Need some help with tax?

I work with many food producers who have started off on their kitchen table (literally!), but eventually outgrow their home and start to make their product in ever bigger quantities. It’s exciting to see the success of a new venture and to recognise the brand at farmers markets, festivals, and then into delis and mainstream supermarkets. But despite all the hard work and exhilarating growth, it’s still a business with the usual headache of tax and VAT and you can’t really afford to get these aspects wrong.

At first a business is often operated as a ‘Sole Trader’. The business owner just starts off by making products and getting sales, and operates everything through their own bank account. Obviously you have to keep track of what you’ve spent and what you’ve made, but it’s easy, quick and simple. All you need to do to keep on the right side of the taxman is fill out a self assessment tax return each year to show the amount of profit. You will then be taxed personally on this figure.

So, if you don’t intend to have employees or register for VAT (see below), the benefit of being a sole trader is that your personal details are kept private, the accounts are fairly simple and it’s not necessary to have a separate business account.

However, you will be personally liable if things go wrong. So if there is a claim against the business or has financial difficulties, someone can attempt to secure this amount against your personal assets. In addition, some of the larger retailers won’t work with sole traders.

If you start to get regular monthly sales you’re likely to pay more personal tax and National Insurance than if you were a ‘Limited Company’. Not only is this the most tax efficient way to run a business, if the company runs into trouble your financial liability is limited, which usually means your personal assets are safe. As ever though, it’s more complicated to set up a limited company so it’s advisable to get your accountant to do this for you.

A limited company has a separate legal identity from the owners (shareholders) and directors (the people who run the company). You can of course be both a shareholder and director, but these are separate things legally. The owners ordinarily have no personal liability beyond the amount paid for their shares, as long as they haven’t done anything illegal. If you’ve given personal guarantees for loans these will still apply however.

While being tax efficient there are two other key advantages to forming a limited company. You’re more likely to be able to sell a limited company than a sole trade business and you can raise funds from investors or family members by issuing shares. The downsides are less privacy, (members of the public will be able to see the identity of shareholders and directors), and administrative expenses will be much higher to comply with company law and tax legislation. 

Whether you are a sole trader of a limited company, if you have sales of over £85,000 in any 12 months, (not just your financial year), you will have to register for VAT. You can do this online or get your accountant to sort it out for you. For food businesses, many of the products they produce are zero-rated, that is to say there is no VAT charge to be added to the sale price, but you still have to be registered if you go over the £85,000 threshold.

However, some food products are at the standard rate of 20%. These include alcoholic drinks, confectionery, crisps and savoury snacks, hot food, sports drinks, hot takeaways, ice cream, soft drinks and mineral water. Why these? Who knows! Of course, this means that as soon as you register for VAT, you will be charging your customers 20% more if your product comes under that list. You’re effectively collecting this tax payment for the government and then sending them the 20% you collect every quarter.

But there is good news. If you’re a VAT-registered business you can generally claim back some or all of the VAT you pay on business expenses. Your VAT return every four months therefore shows what you have charged in VAT to your customers minus the VAT you have paid out in business costs. You make a payment to HMRC for the difference every quarter.

The paperwork is a bit of a burden so it’s probably better to get an accountant or bookkeeper to do it for you in the early days. There are also ways to make it simpler by using The Flat Rate Scheme (if your turnover is less than £150,000) and the Cash Accounting Scheme.

The first allows you to pay VAT at a fixed percentage of your turnover instead of calculating every transaction. The rate is lower and you’ll have less paperwork, but you can’t claim back VAT on your business expenses. The second allows you to pay VAT only when you’ve actually been paid by your customers, but you can’t reclaim VAT on your purchases until after they’re paid either.

DISCLAIMER This article is intended for guidance only. Although care has been taken in preparing the information, it is only correct at the time of publishing and does not form part of any contract. No liability is accepted by for actions taken in reliance upon the general information given.