Tax Tips for Individuals 2022

Although your tax return is not due for a few months yet, the end of the financial year is nearing…have you captured all your work-related deductible expenses to make the most of your 2022 tax return?

Income

The Australian Taxation Office (ATO) automatically receives information from your employers about salary and wages that you have been paid for the financial year. You need to declare all income from other sources on your tax return as well.

  • Wages and salaries from employment.
  • Pensions, annuities or government payments such as JobKeeper.
  • Investment income including interest earned and dividends paid.
  • Cryptocurrency gains or losses.
  • Business or hobby income.
  • Foreign income.
  • Crowdfunding income.
  • Sharing economy income such as Uber or Airbnb.
  • Any other income such as prize money, compensation or insurance payments.

Even if you have only earned a small amount from one of these sources, it still needs to be declared on the tax return. Gather all your records for anything you have earned apart from salary and wage payments from employers.

You will need:

  • bank statements that show interest income;
  • proof of earnings from other sources such as crowdfunding or share economy platforms;
  • records of business or hobby income;
  • records of government payments received;
  • records from cryptocurrency wallets showing transactions and the balance of each currency at 30 June;
  • and records of any other payments received from overseas sources, prize winnings, insurance or investments.

Tax Deductions

Employees are entitled to claim work-related expenses as a tax deduction. To claim a tax deduction, you must have spent the money out of your own funds and not have been reimbursed by your employer. The expenses must relate to your earnings as an employee. Make sure you have invoices and receipts as proof of payment for any work-related expenses.

Expenses you may be able to claim

  • Vehicle and travel expenses – make sure you have a travel diary to record details of trips taken for your employment.
  • Clothing, laundry and dry-cleaning expenses – you can claim for occupation specific clothing, uniforms and protective gear.
  • Home office expenses – the shortcut calculation is still available this year for people who have worked from home due to COVID-19. This allows for a flat rate of 80 cents per hour for work time. You will need records of the hours you have worked from home to claim the ATO special rate. For people who usually work from home, check the ATO home office expenses calculator to maximise the allowable deduction.
  • Self-education expenses – some education expenses that relate to your current employment are claimable.
  • Tools and equipment – if you buy gear to help you in your job, these may be claimable. Small tools of trade, protective items, professional references and laptops are some examples of equipment you may be able to claim.

Occupation and Industry Specific Guidelines

The ATO recognises that some occupations and industries have specific requirements that employees need to pay for.

There are handy ATO fact sheets for many industries, including hairdressers, teachers, performing artists, hospitality workers, lawyers, medical professionals and more.

These guides are a great starting point if you are not sure what you can claim, but we can give you information tailored to your situation when you do your tax return.

Superannuation

If you have made personal superannuation contributions separate to your employer’s superannuation guarantee contributions, you may be able to claim this as a tax deduction. You will need to provide a notice of intent to claim form to your super fund and receive acknowledgement from the fund before doing your tax return.

Book a time with us now to prepare for your tax return and we’ll make sure you maximise your allowable tax deductions this year.


Business tips: Budgeting and managing cashflow

If you want to stabilise your finances and grow the business, working to strict budgets becomes a necessity. Managing the cashflow twists and turns of a project can be hard work. But it’s easier to do when you have an agreed budget and can track your spending and performance.

So, what’s the best way to stay in control of the budgets you’ve set? And how can you manage your cashflow position to make sure there’s always enough cash to fund the project?

Understand the costs of each project

Starting a project without fully understanding how much it will cost is a no-no. To keep on top of costs, overheads, staff expenses and general spending, you need at least a ballpark figure for this expenditure. In an ideal world, you’ll want to be as precise as possible with these costs.

Run through the project from start to finish and highlight every point where there will be costs to incur. It might be the cost of your raw materials. It may be the cost of buying new equipment. It could be the payroll costs for the people actively working on the project. Break everything down and come up with a total expense for the project. This is your starting point.

Set your budget and track it over time

Once you know your baseline cost for the project, you and your team should decide on the amount of funds to allocate to the budget. Your baseline cost is a starting point, but don’t forget to include extra for specific contingencies. What if the project overruns? What if your raw material costs go sky high? What if you need more people to get the job over the line?

