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Setting up your own business is a straightforward process but the decisions you make when you do this will have an impact on the tax benefits you can claim.

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You’ll likely have heard about the benefits to be gained from setting up your own business. The flexibility to work wherever you want while doing something you love and at a time that suits you is an attractive proposition. However, when you set up a business you have more responsibilities than when you are an employee.

Here are three things you should consider before setting up your business.

1. Business type

When selecting the business type you would like to set up, you need to consider whether you would like to grow your business or just meet legal requirements to service the needs of your existing clients.

Freelancers often choose to set up as sole traders as this minimises the amount of work involved in setting up their company. As a sole trader, you can keep all your business’s profits after you have paid the appropriate tax. If you are working for yourself (ie, you are self-employed), HMRC will class you as a sole-trader – even if you haven’t registered your business.

It’s worth bearing in mind that sole traders are personally responsible for any business debts and are required to pay income tax and national insurance. If you enter into a business partnership, you will share responsibility for business expenses and debts.

Setting up a limited company removes personal responsibility for business debts but there is more work involved in setting up the company. The main benefit of setting up a limited company is you can claim tax relief on business related expenses to substantially reduce your Corporation Tax, which increases company profits and the amount you can pay as dividends to company employees.

2. Compliance and legal requirements

After you have decided which type of business you would like to set up, you need to select a name for your business to use for registration. It is not unusual for businesses to select trading names that are different to their registration name.

You would then need to register your business with HMRC for self-assessment while limited companies also need to register with Companies House. If the annual taxable turnover of your business is over £85,000, you need to register for VAT.

To set up a limited company, you need to register with Companies House, providing a memorandum of association and articles of association with your application. When your company has been set up (or incorporated), the Certificate of Incorporation and Memorandum and Articles will be issued, which you will require as evidence of incorporation before you can set up a business bank account. Limited companies also need to register for PAYE and Corporation Tax.

Before you start trading or invoicing your clients as a sole trader, partnership or limited company, you’ll need to make sure you have business insurance and a business bank account set up. By law, you may be required by law to have some types of insurance cover.

There are also a number of pieces of legislation, such as the Data Protection Act, that you’ll need to familiarise yourself with to ensure legal compliance.

3. Accounting for your business

Regardless of whether you are registered as a sole trader, partnership or limited company, you’ll need to complete a self-assessment tax return each year.

Many freelancers employ an accountant to assist with their self-assessment but if records are missing or expenses accounted for incorrectly, this process can become expensive and drawn out – not to mention stressful if the submission deadline is drawing near!

Accounting firms may offer a service to set up a limited company on your behalf, which is worth considering if you are planning to pursue a freelance career. When you set up a limited company, you can claim substantial tax relief on business related expenses.

Depending on the nature of the purchase, you may be able to claim the full value of assets like computer equipment back. Further relief is available for expenses incurred while operating out of your home office, including rent, utilities, company phone, insurances and even your accounting fees. By opting for ongoing accounting support, you’ll ensure your business is compliant and records are up to date so there are no unpleasant surprises at year end.

Another option for accounting for your business is to employ the services of an umbrella company. They’ll take care of your tax and national insurance requirements and pay your salary, however, this option is better suited to those freelancing for a period of three to six months as this model becomes less tax-efficient in the long-term.

If the industry you are working in falls under IR35, it’s worth discussing what your responsibilities will be with an accountant, as requirements have grown tighter for those working in the public sector.

Cobia Accounting specialises in fixed monthly rate accounting services for contractors, freelancers, self-employed individuals and small businesses. We ensure your business is run as tax-efficient as possible while still being compliant and profitable. To learn how we can help you grow your business, contact us today.