Category: Tech

Startup accountant
We are startup accountants & can help you setup

Setting up a new startup or business can be stressful with what looks like a mountain of paperwork and red tape to deal with.

We’re here to help you with the tax and accounting side of things and have advised startups as diverse as a new hotel chain to a payments platform to fashion stores and e-commerce. We can support you with the fund raising process from seed rounds all the way through to an IPO.

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Generally speaking, if you make money from a business then you have to pay tax on your profit.

Profit is defined for tax purposes as your sales and business income minus eligible business expenses. Most expenses incurred in running a business will save tax, but some are disallowed such as entertaining customers/suppliers with restaurants, events or gifts.

Business structure

Limited company

The vast majority of our clients are limited companies because this structure can save a lot of tax and offer a lot of flexibility.

If you want to scale and grow quickly via investment then you’ll need a limited company to issue shares to investors. You can also use a holding company to own subsidiaries if you may need to sell in future or will have different sites/sectors.

Limited companies also provide protection against personal assets (eg house/car) if the business goes bust and can’t pay its suppliers/lenders.

Some examples of the tax savings:
- use a salary and dividends payment structure to avoid NIC and pay less income tax
- you can decide how much money to take out the business and when
- delay/defer tax using a directors loan
- appoint family members as shareholders/directors to save tax
- EIS/SEIS tax breaks
- R&D tax credits
Limited companies are required to file annual accounts and corporation tax returns, as well as file an annual confirmation statement. There is also more documentation involved to deal with shares and directors will need to file a self assessment to declare their dividends.

Sole trader

Sole trader registration is best for very small businesses as it involves less admin and cost.

If you expect your profit to exceed the annual personal allowance (2019: approx £12k per year) then you’ll need to be registered with HMRC as a sole trader.

Once your turnover exceeds £40-50k per year then it will usually be worth converting to a limited company.

If you expect to make a loss in the first few years then sole trader status can be quite beneficial as you offset the losses against previous years employment income to get tax refunds.

The main filing requirement is to prepare a self assessment tax return with details of income and expenses.

VAT

If your sales will exceed a certain threshold (£85k per year in 2019) then you have to be registered for VAT. This means you have to hand over 20% of your sales to HMRC, but you can also reclaim input VAT on expenses.

Most of our B2C clients will therefore add 20% to their planned sales prices so that they don’t suddenly start making a loss once VAT registration kicks in or lose consumers from having to increase prices. For B2B clients its not really an issue as business customers can generally just reclaim the VAT.

Many of our startup clients have voluntarily registered for VAT so that they can get regular refunds from HMRC for VAT paid on their expenses such as rent, software and consultancy etc.

VAT returns and payments usually have to be made quarterly.

Payroll

If you hire staff then you have to setup a PAYE scheme and issue payslips to employees. You’ll also need to calculate their income tax and national insurance and pay this to HMRC every month.

A pension scheme will also need to be setup and staff enrolled, although they can choose to opt out if they prefer.

Most of our limited company clients will setup a PAYE, even if there are no staff, as directors can pay themselves a salary to save tax.

Record keeping

As you can see above, various documents have to be filed with HMRC for accounts, self assessement and VAT etc on a regular basis.

In order to prepare these documents we need to have the full records of the business including:
- bank payments and receipts
- sales
- expenses
- loans
- share issues/options
Most clients will enter the transactions into cloud software like Xero, or use our excel template. Some clients are too busy or hate bookkeeping and so we do it for them.

Managing performance

If the bookkeeping is done regularly then we can check how the business is performing. We can also prepare cashflow forecasts and predict how the business will do in the next year.

This is important because the vast majority of startups fail in the first 3 years, but as we help clients to manage their performance, our clients tend to survive and thrive.

For example, we noticed one of our clients had a lot of slow paying customers with low value invoices and helped them to setup direct debit collections to automate the process. On another client we helped them to analyse their margins and to increase prices.

Next steps

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Please contact us for a free, no obligation consultation to discuss your requirements. Our offices are at Liverpool Street or we’re happy to have a phone/email discussion.
February 20, 2019
BREXIT: A GUIDE FOR SMALL BUSINESSES

DOWNLOAD THE FULL BREXIT REPORT HERE

Background

As readers are no doubt aware the UK voted to leave the EU in June 2016. We were shocked that Brexit actually happened and were worried about the impact on our clients.

