Practical considerations when setting up a new business in the UK

There are hundreds (possibly thousands) of articles on the internet containing checklists for ‘steps to start your business’. While these are great, they are often generic, starting with ‘choose your business idea’ and ‘do your research’. While we agree that both are good nuggets of advice for someone in the very early stages, we’re going to assume you’ve already nailed down what your business is going to do and instead focus on the nitty gritty practical things you need to think about when setting up a new business in the UK.

The last five or so years have been complicated for those wishing to set up a business. Given the uncertainty surrounding future business conditions following the outcome of the 2016 Brexit referendum (and the difficulties reaching a deal with the EU), an unforeseen pandemic halting the economy for the best part of two years, forty-year high inflation and a cost-of-living crisis, the thought of starting a new business could make some tremble at the knees. But 2021 saw the launch of 810,316 new businesses – the highest number on record – filling space in the market left by those not surviving the pandemic and making the most of the economy reopening as COVID-19 restrictions eased. There are currently 5.5 million small businesses in the UK; micro and small businesses (up to 49 employees) comprise 99.4% of all UK businesses.

A lot of preparation is required before launching a new business. Around 1 in 5 new start-ups fail within a year; planning is essential to get off to the best start possible.

Deciding legal structure and business name

New businesses are set up as either a sole trader, limited company, or partnership, depending on how many people are involved and desire to separate personal and business assets.

Sole trader

In 2021, 15% of businesses were run by sole traders. Sole traders are self-employed and entitled to keep all profits (after tax) generated by their business. They are liable for all expenses incurred, and for losses made by the business. There is no distinction between personal and business assets, and large business losses could have serious financial implications on the sole trader’s personal finances.

Registration as a sole trader is done via the GOV.UK website. On registering for self-assessment, you become recognised as self-employed and are allocated a Unique Tax Reference (UTR) number. This allows you to complete an annual tax return.

As business grows, sole traders may opt to set up a company instead. Limited companies pay corporation tax, which is currently set at 19% of taxable profit – lower than rates of income tax payable by sole traders on profits after deduction of eligible expenses and the personal allowance (tax year 2022/23 – 20% on profits between £12,571 and £50,270, 40% between £50,271 and £150,000 and 45% above this). Companies are also eligible for research and development tax reliefs, which are not available to sole traders.

Limited company

A limited company is a legally separate entity from those who run the business. It has its own identity and retains all assets and liabilities (which separates them from personal ones). The company must be registered with Companies House, and annual documents (confirmation statement and accounts) must be submitted each year. Name, address, and month and year of birth of shareholders and directors are also published and available to the general public, allowing for less privacy than a sole trader.

Both sole traders and limited companies need to consider VAT. The current mandatory registration threshold is turnover of £85,000 per year. If annual turnover is lower than this, VAT registration is not obligatory but voluntary registration is possible. Once registered for VAT, a sole trader or company must pay VAT on their sales (which may mean prices need to be increased to cover it – this is not an issue if customers are also VAT registered and can claim it back but could make prices uncompetitive for those who are not VAT registered) and claim it back on expenses incurred.

Partnerships

Partnerships allow two or more partners to share responsibility for the business. Profits are shared out, and each pays income tax on their portion.

Business name

A business name should both sound good and look good written down for maximum customer appeal. Simple names are more memorable and easier to spread by consumer word of mouth. The name should reflect the nature of your business and may communicate the primary product or service you provide or a key business value. A unique name is more likely to rank well on search engine results pages.

Depending on the legal structure you choose for your business, there may be some restrictions on business name. For example, a sole trader cannot include ‘limited’, ‘Ltd’, ‘LLP’ or ‘plc’ as these initialisms are reserved for limited companies, partnerships, and public listed companies respectively.

Set up a business plan

A business plan is a document that sets out how a business intends to meet its objectives; they have been shown to directly improve business performance. It is also useful to present to potential investors and bankers when additional capital is needed.

Writing a business plan provides an opportunity to really analyse your future business. It needs to contain a description of your business (intended products, demand for these, business location), a market analysis (target market, main industry competitors) overview of the products or services to be offered (design, development, production, distribution), people and organisation structure, sales and marketing strategy, and a financial plan (how the business will be funded). An executive summary is generally included as an overview of the plan.

