If you are setting up a small business on your own, or even with a partner, it is easy to think that the fastest and easiest way to get the business going is to set out on the self-employed route. That is probably true in the early days. But even if you are only two individuals at the beginning, if you have any ambitions to hire staff it is worth setting up a PAYE system – or pay as you earn tax system – as soon as possible.
“If you start self employed and then take someone on it is an absolute nightmare. You have to work out half the year as self employed and the other as PAYE. I would say just make the effort and go PAYE straight away,” advises Julian Hare, financial controller at IB Net.
This may seem like an unnecessary burden when it is two of you working from the spare bedroom, but it could save you a lot of hassle later on in the year. The simplest way to resolve this is to simply outsource it to a payroll bureau. These are relatively cheap and easy to access.
Typically this will involve an upfront fee to set up the service and a small additional charge every time a staff member is added. This means that you won’t build up any nasty debts to the government in unpaid tax or national insurance – and these are nasty debts as the government tends to get paid – but for a small sum you are also assured of being up to date on all the latest rates and legislation.
And when you do get to the stage of hiring staff, they will expect to be paid on time each and every month. You may be building a business for the future, but no matter how much they believe in your business, your staff are here for the cheque at the end of the month. Investing in a payroll system early will help to ensure that your most precious asset – your staff – don’t walk when the payslips are late.
Another administrative hassle that you might ordinarily choose to avoid is VAT. Unless your business is over the threshold – which is currently £70,000– you don’t have to register for VAT.
You do have a choice. If the administration involved is too much for a small company, you don’t have to register until you hit the threshold. But even if your company hasn’t breached the threshold, it is worth considering.
“You should be VAT registered sooner rather than later,” says Mark Holland, head of the IT consultancy for London and the South East at accountancy firm HLB Kidsons. “Obviously if you have no revenue it is no problem but you will be incurring costs and you may be able to recover the VAT on an element of those costs.”
In fact, if your company is buying people-based services, it is unlikely that there will be much of a VAT element that you could claw back. However, if you are buying in raw materials, VAT is likely to be included in the cost and you might be able to reclaim that 20%. It really depends upon your individual circumstances.
(Effective since January 3 2011, the rate of VAT has risen from 17.5% to 20%.)
It is worth becoming comfortable with the concept as soon as you can. “It is far easier to do it from the outset. You get to build it up and understand it and you don’t have the problem of where the threshold is,” says IB Net’s Hare. “In general terms I would say do it from day one always. There is no reason not to do it. It is not something to be frightened of.