2. Lesson Objectives • To recognise the importance of an appropriate trading name for a business. • To appreciate why accurate record keeping is important to a business. • To understand the main taxes a small business will have to pay — VAT, corporation tax, income tax and National Insurance contributions.

3. Choosing a Name • Choosing a name for your business can often be tricky • Business Names fall into three categories Related to a Person Name Related to the Business Obscure!

4. There are four main legal areas to be aware of when starting a business: Start-Up Legal Issues Business Organisation Employment • A company (Ltd or Plc) has a separate legal entity • This means the business and not individual owners would be sued • There are many employment laws covering: • Health & Safety • Discrimination • Wages & hours Consumer Protection Environmental Protection • The law provides protection for consumers that businesses must meet, including: • Sale of Goods • Trade Descriptions • There are strict laws covering pollution • This will affect manufacturing firms more

5. Record Keeping • If you are self-employed (Sole Trade and Partnerships) you are responsible for reporting ALL your income and expenditure to H M Revenue & Customs. • The records MUST be HONEST and ACCURATE • Generally, non-financial company records (accident book) must be kept for 5 years; • All financial documents (bank statements, receipts) must be kept for 7 Years.

7. Why do we pay tax? Income from taxes is used to fund various things such as: • Healthcare • Education • Defence (military) • International Aid • Environmental protection • Disaster relief • Ministers expenses & bonuses • Transport • Crime

8. Her Majesty’s Revenue & Customs • Taxes are paid to the government agency HMR&C. • It expects ALL businesses to keep their own tax records & they inspect business records. The taxes that businesses will have to pay depend on: • The amount of sales over a year • Whether or not the businesses has employees • If the business is a limited company or sole trader

9. Tax on Small Business • There are a variety of taxes that small businesses may have to pay including: • VAT • Income Tax • National Insurance Tax • Corporation Tax

11. Each EU country has its own rates of VAT In the UK, In the UK there are 3 rates: • Standard rate You pay VAT on most goods and services in the UK at the standard rate, which is 20% 2. Reduced rate In some cases, for example children's car seats and domestic fuel or power, you pay a reduced rate of 5 per cent. • Zero rate There are some goods on which you don't pay any VAT, like: Food, books, newspapers and magazines , young children's clothing and footwear, special exempt items - for example equipment for disabled people.

12. How VAT is worked out • When someone charges you VAT they multiply the original ('net') price of the item or service by the VAT rate to calculate the amount of VAT to charge. • They then add the VAT amount to the net price to give the gross price - the price you pay.

13. VAT Price £40 HMR&C £32 goes to the business that sold the product £8 goes to the Government

14. Paying VAT

15. Task • Work out the VAT on these items: • Car exhaust costing £49 – • Car Hire costing £175 - _____________ • A children’s car seat costing at £199 - ______________ • Wooden floor costing £499 - ___________

16. Income Tax

17. Income Tax • Income tax is a tax paid your income! • This includes employees, people who are self employed, pensions etc. • The amount of income tax you pay as an employee depends on the amount you make. • You have a personal allowance with allows you to make a certain amount of money BEFORE you have to start paying ta on it

18. How much income tax you pay These are the rates of income tax that an employee will pay. These figures are after your personal allowance

19. Income Tax example • Sole Traders must pay INCOME TAX in two ways. • If it employs any workers, it must take the tax off their wages and pass it onto the HMR&C. This is called the Pay As You Earn system (PAYE). • Sole traders must pay income tax on their earnings (in the same way as a employees do on their earnings)– the difference between their sales revenue and the expenses of running a business.

20. Tax rates – some examples

21. National Insurance Contributions (NICs) Businesses have to pay different types of NICs. A company with employees is responsible for 2 types of NICs: 1. Firstly, they deducts NICs from employee salaries and pass them to HMR&C. 12% 2. Secondly it must pay EMPLOYERS CONTRIBUTION (THIS IS CALCULATED AS A PORPORTION OF THE EMPLOYEES WAGES) 13.8% Sole traders: Have to pay a FLAT RATE NIC of 13%

22. Corporation Tax

23. Corporation Tax • This is ONLY paid by LIMITED COMPANIES (Ltd’s and PLC’s). • It is a tax on the PROFITS of a company. • You DO NOT pay CORPORATION TAX if you are self-employed (Sole traders & partnership). Sole traders only pay INCOME TAX on their PROFITS.

24. Corporation Tax Corporation tax is payable depending on the amount of profit that the business makes. It must also be paid by Housing Associations, Members clubs and Trade Associations. The current rate is;

25. Shelly IsFit taxes • Answer: • Income tax – this will tax her salary/income. She will not pay corporation tax as she is a sole trader. • National Insurance – she will only need to pay it once as she is a sole trader

26. Monsieur LePlonk taxes • Corporation tax – this is a tax on the profits the business makes • NIC – the business will need to deduct the NIC for each of the employees before they are paid • NIC – the business will need to pay additional NIC based on the number of employees they have.