Agree on a clear budget and set up your finance system to track spending against this budget. With a cloud accounting system at the heart of the business, it’s very easy to create a budget and then record and track your spending over time.

Keep a close eye on budgets and project cashflow

One of the big things to remember is that a budget is not a static thing. You’ll obviously aim to stick to your initial costs, but prices and availability will affect the total spend over time. Because of this, it’s vital to not just write the budget and then forget about it.

Keep a close eye on your budget performance and the cashflow for each project. Being able to review this performance, in real time, should help you avoid overspending, or running out of cash for the project. And when the cash in the kitty is getting low, you can get proactive and look at ways to top up the budget, or rein in spending in other areas of the project.

Take action to maintain your positive cashflow position

Balancing the cashflow scales on a project isn’t easy. But when you spot that there’s a potential hole in the budget, the important thing is to do something about it, pronto!

Running any project with your fingers crossed that ‘it will all work out in the end’ is a recipe for disaster. And with such detailed budget reports and cashflow forecasts available with today’s finance apps, there’s really no need to be disorganised about your spending.

Think about:

  • Setting up key metrics for each project, to measure spending, cashflow and progress
  • Run worst-case and best-case cashflow scenarios, so you’re prepared for anything
  • Regularly reviewing your spending and looking for areas to make savings
  • Taking on finance facilities to plug any cashflow holes as they appear.

If you’re thinking about scaling up your established startup, please do get in touch. We’ll help you build solid, workable budgets that can be easily tracked through your accounting system.


Business tips: Making it easier to get paid

Making sure you get paid on time is crucial to your success. The process of making sales and generating revenue lies at the heart of any business model. But you can't manage your cashflow effectively or raise any profits if customers don't actually pay their invoices.

The easier you can make it for customers to pay you, the faster you'll see cash coming into the business. That’s good news for your financial position, your ability to cover your operational costs and your capacity to fund the growth and expansion of your business.

So, how do you speed up those payments and make sure you get paid on time?

Set out clear payment terms

Your payment terms are the starting point for healthy payment times. These terms set out when you expect to be paid and form a legally binding contract with the customer. You may expect immediate payment on receipt of the invoice. Or you might set out a specific number of days that the customer has to pay the invoice (generally 30, 60, 90 or 120 days, depending on your industry). This is sometimes called ‘trade credit’ and allows your customers to pay for goods and services at a later, pre-agreed date – helping them to spread the cost.

Your payment terms should also include details of any late payment penalties. If the customer doesn’t meet your agreed payment times, most businesses will add a 1% to 1.5% monthly late payment fee to the outstanding bill. This acts as a great incentive for the customer to pay the bill, before the penalty fees start mounting up.

Invoice customers as soon as you can

In a business-to-consumer (B2C) environment, your customers will generally pay for their goods and services immediately. But when you’re working in the business-to-business (B2B) world, you’ll need to send your customer an invoice, asking for the money to be paid.

A customer can’t settle their bill until you send them an invoice. So, it’s vital to send out the invoice as quickly as possible, so you can minimise the gap between doing the work and being paid for the work. In some industries, the project will be broken down into multiple invoices, paid across a period of time. This makes it easier for the customer to pay, and means you (as the supplier) don’t have to complete the project before receiving the money you’re owed.

Ideally, you want your invoices to go out as early as possible. This allows your payment terms to kick in and makes it easier to predict when cash will be coming into the business.

Be organised about your payment admin

Getting paid is a process – and the more organised you make the process, the quicker the payment will be received. When you send out the invoice, make sure you send it to all the relevant people in the payment chain. This will usually be:

  • Your main contact at the client – the person who you usually deal with
  • The person who will approve the bill – the person who will green-light the payment
  • The finance team – the person (or people) who will actually action the payment.

It’s also a good idea to quote any relevant purchase order (PO) numbers that the customer has raised, and to give a very clear description of the work done, or the goods purchased.

Embrace the available payment technology

Invoices used to be hard-copy printed bills, but in the digital age the vast majority of companies will send out e-invoices. Electronic invoices are easy to raise (usually from your accounting software or project management app) and can be emailed out instantly. Doing everything in the digital realm also makes it easier to keep records and keep track of payments.

