Frequently Asked Questions

Starting a new business

Q: I am thinking of starting my own business. A friend who is currently self employed said I had to register as self employed. Can you please tell me how to do this and how soon do I have to register?

A: You have to be registered as self employed for National Insurance purposes within three months after the end of the month in which you became self-employed. Failure to do so will result in a £100 fine.

There are various ways to register. The most popular ways being either by telephoning the Self Employed Registration Helpline on 08459 15 45 15, or by filling in form CWF1. The form will act as a joint notification for both Tax and National Insurance purposes and you will be required to complete a tax return every year.

Can I reclaim VAT I paid prior to registration?

Q: My business has been growing very steadily and I am very close to reaching the threshold for becoming VAT registered. A friend who also runs a small business mentioned that once I reach the threshold for becoming VAT registered, I will be eligible to claim back the VAT from my previous two years of trading. Is this true?

A: Unfortunately not, you can only claim back the VAT on goods that you have acquired in the 3 years prior to registration which are still held in stock (or used to make other goods which are still held in stock) and originally acquired for the business purposes. This also includes VAT incurred on fixed assets you still use in your business. You can also recover the vat incurred on services, which have been supplied within 6 months prior to becoming registered, assuming they were also supplied for the purpose of the business. Therefore, any VAT suffered on goods which have been sold on to customers cannot be re-claimed.

The National Minimum Wage

Q: I am currently looking to take on a new member of staff.  I understand the national minimum wage rules may mean I have to pay him a certain hourly rate? Is this true?

A: The minimum wages rates are currently set at £5.52 for adults aged 22 and older. The development rate for those aged 18-21 inclusive is £4.60 and the development rate for 16-17 year olds is £3.40. It was announced in the Chancellors Budget 2008 that these amounts are going increase on 1st October 2008.

New CIS scheme changes

Q: I am currently working as a self employed bricklayer and have heard that the Construction Industry Scheme which I am registered under has changed. Can you tell me about the changes?

A:  You are correct, there is a new scheme which was introduced with effect from April 2007 and it applies to everyone who is a contractor and/or subcontractor in the construction industry. This can include limited companies, partnerships, trusts and self-employed individuals such as you.

The main differences between the new scheme and the one you have used prior to April 2007 is that your cards and certificates will be replaced by a “verification” service to confirm whether subcontractors should be paid gross or net  of tax. Additionally, the tax rate for registered contractors has increased to 20% from 18%.  Subcontractors who cannot be verified by contractor will have tax deducted at a higher rate of 30%.

How will the VAT Flat Rate scheme help me?

Q: I have exceeded the VAT threshold and will be registering for VAT at the end of the current month. I am not great with administration aspects of my business and accounting for VAT is going to take a lot of time that I don’t currently have. Are there any schemes which will make accounting for VAT easier?

A: Yes there are. HM Revenue & Customs have three simplified accounting schemes for small businesses, one of which is the “Flat Rate” scheme. If your business has a taxable turnover (excluding VAT) up to £150,000 you may be eligible. You are also able to join on initially registering for VAT if you expect your turnover to be under this threshold for 12 months from registering.

The flat rate scheme saves you time, by simplifying your VAT accounting into a single calculation. Under the scheme, you pay VAT as a percentage of your turnover instead of having to work out and record the VAT on all your sales and purchases.

The percentage is determined by the type of business (that is, the kind of goods or services being traded) and this varies between 2 and 13%. It makes your life easier as there is no input tax to account for (although a business can reclaim VAT on capital items costing over £2,000). Additionally, businesses on the scheme may take 1% off the flat rate they are using for the first year they use the scheme.

You must leave the scheme when your turnover (excluding sales of capital assets) exceeds £225,000. You can however voluntarily leave the scheme at any time but you must let the HMRC know in writing, and if you do decide to leave, you cannot rejoin it for 12 months.