I have been in this country for about seven years, and I work in a nursery. In my country, I have been working as a teacher in a primary school but at the same time, I used to help my husband in a small shop. In England, I am alone as a single mother with two children – 15 and 17. I want to work harder and help them for the future education and I feel confident to open my own small business.
What I wish to do is to open a private nursery. I have a lot of parents that are supporting me with the idea. My only concern is that I don’t know about tax rules.
Can you please advise me on about taxes and how can I operate in the correct way that is best a nursery business? Please note: I am scared of paperwork! Do I need to hire an accountant – or is it easy to do by myself? I really would appreciate your advice?
Many thanks. Ro.
Firstly, Decide if Setting Up as a “Sole Trader” or a Company.
It’s great to hear you want to open a private nursery. Starting a new business can be extremely exciting -although sometimes a little daunting.
In the UK, there are a number of tax considerations to think about, but these will depend upon the legal structure through which you operate the business.
I assume you will be running this on your own account and, therefore, a partnership structure would not be appropriate. You could operate as a “Sole Trader” or through a Company (and a social enterprise is sometimes considered) and I have highlighted the main tax issues of these two different structures below.
Setting Up as a “Sole Trader”
- The business will not have its own separate legal identity and, therefore, any profits will be subject to income tax at your marginal rates (20% / 40% / 45%).
- You will need to register your self-employment status with HM Revenue & Customs. Failure to register within three months of becoming self-employed can result in a fine.
- You will need to account for National Insurance Contributions (NICs). This will consist of both Class 2 NICs (£2.75 per week payable quarterly) and Class 4 NICs (calculated at 9% on taxable profits up to £41,865 and 2% above this amount for the 2014/15 tax year).
Setting Up a “Company”
- The business will be treated as a separate legal person and, consequently, any taxable profits will be subject to corporation tax (broadly at a 20% rate).
- It will be necessary to consider how such profits should be extracted (if any) and this could be in the form of salary, bonus, dividends and loans or any combination of these. Ideally, you will want to ensure that you avoid any unnecessary double tax charge; one at the company level and a second charge on any profits extracted by you personally.
“Value Added Tax” (VAT)
I am assuming that your only service will be supplying nursery care and, therefore, the fees charged by your business will be exempt supplies for VAT purposes. Accordingly, you will not be able to register for VAT and, therefore, will not be able to recover the VAT costs on your business expenditure.
Which legal form your business should take will depend upon a number of different factors (and not just tax). However, business owners often set up initially as a sole trader and then, once the business has grown and demonstrated profitability, they incorporate the business and run it through a company.
The added tax benefit of taking this route is that any losses incurred with the start up (where most of the expenditure is incurred) can be set off against an individual’s other income (such an employment income) of the same year in order to reduce that individual’s overall tax liability. On the other hand, sometimes it is preferable to set up as a company, particularly as this provides limited liability so that any claims can generally only be made against the company and not against you personally or any other directors / shareholders, unless any personal guarantees, for example, in connection with any bank borrowings have been given.
It is always generally recommended to engage an accountant to help with the numbers side of the business. This will be so important in helping to manage invoicing, expenditure, cash flow, payments to staff and accounting for all taxes.
Depending upon where you live, there may be local funding available to help with your start up costs. This varies by council so do contact your local childcare business support team to see what grants or other financial help may be available.
Overall, there are a number of issues to consider when setting up a business, particularly how it should be operated and what is the most tax efficient route for you (short, medium and long-term). It is always recommended to seek out specific tax advice before committing yourself down one particular route.
If you have any questions, please do not hesitate to contact Simon Newsham at firstname.lastname@example.org Tax Partner at the law firm Winckworth Sherwood.