Many e-invoice systems will also let you add a variety of different payment options for the customer. You could just include your bank details and wait for the customer to make a direct payment to your account. But you can also include payment buttons in the e-invoice that give customers the option to pay via digital payment gateways, like PayPal or GoCardless etc.

Offering more ways to pay makes the whole process more convenient for your customers – and will generally result in faster payment times as a result.

If you want to speed up your payment times and boost your cashflow, please do get in touch. We can help you streamline your payment processes and embrace the latest in payment tech.


Business Tips: Setting KPIs and measuring performance

Once you begin trading, you’re faced with a new challenge – successfully managing the course of your brand-new business and making sure it’s a profitable enterprise.

It’s easier to manage your startup’s sales and finances when you have access to the best possible information and data about your performance. Tracking specific metrics and key performance indicators (KPIs) allows you to see how you're performing against your targets – so you can take action to improve performance, sales, growth and profitability.

But which KPIs should you be tracking?

Sales and conversion rates

An obvious metric to track is the number of sales you’re making each month. You’ll have set a target for these sales in your business plan, so it’s important to record each sale and see how the startup is performing over the first six months of the business.

It’s also important to log and track the drivers that lead to these sales. How many sales enquiries are you receiving? How many of these enquiries are being converted into actual sales? How many customers are being engaged by your marketing campaigns, and is this engagement leading to interest in your products and/or services.

The more detail you can track from your sales and marketing activity, the more forensic you can get with which campaigns are actually delivering the goods.

Sales revenue and other revenues

When customers buy your goods, that creates income (or revenue) for the business. Ultimately, no business can succeed unless it’s generating enough revenue to keep the wheels turning in the business. So, tracking your sales revenue is a vital measure of your financial health.Tracking your various revenue streams over time keeps you in control of your finances and helps you make the right decisions. You can track performance against your revenue targets. You can forecast how much working capital you’ll have at a future point in time. And you can see if there’s enough cash in the bank to fund your projects and growth plans.

Cashflow and ongoing cash position

Good cashflow management is all about balancing the process of cash coming INTO the business and cash going OUT if the business. Recording and tracking your cash position is easy to do with the latest cloud accounting software and cashflow apps, so there’s no excuse for not tracking your cash position.

Ideally, you want the business to be in a positive cashflow position (with more cash coming in, than going out). But to achieve this, it’s helpful to see these cash inflows and outflows in real-time. With up-to-date metrics on your cashflow position, you can make informed decisions about spending, payment of bills and where additional cash and funding may be needed.

Debtor days and aged debt

When customers fail to pay your invoice on time, that creates an aged debt – money that you SHOULD have received but which the customer has yet to pay. An aged debtor report shows you which invoices are unpaid, which customers haven’t paid, and the total size of this debt.

Your debtor days number is a metric that shows the average number of days it takes your customers to pay you. Anything above 45 days is bad news, so you want to aim to keep this number between 14 to 30 days, if possible. A large amount of aged debt will leave a hole in your cashflow – and that can quickly start to impact on the day-to-day running of the business.

Gross profit margin

Generating a profit is crucial to the continued success of your startup. Having metrics to measure your profitability is an important part of managing your finances.

One common way to do this is to track your gross profit margin. This metric shows the amount of profit made BEFORE you deduct things like overheads and the cost of goods sold (COGS), shown as a percentage. The formula for calculating your gross profit margin looks like this:

Gross Profit Margin = Gross Revenue minus COGS, divided by Net Revenue, multiplied by 100

  • Deduct your COGS value from your gross revenue to find your gross profit.
  • Divide this gross profit by your revenue.
  • Multiply the resulting number by 100 to get a percentage.
  • This is your gross profit margin as a percentage of gross profit
  • A percentage of 50% to 70% is healthy, but aim for a big a margin as possible

By keeping a close eye on these financial metrics and KPIs, you have the best possible insight into the performance of your new startup – and that’s invaluable as your startup journey unfolds.

