setting up small business on HSMP

[rella]

Has anyone set up their own company on an HSMP?

I'm a spouse of an HSMP holder and we are looking at setting up a small software business here in the UK. I'm trying to figure out which steps we should take and in what order. Neither one of us has worked in the UK before, so we don't have NI numbers. We will be equal partners in the business, which will mainly be selling our own software by download online, though we may have some consulting business and some contract writing jobs.

We have a limited liability company set up in our home country and we have considered keeping that and paying ourselves over here. But, we're leaning more towards just setting up our lives completely over here and getting everything up and running in the UK.

I'm trying to make a list of what we need to do and what in order. The order part is confusing to me, since I'm completely ignorant about the system here.

Obviously, we need to form the company. We also need to set up a company bank account. Is this difficult to do over here? We have personal accounts all set up already.

We need to get NI numbers and set up some way to pay ourselves. Should we do this as self employed? What is the best way to set up the business and our personal incomes for tax purposes? Is there some website that explains the tradeoffs of various options?

We need to get a VAT certificate, so we can buy supplies. Is that a long, involved process and do we have to be in business for a certain time before we can get it?

I think the my biggest concern is trying to keep our tax liability down. The UK has a tax treaty with our home country and if we make over ~ £40K (between the both of us), we will be taxed at a high rate in BOTH countries. Assuming we do well in our business, this could be a real problem. We may just barely make enough to survive, but if things go well, we are looking at decent growth and we need to try to anticipate the best way to set up the business for different outcomes.

Is there any benefit, and is it legal, to set up a company in another country, particularly a EU country? We also have to consider getting the HSMP renewed, since we are in the first year.

We are low on funds, so I have to figure out how to do everything myself. I'm feeling a bit overwhelmed. So, I would appreciate hearing others' experiences and how you navigated the system to set up your company.

Many thanks!

[Wanderer]

You'd be better off setting up a partnership, no need for limited liabilty in my opinion.

No need for VAT registration either, unless you anticipate turning over over around 50k pa, I can't remember the figure off-hand.

You can trade from your personal bank account if you like - just makes it very difficult for the accountant!

I'm no expert tho, over ten years since i did Company Law....

Steve

[rella]

Steve,

Thanks for your comments.

You'd be better off setting up a partnership, no need for limited liabilty in my opinion.

I thought that the tax brackets were better for corporations vs individuals?

No need for VAT registration either, unless you anticipate turning over over around 50k pa, I can't remember the figure off-hand.

I thought VAT would be appplicable to us from two directions. Do we have to charge UK VAT if we sell software on our website? And as a business, shouldn't we be able to not pay VAT on business purchases, like computers and other supplies and expenses?

You can trade from your personal bank account if you like - just makes it very difficult for the accountant!

I'd like to keep the money separate and pay business expenses directly out of our business account. I can't afford an accountant right now, so I'm the accountant... shudder...

I'm no expert tho, over ten years since i did Company Law....

I'm trying to find some websites with relavent information and I'm looking for books that explain the ins and outs of small business set-up and day-to-day running in the UK. If anyone has any suggestions, I'd appreciate it. If I find anything useful, I'll start a new thread if there's any interest, to help others who are coming in on HSMPs and trying to get their own businesses going.

[Wanderer]

You should get and accountant - he will save u money. For example did u now as a sole trader or partner you can offset losses against previus tax when empoyed? I forget the rules, u'll need an accountant!

Re: VAT you can register if u like and reclaim the VAT. Bear in mind you do actually PAY the VAT on purchases, and claim it back three months later (you can opt for monthly and indded opt for cash basis) so you will need to have the funds initially. You will have to charge VAT if u anticipate turning over over around 50k pa, or you can opt to register regardless. You look more professional with VAT reg. and it's not hard to apply. But bear in mind the VAT man is a real bastard and he will have his money whether you can afford it or not! And not a day late or penalties!

Tax is lower for small businesses but u have to look at the whole picture, ie u as a sole trader or u as an employee and you as an employer. You probably know your company would employ you. So that's two lots of NI to pay......

I personally wouldn't go limited unless I had to. The protection you get is worthless as a startup (with directors personal guarantees) and there are savings to be made re offset of prior personal tax and NI as a sole trader/partnership. Plus a good accountant will do his best to show a paper loss or minimal profit so a 5% tax rate advantage would seem so great!

There's nothing stopping you starting off this way and incorporating later.

Steve

[rella]

Thanks for the advice. I'd pretty much come to the conclusion that we start out as a partnership and switch over to a limited company if we start making a ton of money (knock on wood). The one thing I don't understand and will probably have to find an int'l accountant to figure out, is what you do if you make more than the $80K US per year. That's for a both of us, as a couple. We can live on around $80K, especially with the deduction for rent, council tax, utilities, etc. But.. if we exceed that, we'll have to pay U.S. tax and UK tax.