The long lasting effects are unknown and much will depend on the negotiation of trade agreements with the EU. Some commentators have suggested that the UK could be in recession for many months whilst others have suggested that this will all blow over and the UK will rapidly recover.

We have attempted to evaluate the worst case scenarios and impact on our small business clients.

We all need to be aware of the potential threats to the UK economy and our clients/customers and take appropriate steps in order to survive and to thrive.

Summary

The Bank Of England is likely to cut interest rates and provide liquidity facilities to banks in order to prevent another credit crisis and to calm the markets. Financial markets could be due to political or financial/economic reasons and its too early to predict what could happen in the future.

However, there is a potential risk of recession due to the fall in exchange rates, inflationary pressure and uncertainties affecting business and consumer confidence. Foreign investment may also fall.

The full impact of Brexit is not yet known and one of the key factors will be the negotiations of a new trade agreement with the EU. If the Norway/Swiss models are followed and UK businesses can access the Single Market for imports/exports and financial passporting then the impact of Brexit may be limited.

However, we have considered the worst case scenarios for our core sectors:

Financial services: In the short term, FCA firms should re-check financial forecasts, risk assessments and capital adequacy requirements. In the medium/long term they will need to consider whether they will need to migrate to the EU or setup a subsidiary to ensure passporting.

Tech startups: In the short term, cash burn and forecasts should be re-assessed as it could potentially become more difficult to raise finance if investors are nervous about the UK economy. In the long term, restrictions on movement of labour could reduce the talent pool and some of the infrastructure and benefits of operating in the UK.

Fintech: Could suffer the same problems as tech startups but could also be affected by lack of passporting or reduced demand from the financial services sector if they are suffering from Brexit.

Import / Export: Amazon sellers could suffer from double layers of taxation and tariffs if they’ll now have to export goods to both the UK and EU separately, depending on how trade agreements are negotiated. Foreign goods could also become more expensive to UK customers, reducing to demand.

Contractors: Economic uncertainty could increase demand for temporary contracts if businesses are adverse to hiring new permanent staff. However, financial services could potentially suffer from job losses and temporary staff could also be affected. EU citizens need to check if they can stay in the UK and may be able to apply for permanent residence.

AIM/ISDX plcs: Equity markets have suffered and existing plcs may find it difficult to raise new capital. If the credit crisis of 2007-08 can be used as a guide then it may be difficult for new firms to list or to reverse in the near future, as many deals collapsed after the credit crisis.

DOWNLOAD THE FULL BREXIT REPORT HERE

June 24, 2016
Setting up company structure
Factors involved in setting up company structure

There are different factors involved in setting up company structure and it depends on the type of business, circumstances of the shareholders and their aims for the business.

Shareholders:
- if you may sell the company and re-invest the profits a holding company may be useful
- otherwise, the co-founders can be the shareholders
- for contractors and family owned businesses, husband/wife can be shareholders to maximise dividends
- ambitious startups looking to grow should setup a share cap table
- leave an option pool for key staff
- eg 2 co-founders setup a company owning 45% each and leave 10% option pool
Multiple trades:

Clients often have more than 1 business. The simple and efficient solution is to have 1 company and run the different businesses as divisions of this company.

For tax purposes, the different trades need to have separate profit and loss calculations. This is because losses from a trade can be set against the profits from another trade in the same year. But if losses are carried forward against future profits they can only be used against profits from the same trade.

If you’ll be expecting to sell a business/trade, it can be hived out into a separate company before sale. If its held for at least 1 year before sale, then there is no tax due to Substantial Shareholding Exemption.

Sometimes its better to start off with a group structure, so 1 holding company and 3 subsidiaries for the different businesses/trades, although this can also be achieved later on.

Dividends:

Profits after tax can be given to shareholders, and this is normally the most tax efficient way to extract profits.

Dividends have to be paid according to shareholding. So if a husband and wife hold 50% each, they have to receive equal dividends. Sometimes, it may make sense for 1 spouse to hold 100% shares and shares can be transferred between spouses without tax at any time (with the right paperwork) to maximise differences in tax rates and allowances.

If you’ll be receiving investment, the investors will also be able to receive dividends. So if you have a separate side business operating out of the same company, it will normally be better to hive this out before receiving investment.