If you’re at the early stages of planning out your business idea, please do get in touch. We’ll help you set up a custom KPI dashboard to manage the future path of your business


Business tips - Scaling up your business and workforce

Scaling up your business isn't about steady growth over time. It's about having a clear strategy for quickly expanding the business to achieve full-scale hypergrowth.

Most startups grow organically, adding customers here and there and gradually expanding over time. Scaling up aims to accelerate this process, pushing your growth to move beyond that slow, organic pace. To achieve this, every element of your business model needs to be reviewed, refined and systemised – so you have scalability built into the company from the ground up.

Systemise your processes and build scalability into your DNA

Scaling up is a fast-paced, hectic and transformative process for any business. But with the right planning, strategy and funding, the return on your scale-up investment can be significant. Systemisation is the starting point and the driver of your efficiency.

The aim of your systemisation process is to make the business ordered, standardised and efficient. Look at how the business works. Write down every process and operational action. Then see how these processes can be made as lean and effective as possible, and aim to make these operations easily repeatable – so they can scale on demand as the business grows.

If any processes can be automated, automate them. Automation is a key driver of productivity and efficiency, so make use of any tech that could help you get more streamlined.

Remove yourself from the everyday running of the business

This may sound counterproductive, but a big goal of a scale-up strategy is to make yourself redundant from the everyday business. If all the operational elements of the business have to pass through you, as the founder and CEO, then that limits your ability to scale.

Remove yourself from the equation, so the business can grow without your everyday input at the operational level. This allows the business to function without you, leaving you with more time to focus on the high-level strategic work. That’s more time for business development. More time working on innovation. More time building relationships with customers and suppliers.

Expand your executive team and workforce

Once you’ve stepped back from the day-to-day tasks, your CEO role can become far more of a driving force behind the growth of the business. But you can’t do this single-handedly. You’ll need a close and trusted executive team to work with. Plus an experienced management team who you can delegate to. And an expanded workforce at all levels of the organisation.

As the startup evolves into scale-up, the business will become more complex and the workload will increase. To cope with this and keep the company running like a well-oiled machine you need a team who are ready for the task and fully on-board with your aims for the business.

Increase your operational infrastructure

Hypergrowth of the business means a greater volume of sales and work. To meet this demand, you urgently need to expand your operational infrastructure. That means looking at the size of your workspace. The amount of tech, equipment and machinery you have. And the ways you deliver your end product/service to your increased customer base.

The key here is to apply a LEAN methodology – keeping everything as simple and basic as possible, while also building in the capacity to deal with this increased volume of work. Get the operational procedures out of your own head and turn them into lean, seamless processes. And invest in the equipment and operational systems needed to cope with your increased output.

Look at investment and access to funding

To bring your scale-up plans to life, there’s a need to invest heavily in the future of the business. You’re likely to need new assets and equipment. Larger premises or multiple workspaces. More raw materials or stock. And a bigger workforce – which will mean a larger payroll each month.

You may be in the fortunate position of having plenty of spare cash in your reserves. But for most potential scale-ups, there’s going to be a need for external funding. This could mean you and your fellow directors putting money into the business. It could mean approach lenders and business finance providers to take out a loan. Or it could mean looking for private investors to plough money into the business. Whatever the source of this additional funding, you a clear funding strategy to work from – a funding plan that’s aligned with your scale-up plan.

Share your strategic goal and growth plan

For scaling up to be a success, everyone in the company must be on board with the idea. Make your growth aim and key numbers transparent, so the whole team is engaged and motivated by this common aim. And make sure you have a detailed scale-up plan that factors in the challenges of expanding your workforce, resources and operational infrastructure.

Think about:

  • WHY you want to scale and what the end goal will be
  • HOW you will achieve this – and what the timescales will be
  • WHO you need on board to make this work
  • WHAT new assets and equipment will be needed
  • WHERE the funding will come from to bankroll this plan.

If you’re thinking about scaling up your established startup, please do get in touch. We’ll help you build a viable scale-up plan, with costings, budgets and achievable targets to meet.


On the financial downfall of Borris Becker & what we can learn from it

Borris Becker was a bit of a childhood hero for me. My sisters and I used to stay up and watch Wimbledon on the colour TV and I can still remember the bloke thundering away at lesser opponents on the tennis court while winning Wimbledon back in the 80’s. There were other iconic tennis players throughout the years, but Becker stood out.