Financing the business

Some businesses have low costs of entry, others need heavier investment to get off the ground. Several options are available depending on how much debt you’re prepared to take on, and whether the business is a company with share capital: put the money in yourself, apply for external debts (bank loan), apply for venture capital (cash is given in exchange for shares in the company, potentially diluting control and reducing the profit available for other shareholders), crowdsourcing, and government grants.

Caution should be taken for sole traders, who are personally liable for any debt taken out.

Consider setting up a business website

Websites are an excellent resource for customers wishing to purchase products or services online. They also allow businesses to build up an online presence and establish authority in an industry through publication of relevant content. Analytics are also a great way to understand which pages (and products) on your website are most popular and see how customers interact with your page.

Online sales were increasing before the pandemic and accelerated rapidly as ecommerce became the only retail option when the high-street closed amid COVID-19 restrictions. IBM estimates digital shopping has advanced five years as a result of the pandemic. Though the recent cost-of-living crisis has curbed consumer spending both on- and offline, it remains an additional channel to access customers and expand the reach of your business.

The government has rules in relation to online selling – certain information must be provided to customers before, during and after a sale. Refer to the GOV.UK website for further details on these.

Open a business bank account

For a sole trader, a business bank account is not a legal necessity, but is an efficient way to separate personal and business transactions, keep track of income and expenditure, and help with the completion of tax returns. Some also have invoicing facilities built in, which allows invoices to be raised and matched to incoming cash, helping you keep track of your transactions. It also provides an opportunity to build up an earmarked reserve to cover your annual tax liability.

If you are a limited company owner, a business bank account is required in the company name – the company is recognised as a legal entity with its own cash. A bank account could increase the business’ credit score, improving the chances of being accepted for a business loan.

Pension, NICs and life insurance

If you are no longer employed by someone else, many of the benefits typical of employment will not automatically be available to you. Consideration should be given to setting up or continuing payments into an existing personal pension scheme, and whether life or medical insurance is something you would like to have. Each of these will need setting up by you personally.

National Insurance Contributions are paid through self-assessment for a sole trader. For the tax year 2022/23, Class 2 NICs are payable at £3.15 per week on profits over £6,725 and Class 4 NICS at 10.25% on profits between £9,881 and £50,270, and 3.25% over £50,270. Some self-employed people don’t make contributions via self-assessment, instead opting to do so voluntarily (such as examiners, those with land or property businesses). Please refer to the GOV.UK website for more information.

Limited companies are required to pay secondary Class 1, 1A and 1B NICs, in relation to their employee salaries.

Find a great accountant

Managing the finances of a business can be challenging. Many small business owners have little experience with accounting and may not have access to an in-house finance function.

More Than Accountants are here to help – we can provide all the accounting and financial reporting support your business needs, freeing up your time to concentrate on business development and growth. In addition, we provide expert tax advice (taking into consideration all available tax reliefs) to keep your tax liability to a minimum.

Xero is a market-leading accounting software, developed with small businesses in mind. More Than Accountants use Xero as standard for all our clients, and provide training on this software, and our receipts system, Dext Receipt Reading, as part of our services.

Get in touch for further information

This post gives an overview of some of the key things to think about when starting up a new business. It serves as a guide, rather than a comprehensive instruction manual – the breadth of business is simply too vast to include everything here. If there is anything in this post you would like to discuss further, please get in touch with the More Than Accountant’s team, who will be more than happy to help.

Sources

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Anon 2022, Income tax rates and personal allowances, GOV.UK, viewed 7 June 2022, Income Tax rates and Personal Allowances : Current rates and allowances – GOV.UK (www.gov.uk)

Burke A, Fraser S & Green FJ. The multiple effects of business planning of new venture performance. Journal of Management Studies. 2010;47(3):391-415 The Multiple Effects of Business Planning on New Venture Performance – Burke – 2010 – Journal of Management Studies – Wiley Online Library

Nealon K 2021, How Covid-19 changed retail – probably forever, Forbes, viewed 7 June 2022, How Covid-19 Changed Retail — Probably Forever (forbes.com)

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Anon 2022, Online and distance selling, GOV.UK, viewed 7 June 2022, Online and distance selling : Online selling – GOV.UK (www.gov.uk)

Anon 2022, Self-employed National Insurance rates, GOV.UK, viewed 7 June 2022, Self-employed National Insurance rates – GOV.UK (www.gov.uk)