Need help?

If you need more help on setting up company structure then please contact us for a free consultation.
February 22, 2016
Bitcoin audit

Why would a Bitcoin audit be required?

The New York State Department of Financial Services have proposed Bitlicense regulations which would require licensees to submit audited annual financial statements. If these regulations are passed it is possible that authorities in other jurisdictions would implement similar requirements.

For example, we note that online gambling was initially illegal in many jurisdictions around the world, but one by one, governments have been licensing operators and subjecting them to heavy taxes.

However, even if Bitcoin audits do not become mandatory, it could become best practice for Bitcoin businesses to undergo an audit of their financial statements. Many Bitcoin exchanges have already had independent tests to prove their level of Bitcoin reserves so the next step could be to have their financial statements audited.

A Bitcoin audit could be also be required in the UK if a company exceeds the small company limits or is deemed to be an ineligible company.

What does an audit of financial services generally involve?

In the UK, a company has to produce a set of annual accounts in accordance with generally accepted accounting principles (eg UK GAAP or IFRS) and Companies Act 2006. However, if a financial director produces a set of accounts, how would a user or reader of the accounts know whether or not they can trust its contents?

An auditor will independently verify whether the accounts are true and fair and in compliance with the applicable laws and regulations. The auditor will need to be suitably qualified, be named on the Audit Register and will need to perform the audit in accordance with International Standards on Auditing.

An auditor will obtain a full understanding of the business and the industry in order to perform a risk analysis and to plan the audit. They’ll need to consider what the key balances and transactions are and which ones are most susceptible or fraud or error.

Once the audit has been planned they’ll work through the accounts to verify and corroborate the assets, liabilities income and expenses that have been included in the accounts and also to test for any significant transactions or balances which have been omitted.

Key risks for a Bitcoin audit

A Bitcoin business would have assets, liabilities and transactions denominated in Bitcoin. Key risks would include whether Bitcoin assets (eg reserves in cold storage) and liabilities (eg customer deposits) exist, are correctly valued and whether they are complete.

It may be possible to obtain sufficient, appropriate evidence about existence and completeness for exchanges by using an approach similar to that used by Stefan Thomas and his tools such as Easy Audit. Other Bitcoin businesses may need different techniques. Depending on the type of Bitcoin business and the complexity of its transactions, an auditor may require a cryptographer or IT specialist to perform such procedures in order to comply with ISA 620.

Bitcoins are likely to be treated as a cash equivalent/ foreign currency or as an investment, depending on how the business uses them and its intentions. In order to ensure they’re correctly valued, they would need to be translated into the base currency used in the financial statements (eg £ in the UK) and an adjustment may be required depending on the accounting policy.

A Bitcoin business is likely to be involved in online transactions and the transfer of funds, so internal controls and anti-money laundering procedures are also likely to be key areas for a Bitcoin audit.

We can help

Our team have audited both financial services businesses and e-commerce businesses and can use this experience to help us audit a Bitcoin business efficiently and effectively.

For example, a large online gaming businesses had millions of customer accounts and we had to verify the total liabilities owed to customers, as well as testing a sample of individual deposit/withdrawal transactions and interactions with payment gateways.

The financial services businesses we audit have complex accounting/tax rules such as mark to market/fair value and also strict rules for anti-money laundering and dealing with client money.

Please contact us for assistance and we’ll be happy to offer a free consultation where possible.

September 16, 2014
Xero Accountants

We are certified as Xero Accountants

As Xero accountants we specialise in tech startups but also have experience of many other types of businesses from creative agencies to contractors to restaurants.

What is Xero?

Xero makes it very easy for businesses to do their bookkeeping, for example by automatically feeding in transactions from your bank and using plugins to connect with your business.

Tax

We can review what you’ve done in the cloud as your Xero accountants and provide expert tax and VAT advice to make sure that:

1) everything is in compliance with tax legislation
2) tax savings are made wherever possible

Business advice

Xero also has lots of great charts and reports and we’ll run through your business with you to analyse your performance and discuss how you can grow or face challenges.

Save 15%

Did you know that Xero offers a discount on all cloud accounting packages signed up by Xero accountants? We pass on those savings to our clients whilst many other firms keep the discount to boost their own profits.

