Lockdown is easing. I used the Tube for the first-time last weekend (and witnessed a shocking amount of non-compliance on the compulsory mask rule) and I might go to the pub for the first time this weekend. Things are returning to some sort of normality. However, that should not mean your business and business practices need to go back to the way they were.
Now is as good a time as ever to evaluate what lies ahead for you and your business. This does not just mean reviewing the financial health (for example, I covered reviewing cash flows in my previous article), but all aspects of your business and business relationships. Also, when I say business, I do not simply mean a traditional company with staff, this applies as much to someone who is self-employed, such as an actor.
Let us consider a comedian. For the past few years they have been working the comedy circuit and building a reputation. The easiest and cheapest way to operate their business was as a self-employment and filing a personal tax return each year with HMRC. They kept basic records and claimed the bare minimum to be safe (or perhaps the exact opposite- claimed everything in sight and hoped no one at HMRC looked). With this hiatus in gigging, now would be a great time to ask themselves if this structure is still suitable.
The most common alternative business structure is a limited company. This is a separate legal entity and will be taxed separately under different rules. The individual will still be taxed on income taken from the business, the rates depending on how it is withdrawn (salary or dividends). The most tax efficient manner is normally to take a small salary and the remainder as dividends, but this will depend on your other income (e.g. if you have another part-time job on the side to supplement your income).
The total tax bill for a limited company will normally be slightly less than a sole trade, however, the tax savings are often eaten up by the additional compliance costs. You need to file statutory accounts with Companies House and file a separate tax return for the company. This will normally require the services of an accountant and, unfortunately, we do not come cheap. Also, the company has a public record and a registered office address and so might not be suitable for people who want as much privacy as possible.
An upside of a limited company is the limited liability that this offers. The benefit of it being a separate legal entity is that your liability is limited to what you have invested in the company (hence the name). Should you do something wrong (in the comedian’s case, maybe they accidentally hit a punter in the head while swinging the microphone around as part of a telling particular expressive anecdote), the wronged party can only sue the company (with some exceptions for fraud and manslaughter). This means your personal assets – the house, the car etc. – are protected. That said, often a good insurance policy will give you more or less the same result.
Another benefit of having a company is the image it portrays. Most people think a company has more gravitas and implies a bigger and more established business. While this might not help our hypothetical comedian, it might help an emerging comedy booking agent, who needs to impress potential acts and the venues he wants them to play at.
The opposite angle might be considered for other talent – i.e. someone who formed a company years ago and is no longer sure this is the best structure for their trade. Whether it is due to declining income or perhaps professional fees have become excessive, they might to return to some simplicity of self-employment. As an example, most US production companies will not hire actors through foreign corporations, therefore they will only contract with an actor through a US company or individually. A young UK actor that is taking their first steps into Hollywood would now have twice the compliance cost – requiring accounts for the company and individually. For simplicity, having a self-employment means there is only set of accounts, which makes everyone’s life easier (and cheaper).
Given these pros and cons, I would recommend you discuss the options with an accountant to help you come to the best structure for you, which might also include an LLP where there is more than one person, such as a band. Also, you will have to ensure there are no surprise tax charges, which can often be overlooked when a business changes its structure.
Now also might be a great time to look at your professional team. Has your business developed such that your accountant is no longer capable of dealing with the complexities of your industry? Sure, they might be cheaper, but are you confident the tax returns and the accounts they are filing are correct? You might also have outgrown your management or agent, or want a change in approach, so you could consider changing these representatives too. That said, do be careful to check your agreements before you break them – you don’t want things to get ugly – in which case you might also want to hire a lawyer with more industry experience too.
There are changes all small business need to be aware of in terms of their record keeping. If you currently keep paper records or a basic spreadsheet, you will soon need to consider updating your bookkeeping system. HMRC are pushing forward with their “Making Tax Digital” (MTD) agenda, which will see all records kept electronically and will require businesses to more regularly submit their records. They have recently announced that from April 2023 all business (with turnover above £10,000) will be required to submit quarterly tax returns. While this might seem onerous, there is plenty of time to plan and transition across to a new system.
There are plenty of choices for online, cloud-based systems that have great functionality and connect seamlessly with your bank and apps on your phone. You can take pictures of invoices on the go, so no more risk of losing a receipt, and your records can be updated anywhere and at any time. You can send an invoice to the customer as you stand waiting for your bus home after the gig. This technology can help you form better business practices, so you feel in control of your finances. This also means your accountant can dive into your figures at will and more quickly give you meaningful answers. It will also help you estimate your tax bills well in advance.
It is quite likely there will be an increase in compliance costs for most businesses as a result of MTD, but there will also be opportunities. If you now must file quarterly returns to HMRC, you could investigate whether a VAT registration would be beneficial (as this is quarterly filing also). If your customers are all VAT registered, you might be able to save additional cash by recovering VAT on your costs. Again, as with the right business structure, this will depend on your specific circumstances, so you should discuss with your accountant first.
The world has been turned upside down in recent months, so before things start falling back into place as they were, take a moment to consider if you would like your business to look differently – what will be the new normal?
If you want to discuss any of the above, or any other matter, just give us a call on 020 7183 3383 or email info@kma-spotlight.com.
