Start-up legal and tax issues

Aims for today

1. Understand the key legal issues of starting up a business

2. Examine the implications of VAT, Income Tax, National Insurance and corporation tax

But first a thinking skills question...

What has this

picture got to do with starting up

a new business?

Legal Issues

1. Business organisation

2. Employment

3. Consumer protection

4. Environmental protection

1. Business Organisation

• Firstly you must decide which business organisation you want – a limited company or an unlimited firm?

• Establishing a company creates a separate legal entity. This means that if a customer sued ‘Hale’s Butchers LTD’ for food poisoning, they would be suing the business. If the court decided that the company should pay a £1000 fine, then Mr Hale would not be personally liable for the debt – his company would be as he only has LIMITED LIABILITY.

Task 1: Limited company or unlimited firm?

• Consider the differences between limited and unlimited liability.

In your groups, create a list of:• Existing limited companies • Companies that may set up as sole traders with

unlimited liability...

-You have 10 minutes -

Limited companies examples

Limited companies

Alliance & Leicester

Domino's Pizza

Tesco, Asda, Morrisons

Boots & First Fof Accont

AXA HealthcareDirectline

Man United

Google & MSN

New Look

First Choice

NatWest PLC

Shares in a public limited company can be bought and sold on the Stock Exchange. Shares in a private limited company can only be bought and sold privately.

Business Name Legal Issues• New start up business names must be unique and not

copy a trademark or copyrighted name.

• New company names are checked by COMPANIES HOUSE. http://www.companieshouse.gov.uk/

• Sole traders cannot use the name of competitors in their local area but can have the same name as other sole traders elsewhere.

Business Name Legal Issues

The business name:• Should promote the product – for example, ‘The Rubbish Roadside Cafe’ wouldn’t exactly sell food!

• Say what it does/offers – ‘The Roadside Coffee House’.

• Could contain the founders names ‘Marks & Spencer's or ‘ Smith’s Quality Coffee Cafe’.

Task 2• In your groups, come up with a business name

for the following new start-ups. Decide if they are limited companies or sole traders (Check your proposed names on the COMPANIES HOUSE website)

• A shoe shop in Maidstone selling expensive ladies footwear.

• A mobile ice cream vendor (van).• A new online sports shop.

Keeping records

• All business are legally required to keep records. They are evidence of what has happened in the past.

• Generally, non-financial company records (accident book) must be kept for 5 years;

• All financial documents (bank statements, receipts) must be kept for 7 Years.

Page 101

Generally any financial records are legally required to be kept for 7 years

Cash receipts books Vehicle log books

Cheque butts Cash register Z Totals

Credit card receipts Permits or licenses

Tax invoices Wages and salary payslips

Purchase orders Bank records

Workplace injury register Timesheets

Records that must be kept

2. Employment

Every employer has a number of legal responsibilities. They must carefully consider laws relating to:

• Health & Safety at work (mental & physical)• Minimum wage• Working Time directive• Discrimination • Pre-employment checks

The list is not-exhaustive!

3. Consumer protection

• Employers also have a responsibility towards consumers through laws such as:

• The Sale of Goods Act – Insists that goods should be ‘fit for purpose’. If they do not, consumers are legally entitled to get their money back.

Key consumer protection agencies include: • The Office of Fair Trading (OFT)• Trading Standards (TS)• The Consumer Protection Agency (CPA)

4. Environmental protection

Businesses also have a responsibility to the environment.

Example of Laws include: •Environmental Protection Act 1990 •Hazardous Waste Regulations 2005 •Noise and Statutory Nuisance Act 1993

• Waste must be suitably disposed of in landfill or through recycling.

Newsbytes

http://clipbank/espresso/clipbank/servlet/link?macro=setresource&template=vid&databaseType=cms&resourceID=2921

Tax Issues affecting small businesses

What does this picture say about TAX? - Justify your answer-

Why do we pay tax?