If you're set up as a company, can you just pay the corporate tax rate and leave the funds that you don't pay yourself in a savings account? Is there a downside to that? Then, we could either figure out a way to pay ourselves later or invest the money into growing our business.

These are the issues I don't understand and I'm searching for a book that will explain the tradeoffs of the various options.

[rella]

One more question... under the tax system that we're used to, income taxes are figured for the couple, rather than the individual. Over here as I understand it, income taxes are caculated on a individual basis. With a married couple who are set up in business as partners, are we better off paying each of us equal amounts, or having the bulk of the money go to one person? Is there a benefit for NI and income tax in setting up a certain way?

[Wanderer]

Thanks for the advice. I'd pretty much come to the conclusion that we start out as a partnership and switch over to a limited company if we start making a ton of money (knock on wood). The one thing I don't understand and will probably have to find an int'l accountant to figure out, is what you do if you make more than the $80 US per year. That's for a both of us, as a couple. We can live on around $80K, especially with the deduction for rent, council tax, utilities, etc. But.. if we exceed that, we'll have to pay U.S. tax and UK tax.

If you're set up as a company, can you just pay the corporate tax rate and leave the funds that you don't pay yourself in a savings account? Is there a downside to that? Then, we could either figure out a way to pay ourselves later or invest the money into growing our business.

U should bear in mind that any money you use to live on, whether by drawings as a partnership, or salary as an employee of ur own company, you will pay UK income tax on it.

So $80k is about £50k, £25k pa each, so you will most definatley both pay UK tax and NI if that's the figure you intend to live on. Aboit 35% in total each off the top of my head.

Also you have remember you and ur partner wil have a tax liability, as will the company/partnership seperately.

WRT to leaving money in bank as a company yes you can do that and it will remain untaxed. As soon is that money is 'used' tho it will incur a tax liabilty unles you have a very imaginaltive accountant and are willing to sail very close to the wind! By used I mean drawn as salary, or used by company in it's activities.

Steve

[Wanderer]

One more question... under the tax system that we're used to, income taxes are figured for the couple, rather than the individual. Over here as I understand it, income taxes are caculated on a individual basis. With a married couple who are set up in business as partners, are we better off paying each of us equal amounts, or having the bulk of the money go to one person? Is there a benefit for NI and income tax in setting up a certain way?

ISTR (my knowledge is a bit out of date but might still apply) that it's best to use up as much of the lower tax brackets as possible, ie over 30k (roughly) will be taxed at 40% so it's wise to use all the the tax band for each under 30k each.

If ur an employee of ur company, would could get away with paying each a low salary, and the rest in dividends (ie distribution of profits) which attract no NI (or didn't!) and low tax rate but these are murky waters especailly if u end up working as a disguised employee (ie one client) and IR35 applies, making all ur company income taxable as salary.

My sage advise is don't in the name of god about with UK tax man and espically VAT man for a few grand a year if ur comapny is doing well.

I speak from experience as I once sailed far too close to the tax wind and got a 30k corporation tax bill. And my funds where nil!

Steve

[rella]

I really appreciate all of your help and advice. I hope that there are others lurking, who can benefit too.

I'm going to try to calculate different incomes for each of us to see how to get the best tax benefit. I see that Inland Revenue will meet with people starting new businesses to give advice and explain the paperwork requirements.

Lots to think about...

[Wanderer]

Basically just think about this Golden Rule:

As soon as money is spent, a tax liabiilty is incurred, either yours or your companies.

There's no avoiding it but a good accountant will minimise it believe me. If he's halfway good he will easily save his costs per annum in reduced tax bill.

Right, I'm off to the pub now, we lost 2-1 to Scumcheater Urinals so I'm depressed.

Wanderer

[rella]

I will definitely listen to the sage advice of someone who got a £30K tax bill!

Not only do I not want to get on the bad side of taxmen anywhere... but, I don't want to take a risk of messing up our immigration status. If we blow it, we're back to Bushland...

[Wanderer]

I will definitely listen to the sage advice of someone who got a £30K tax bill!

Not only do I not want to get on the bad side of taxmen anywhere... but, I don't want to take a risk of messing up our immigration status. If we blow it, we're back to Bushland...

I never paid the 30K, I pleaded poverty! It was an 'assessment' - the very thing designed to scare you. Scary think is you can still be fined if you just pay the assessments. One company I worked for did that: next minute the VAT man was in taking computers and even the kettle.....

We had Condi Rice here yesterday, I didn't know who she was such is my grip on world politics. My (Russian) gf was horrified....

I thought she looked like a chubbier Trisha.......

Steve