By any measure, the bloke made a tonne of money. Estimates range from $USD 25M and up just on court – serious cash from a time when a million bucks actually meant something. How could he go from those lofty heights to a 2.5 year jail sentence in April of 22 for breaching the terms of his 2017 bankruptcy?

The short answer is bad personal decision making over the years – particularly on the love / lust front. And now, all these years later that I have grown up to become a trained tax accountant, I wonder what can we learn from Becker’s wipe out? Here’s my top 3 things:

  1. Know your balance sheet – apparently Borris failed to disclose a whole heap of assets to the bankruptcy court. Interestingly, he claimed that he had “no idea” where a lot of his valuables were, including key trophies. A good idea for everyone is to sit down and commit their balance sheet to a simple excel spreadsheet. I spend a lot of time doing this with clients who thank me for illustrating to them in easy to understand numbers what their net worth actually is. 
  2. Simplicity is king – keeping things simple is the key to financially thriving. I have often said to clients that simply keeping their existing job, paying off their existing home, and focusing on getting to $1.7M per member inside their existing superfund is all they need to do to have a great financial life. In Australia, buying boring bank or supermarket shares is another key to financial success hiding in plain sight. However, this seemingly simple and straight path is often strayed from thanks the standard vicissitudes of life and the tendency for humans act on emotion rather than logic. Those who can act with equanimity and patience in the face of massive turmoil will ultimately win. 
  3. Romantic relationships have serious financial implications – Becker had a well-documented and pathological inability to stay faithful. With at least 3 different kids to 3 different mothers, it was kind of inevitable that his earnings and estate would be decimated at some point. It just happened sooner rather than later for him given the fashion in which he conducted himself romantically. I often say to a whole variety of people, there are 4 things (possibly more) that humans should have to pass a test on before being allowed to do; buying a pet, incorporating a private company, making a baby & getting married. The fact that people need so much warning and fine print before signing a mortgage or entering a mobile phone contract, but nothing at all before baby making strikes me as supremely ironic given the gravity and irreversibility of the latter. Another mentor of mine described serious relationships and baby making to me as follows and I see his point; “Blox, it’s like hell. Really easy to get in, impossible to get out.” This state of current affairs also suggests that anyone who wants a bullet proof career of super high earnings, guaranteed longevity and endless streams of work should simply practice family law.

To discuss your balance sheet and streamline your financial life, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


Employees Leaving? Here’s What You Need to Know About Final Payments

Most small businesses in Australia employ people. One of the most common payroll errors is incorrect processing of termination payments when employees leave.

With the introduction of Single Touch Payroll Phase 2, getting payroll correct is more important than ever, as the data is reported directly to other government agencies. If the payroll detail is not accurate, it could affect employees' benefits or income tax.

Final Payments

Final payments for employees can range from very simple to highly complex. It depends on the circumstances of the termination, the industry, the modern award or registered agreement, age and other factors.

Before you pay an employee who is leaving your business, you’ll need to gather information to ensure accuracy.

  • Final date worked and reason for termination – resignation, retirement, abandonment of work, dismissal, redundancy, end of contract or medical invalidity.
  • Check termination provisions in the relevant award.
  • Check the National Employment Standards for the minimum notice period and redundancy pay if applicable.
  • If you usually pay annual leave loading, this is also paid on termination.
  • Amount of leave owing, and if there are any accrued rostered days off or time in lieu.

A termination payment can be made up of several elements:

  • Final ordinary hours.
  • Unused annual leave, loading and long service leave.
  • Redundancy payment.
  • Pay in lieu of notice.
  • Unused rostered days off.
  • Superannuation.
  • Ex gratia payment.
  • Other payments made in case of death, invalidity, or compensation or as required by certain awards.

Taxation of Termination Payments

Taxation can also be complex for final payments. Some payments are taxed at marginal rates and others at a flat rate. Special codes must be included in some termination pays to notify the ATO of payment types. For some payments, there are thresholds that must be observed that will affect the termination payment's tax rates and taxable amount.