Her Majesty’s Revenue & Customs

• Taxes are paid to the government agency HMR&C. • It expects ALL businesses to keep their own tax

records & they inspect business records.

The taxes that businesses will have to pay depend on:1. The amount of sales over a year2. Whether or not the businesses has employees3. If the business is a limited company or sole trader

Tax on Small Business

• There are a variety of taxes that small businesses may have to pay including:

1. VAT2. Income Tax3. National Insurance Tax4. Corporation Tax

Lets go DIRECT.gov!

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015895

Group Task

Go to: www.direct.gov.ukClick on: Money, tax and benefits

• Taxes• Types of tax

You must put together a short presentation on the main types of tax a small business may need to pay including:1. VAT2. Income Tax3. National Insurance Tax4. Corporation Tax

- You have 20 minutes -

Each EU country has its own rates of VAT

In the UK, In the UK there are 3 rates:

1. Standard rateYou pay VAT on most goods and services in the UK at the standard rate, which is 17.5 per cent.

2. Reduced rateIn some cases, for example children's car seats and domestic fuel or power, you pay a reduced rate of 5 per cent.

3. Zero rate

There are some goods on which you don't pay any VAT, like: Food,

books, newspapers and magazines , young children's clothing and footwear, special exempt items - for example equipment for disabled people.

• When someone charges you VAT they multiply the original ('net') price of the item or service by the VAT rate to calculate the amount of VAT to charge.

• They then add the VAT amount to the net price to give the gross price - the price you pay.

How VAT is worked out

Paying VAT

Task

• Work out the VAT on these items:

• Car exhaust costing £49• Car Hire costing £175• Carton of cigarettes at £32• Wooden floor costing £499

Income Tax

Income Tax

Income Tax

• Businesses must pay INCOME TAX in two ways.

1. If it employs any workers, it must take the tax off their wages and pass it onto the HMR&C. This is called the Pay As You Earn system (PAYE).

2. Sole traders must pay income tax on their earnings – the difference between their sales revenue and the expenses of running a business.

How much income tax you pay

Income Tax example

• Businesses must pay INCOME TAX in two ways.

1. If it employs any workers, it must take the tax off their wages and pass it onto the HMR&C. This is called the Pay As You Earn system (PAYE).

2. Sole traders must pay income tax on their earnings – the difference between their sales revenue and the expenses of running a business.

Country Income Tax VAT(CORPORATE) (PERSONAL)

Ireland 12.5% 20-41% 21%UK 28% 0-40% 17.5%Bulgaria 10% 10% 20%Sweden 26.3% 0-57% 25%Denmark 25% 38-59% 25%Qatar (Middle East) 10% 0% 0%

Tax rates – some examples

Salary Calculator

http://www.thesalarycalculator.co.uk/salary.php

Would you like to know how much you would earn after tax

and other deductions are made from your

salary?

National Insurance Contributions (NICs)Businesses have to pay different types of NICs.

A company with employees is responsible for 2 types of NICs:1. Firstly, they deducts NICs from employee salaries and pass them to HMR&C.2. Secondly it must pay EMPLOYERS CONTRIBUTION (THIS IS CALCULATED AS A PORPORTION OF THE EMPLOYEES WAGES)

Sole traders: Have to pay a FLAT RATE NIC plus a % of NET earnings

Corporation Tax

Corporation Tax

• This is ONLY paid by LIMITED COMPANIES (Ltd’s and PLC’s).

• It is a tax on the PROFITS of a company.

• You DO NOT pay CORPORATION TAX if you are self-employed (Sole traders & partnership). Sole traders only pay INCOME TAX on their PROFITS.

Corporation Tax

To finish...Income from taxes is used to fund various things such as:• Healthcare• Education• Defence (military)• International Aid• Environmental protection• Disaster relief• Ministers expenses & bonuses• Transport• Crime

Homework

• Pages 102 & 103 – All questions• Read RESULTS PLUS section as well

How does this relate to the legal and tax issues

faced by new businesses?