how persistent absenteeism is classified. Also, check what your contract says about taking on other work and whether or not this can be done without your permission.

You need to talk to your employee in respect of the overall number of hours per week he is working across both jobs to make sure he is not in breach of the working time regulations, as this will look at his combined hours across both jobs.

You can also consider whether or not you want to challenge the latest absence on the basis that he was not sick. Call him to disciplinary hearing in line with your company procedure. Put together a list of his sickness absences and provide this to him in advance of the hearing so that you can discuss it with him. Listen to what he has to say and decide whether or not you wish to take any disciplinary action at this stage.

Make sure he understands that it is his obligation to attend work fit and able to carry out his duties and if he cannot manage two jobs and meet his obligations to you then he will need to decide which job he is going to give up. Ensure he understands the consequences if this absence continues. If he is having difficulties making ends meet then surely he cannot afford to lose pay due to sickness and cannot afford to be dismissed due to absenteeism and unreliability.

3. How do I pay redundancy?

As a company, you have an obligation to meet your financial commitments. Redundancy payments are a debt of the company, which will need to be met. If the company is legally insolvent, then the insolvency practitioners, administrators or liquidators handling this insolvency will look at how to make these payments.

Another option would be to provide your employees with a form, allowing them to make a claim for a payment from the National Insurance fund through the Redundancy Payments Office. If your business would become insolvent as a result of making the statutory redundancy payments, assistance is available from the Department of Business, Innovation and Skills (BIS) Redundancy Payments Service (RPS) and Insolvency Service, though you will be expected to repay the debt as quickly as possible.

If you are in a position where you are struggling financially to meet your commitments, you need to seek advice with regards to your options and the potential liabilities of any of the company’s debts.

Furthermore, you must analyse the potential for these liabilities to transfer to any new company should a TUPE situation occur.

4. My turnover is falling – what can I do about my credit rating?

A turnover reduction by 75 per cent would raise serious doubts about the long-term future of your business. That you are still in business is a testament to your persistence and determination.

I suspect you are in a catch-22 situation. What will increase the banks perception of your business’ viability is an increase in turnover, but this may be difficult without working capital finance.

One possibility is to consider factoring or invoice discounting your sales invoices. This is not suitable for all businesses; if you sell to other businesses (not directly to the consumer) and your customers are credit worthy it might be a good choice. The factor or invoice discounter provides up to 80 per cent of the invoice value straight away and the balance (less costs) when the customer pays. With factoring the finance company takes over the credit control and the customer pays them directly. With invoice discounting you retain the credit control but the finance provider sets the credit limits applicable to each customer. Factoring or invoice discounting has the merit of giving an increased facility as your sales rise but reduces when sales fall.

You should also consider if you have any business assets, which might be sold or re-financed to provide working capital. You may have a motor vehicle or other assets which could be subject to a hire purchase agreement to provide more working capital.

You might want to consider approaching another bank. Many banks now have a confidential hotline that you can use to make an initial approach. The banks websites will have the details, as well as useful suggestions for improving your financial management. However your poor credit rating may deter other banks interest in financing your business.

You might have some personal assets, which can be sold to realise some cash to inject into the business. You should be convinced that the business has a long-term future (in business terms, is viable) before considering this. I suspect there are few quick solutions. You may have to trade out of your difficulties, keeping the bank informed of any improvements in sales. You may have to wait until it is evident that sales are growing in a sustainable way before they will consider increasing your overdraft facility.

5. Should I go down the franchising or licensing route?

With a business format of franchising, you put together a complete business package. You then license this format to franchisees. They run their own businesses, but use your methods and trading name.

It entails the following:

• You provide an operations manual, saying how to set up and manage a new outlet;

• You agree a contract with your franchisee setting out what rights and obligations you each have. For example, you might provide marketing support;

• The franchisee pays you for the right to use your business concept. For more information, see the page in this guide on franchise fees and royalties;

• You train and support the franchisee through their start-up period.

There are other business arrangements which are sometimes also referred to as franchising, including:

• Selling a license allowing someone else to manufacture and sell your product, but without telling them how to run their business

• Using an agent, who sells your product on your behalf;

• Setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers.

From the above it should be apparent that setting up the first franchise is a costly and time-consuming process. But subsequently franchises should allow you to capitalise on the experience of the first.

You might also like to talk to the British Franchise Association. Talking to people who have experience of the processes involved in franchising over a wide variety of sectors will, in the long run, save you time and money.

6. I set up my own company but need to know how to pay tax and National Insurance?

You should have notified HMRC when you started in self-employment. As you are now regarded as self employed, you will need to get accounts prepared (showing your sales, costs and net profit) for the first trading period of your business and then every year thereafter.

This will form the basis of your income tax and National Insurance liabilities for the years ended 5th April. You will need to complete a tax return showing your income from employment as well as the sales, expenses and profit figures from your first year’s mobile hairdressing accounts.

For income tax purposes, profits from your hairdressing business will be added to any other income you received (such as employment) in the tax year to calculate your total taxable income. Income tax and class 4 National Insurance on your business profits is payable in two instalments on 31 January and 31 July together with an adjustment of any balance owing the following 31 January. So for the tax year 2009-10 (the current tax year, 6th April 2009 to 5 April 2010) you should make payments on 31 January 2010 and 31 July 2010 with any balance owing on 31 January 2011.

Your income tax personal allowance (£6,475 in 2009/10) will be in your code number used to calculate the PAYE (Income Tax) you pay on your full-time employment. Income tax is payable at the basic rate (of 20 per cent) on earnings up to £37,400 (after the personal allowance). So if your combined employment income plus hairdressing business profits are less than £44,875 (£6,475 plus £37,400) the income tax on the business profits will be 20 per cent. If your total earnings exceed £44,875, some of your hairdressing profits will be subject to income tax at the higher rate of 40 per cent. You also have to factor in National Insurance Contributions (NIC). Class 4 NIC is payable on business profits between £5,715 and £43, 875 at a rate of eight per cent (and one per cent on profits above £43,875).

So what are your taxable profits likely to be? You will need to keep records of your takings and expenses. Most expenses should be allowable as a deduction against your takings. As the business is a mobile hairdresser, the expenses of running the vehicle (minus any personal use) will be an allowable deduction. Any equipment you bought (hairdryers, for example) are also likely to be a 100 per cent deduction. So assuming your expenses are largely allowable and your combined hairdressing profits and employment income do not exceed £44,875, if you save between 25 and 30 per cent of your turnover (sales) each week/month, you should have sufficient money set aside for income tax and NIC, when the payments on account fall due. After the first year your accountant should be able to advise you on future liabilities.

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

Related Topics

Sick Leave
Tax & Vat

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