Getting Help

The best general authorities for learning more about termination payments are the Fair Work Ombudsman and the Australian Taxation Office. For more complex payroll and termination payments, our payroll specialist can help, or we can refer you to an employment law expert if needed.

Fixing termination payroll errors can be costly and time-consuming, not to mention problematic for the employee if categories or taxes are incorrect.

Talk to us before paying employees, so you get it right the first time.


COVID-19 tests to be tax deductible

The cost incurred in taking a COVID-19 test will be tax deductible for you as long as the test was used for a work-related purpose.

The legislation has passed through the parliamentary process and will become law. It applies from 1 July 2021, which means you can make claims in your next income tax return.

The new legislation provides a specific deduction and removes any previously held ambiguity about whether an expense for a COVID-19 test was deductible.For the purchase of a COVID-19 test to be tax deductible:

  • must have paid for the test and not been reimbursed by your employer, and
  • were required to take the test before going to work because:
    • of a public health order
    • your employer has asked or required you to take one, or
    • you were previously a positive case and needed to show your employer a negative test before going back to work.

It is important to point out that the deductibility is solely on the requirement to take a test. The test result, or whether you actually worked on the day you took the test, is irrelevant.

Apportionment

You will need to apportion your deduction when you have bought a packet with multiple tests and you have only used some of them for work-related purposes.

Substantiation

It is important to always keep records and receipts of items where you want to claim a tax deduction.

However, if you don’t have the receipts handy, don’t worry. We’ll ask you at tax time to come up with a reasonable calculation for your claim, as the new law comes under rules where you might not have a receipt. This rule generally allows you to make a claim up to $300 for various expenses in your tax return.

If you need to know more about the new allowable deduction, please give us a call. We would be delighted to discuss this with you further.


The importance of business development

Business development is one of the most important areas of focus for any ambitious business.

If you want your business to grow, that’s going to mean having a razor-sharp focus on new opportunities and strategies. That could mean exploring new markets, or nurturing new partnerships. It might mean diversifying to create new revenue streams, or coming up with new ideas to boost your profitability. But, ultimately, good business development comes down to having good ideas – ideas that broaden your reach, sales, revenues and external relationships.

As the founder or CEO, it's important to put business development at the top of your to-do list.

Put time aside for business development

Business opportunities don’t just appear out of thin air (sadly). To come up with an opportunity for a business partnership, or to bring in a big new client, you’re going to have to do some serious work. So, it’s a good idea to put business development (BD) time aside in your diary.

By blocking out time to devote to BD, you can step away from the everyday operational tasks and get into a more creative and objective mindset. Where do you want the business to be in 6 months? What do you need to do to achieve this goal? Are there relationships you could build to bring this plan to life? Asking these questions and getting a more concrete idea of the answers will form the basis for your BD plan – and that’s the route map you can then follow.

Work on your BD plan and strategy

Once you have some positive BD ideas to work with, it’s important to get your goals and your strategy down into some form of plan. As with any kind of growth initiative, your BD activity needs to be well planned, so you have a clear idea of what you want to achieve.

Give each new strategic idea a clear timeline and assign jobs, activities and roles to the relevant people in the team. Cost out each project too, and assign a budget so you can be sure that you’re getting the best return on your investment (both financially and from a time perspective).

Most importantly, though, track your progress against your BD goals. Agree on a target, set a date and measure your progress and performance against that timeline.

Build relationships with potential partners and customers

Relationships lie at the heart of your BD activity. You might be getting to know the executive team at a possible new partner’s company. Or you may be reaching out to a new customer audience with a brand-new product. Getting to understand what makes these people tick is so important to warming them up as a potential partner, customer or supplier.

Trust is the real key here. People are more likely to engage with your business when they trust you as people and as a brand. So, spending time nurturing relationships and networking with other businesspeople and targets is time well spent.

Record, track and analyse your BD performance

With your goals, targets and timelines locked in, you’re ready to start putting this BD plan into action. But to know if you’re making headway, it’s a good idea to track your performance.

If you’re using project management software or a client relationship management (CRM) app, it’s easy to add notes, record your progress and tick off the key actions in the project. You can put the financial reporting tools in your accounting software to good use. Track cashflow for the project, increases in revenue and monitor your sales and marketing expenses etc.