Our fees start from £50/mth + VAT for dealing with accounts and corporation tax (excluding the Xero fee) for simple startups.

Contact us

Please contact us for a free, no obligation consultation to discuss your requirements and to setup or switch your Xero account. Our base at Liverpool Street is just a short walk away from Silicon Roundabout.

April 29, 2014
Startup equity, dilution and cap table

Startup equity, dilution and cap table

If you’re raising funding or startup equity you need to work out how many shares to issue to investors. The easiest way is probably to work out the % holdings after the share issue and work backwards.

For example, if there are 2 co-founders with 100 shares each who are raising £100k and the investor will get 10%, you might think that the investor will get 20 shares (10% of 200 total shares), however this would give them 9% as there would be 220 shares in issue.

The investor would need to receive 22 shares, as this would give them 22/222=10%. This would also dilute the co-founders down to 100/222=45% each.

Take a look at our template for a share capital table and play around with the figures to see how it works:

Share capital table

Share options / option pool

We’ve also included an option pool for share options to be granted to key staff or even advisors. Share options are contracts which specify that the option holder can purchase shares at a specified price if certain conditions are met, for example 1 tranche of options could vest every quarter, whilst another tranche only vests if performance conditions are met.

Need help?

Please get in touch if you need any help with any of the following:

– getting your house in order prior to receiving investment

– calculating number of shares to be issued to investors or option pool

– preparing board minutes, shareholder resolutions, investor offer letters and Companies House forms for share issues

– tax advice for EMI share options or SEIS/EIS tax relief for investors.

However, we highly recommend using a lawyer to draft or check the shareholders agreement or subscription document to ensure that co-founders’ rights are protected as much as possible.

December 9, 2013
VAT on Bitcoins

see here for latest HMRC guidance on Bitcoins.

http://www.hmrc.gov.uk/briefs/vat/brief0914.htm

The post below was written before their guidance was published:

VAT on Bitcoins

Download the full report here

There has been a lot of uncertainty regarding the treatment of VAT on Bitcoins and other cryptographic currencies. This uncertainty has led to a VAT risk as individuals and businesses are not sure of what their VAT liability, if any, could be from being involved in transactions with Bitcoins and cryptographic currencies.

This report sets out to explore the various VAT issues surrounding the Bitcoin ecosystem, apart from whether or not Bitcoins could be classified as “money” or “currency” for VAT purposes, as this is still a work-in-progress.

We have not identified any significant differences between the different crypto coins for VAT purposes.

Are Bitcoins face-value vouchers or something else?

HMRC appears to have classified Bitcoins “face-value vouchers” which may be single purpose.

There may not appear to be any basis for this as demonstrated in the full report.

However, Bitcoins could still be classed as digital commodities (software) or non-face value vouchers, in which case VAT would still be chargeable. This is unless an exemption can be found for them.

Bitcoins do not appear to be Electronic Money as defined by EU Electronic Money Directive Directive 2009/110/EC.

The ideal scenario would be if Bitcoins were classified as “money” or “currency” as these are exempt. Although VATA 1994 doesn’t define money, the EU Sixth Directive does make mention of legal tender. However, this is something which we are exploring in case there is any legal precedent to allow Bitcoins to fall within the exemptions.

If there’s VAT on Bitcoins, how should people deal with VAT

If merchants accept Bitcoins as payment for goods and services, then they would need to account for VAT on their services as normal. The amount is likely to be the market value of Bitcoins as at the tax point.

However, it may be possible for merchants to avoid VAT on Bitcoins when exchanging for legal tender, as they would be used as consideration for a VAT exempt item (money).

Miners, investor/traders and exchanges selling Bitcoins may need to account for VAT at 20% if they are supplying taxable supplies in the course of business. This will need to be looked at on a case by case basis, and there are 6 key tests.

Donations received in Bitcoins may be able to avoid attracting VAT if they are freely given without expectation of goods or services in return, and not in the course of business.

Is there VAT on Bitcoins if customers are located overseas?

Bitcoins are likely to be classified as electronically supplied services in the absence of any exemptions and the special place of supply rules would apply for a UK supplier:

business customer overseas: supply occurs in their country and not subject to UK VAT.
consumer in EU: supply occurs in UK and subject to VAT
consumer outside EU: supply occurs outside EU and not subject to VAT.

Download the full report here

November 30, 2013