Get ambitious with your BD ideas

No business stands still. Your aims and goals as the owner will change. Your market will evolve and new competitors will appear. Economic conditions and business opportunities will change. To keep your business at the cutting edge, it’s vital to keep your BD focus alive and well.

Remember to:

  • Define your goals and make it clear what you want the business to achieve
  • Align your BD activity with the company’s main growth plan
  • Log your ideas and potential opportunities and add them to your BD plan
  • Warm up your targets and potential partners and keep notes on your progress
  • Track your BD performance against your targets, budgets, revenues and timelines
  • Keep revisiting your plan and flexing your BD activity to the current market.

If you want to expand your business development activity, get in touch with us. We’ll help you highlight the opportunities and draw up the best possible plan for your BD activities.


Business tips - Setting up the compliance foundations

To trade as a business, you need to meet the right compliance requirements. It’s certainly not the most exciting part of creating a business, but setting up the right legal, accounting and tax compliance foundations ensures that you’re doing everything by the letter of the law.

Here are the main compliance steps to think about, and why they’re so important to the smooth running of your business.

Decide on a legal structure for the business

First off, you’ll need to make a decision about the legal structure of the company. There are two key choices here – incorporated (a limited company) or unincorporated (usually either a sole trader or a partnership). The key difference here is around liability. In other words, do you want your business to be a limited company, where you and the business are treated as separate legal entities? Or do you want to be unincorporated, like a sole trader, where you and your business are seen as one single entity.

Most startups will opt for the incorporated limited company route, keeping your personal and business finances separate and lowering your personal liability and risk.

Open a business bank account

To trade, take payments and pay your suppliers, you need to have a business bank account that’s separate from your own current account. This helps to create a tangible divide between the money you’ve generated from the business, and your own personal cash.

Most high-street banks won’t let you use a personal current account for business purposes. Banks will offer a variety of different business accounts, with varying levels of fees, overdraft levels and additional business features. Set up the business account and then use this account for ALL transactions going in or out of the company.

Set up a bookkeeping and accounting system

It’s a legal requirement for your limited company to keep adequate records and to submit annual statutory accounts. To be able to meet these requirements, it’s essential that you have a bookkeeping process and a reliable accounting system in place.

There’s a dazzling choice of different cloud-based accounting platforms aimed at the ambitious startup owner. Xero, QuickBooks, MYOB and Sage are big names in this space, and all offer easy-to-use systems that make the accounting process relatively straightforward. It’s a good idea to engage an accountant, right from the start, to get the best possible accounting advice.

Register for the relevant business taxes

Tax is an unavoidable part of running any business. It’s mandatory for you to register for the relevant business taxes, and you’ll also need to factor in that a certain percentage of your startup’s profits will end up going to the tax authorities at the end of each financial year.

If you’ve opted for the limited company route, you must register for corporation tax in your home territory. Corporation tax is paid based on a percentage of your year-end profits, once reliefs and other allowances have been taken into account. Approximately a quarter of your end profits will end up being paid over in tax, so it’s imperative that you put this money away in a separate tax accounting, or ring-fence it in your accounts, so you have the money to pay the bill at year-end.

Other taxes to register for include:

  • Self-assessment income tax – although you’ll pay corporation tax on your company’s profits, directors are also taxed on their own personal earnings too. If you’re an unincorporated sole trader, this is also the way you’ll be taxed on your business profits, as your personal and business income are treated as the same thing.
  • Goods & Services Tax (GST) – GST (or VAT in the UK and Europe) is an indirect value-added tax or consumption tax for goods and services. If you sell products or services that qualify for GST/VAT, you’re responsible for collecting these taxes and paying them to the tax authority on a monthly, quarterly or annual basis.
  • Pay-as-you-earn(PAYE)/Pay-as-you-go (PAYG) – if you have employees, and your home territory operates a PAYE/PAYG system, you’ll need to make income tax deductions from your employees’ wages and pay these taxes directly to the relevant tax authority. This is all done via your regular payroll run.

Get in touch to talk through your compliance needs. We’ll help you understand which taxes apply and how you register for them.