Legal Basics - New & Small Businesses Last modified: 24 July 2007

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Starting a Business 

Here is a checklist of just some of the legal issues that you need to consider when starting a business. Each item in the checklist links to more information on that particular topic, which in turn contain links to even more detailed information and help. 

Before we dive in we should say that no-one can create a definitive guide to setting up your own business, as every individual's situation will be different. Why not take advantage of a chat with your local Business Link advisor. They are  part of the Government's Small Business Service, and both websites also have a great deal of information that may be of use to you. 

It may also pay to talk through certain legal aspects of your business with a solicitor before you actually start trading. Why not try the innovative online law firm LawGym at www.lawgym.com, who offer you the chance to set the price you want to pay for your legal advice, or you could try The Law Society who run a scheme called Lawyers for your Business. The solicitors who have agreed to take part agree to offer a free initial consultation.

Here's our checklist of some of the key legal aspects to starting a business

Business Structure

There are basically 3 ways that you can set up your own business, you can be - 

• sole trader
• in partnership with one or more people
• a limited company

Each has their advantages and disadvantages

- Sole Trader - This is the simplest form of business model. There are no legal formalities required to set yourself up in business as your own boss. The downside is that you also carry the can if things go wrong. You are personally liable for all the debts of the business, and creditors could look to your house, car, savings etc to settle any money owed to them. You do not have to produce audited accounts, but you will need to keep records for the taxman. If you do set up in business on your own in this way you should advise your tax office, as you will now be taxed as a self-employed person (see Tax below)

- In Partnership - If you set up your business with one or more people, then you will be in partnership, whether or not you actually get anything down on paper - even if the partners are other members of your family. Your partnership will be governed by the Partnership Act 1896. Generally this is not what you want or need. Anybody working together in partnership (including families) should get a Partnership Deed drawn up by a solicitor, which covers how the partnership will work on a day-to-day basis, how it can develop and how it can be ended. Generally each of the partners is personally responsible for all the businesses liabilities, whether they knew about them or not. Therefore choose your partners carefully. Partners remain self-employed and only need to prepare accounts for tax purposes (although we'd recommend you prepare them properly anyway).

- Limited Company - This is the most formal way to run a business, but it has the added advantage of limiting your liability to the amount of share capital you have invested in the business. Note that Banks and others will therefore ask you for personal guarantees for loans etc. The disadvantages are that there is a cost involved in setting up a company - you can buy one off-the-shelf for as little as £125, and that you have to comply with Companies Act legislation - accounts, records and returns at Companies House. As a Director you are no longer self-employed, but employed by the company, so you are likely to have to deal with National Insurance and PAYE Income Tax matters.

Trading Name

Business names no longer need to be registered with any Government Department. They are now governed by the Business Names Act 1985. You'll find an excellent guide to the Act here. You will need to display your trading name in accordance with the Act at your place of business, and on stationery and invoices etc.

Basically you need to check, as best you can, that the name you choose to trade under is not the same or similar to any other business, particularly in your locality. If it is then you may find yourself being sued for "passing-off" ie trading on the back of someone else's reputation, or even in breach of a trademark. You can search the Trademark Register online here.

If you set up a limited company then you will only be able to register a name which is not already on the register. You can search the Companies House Register online here. 

Trading Laws

If you are going to be supplying goods and services to the public then you are going to need to know about certain bits of consumer legislation - such as the Sale of Goods Act (they must correspond with their description, be of satisfactory quality and be fit for the purpose) and the Trade Descriptions Act. There are some excellent online information sheets on the Trading Standards' website. Check out the ones that relate to your type of business

Terms of Trading

If you are going to be dealing with the public and other businesses then you need to get your Terms of Business sorted out. These deal with your contractual relationship with your customers and suppliers. They should cover such items as estimates for work, payment terms, transfer of title to goods, failure to perform contractual duties etc. The terms on which you trade should be as beneficial as possible to you (without putting your client or supplier off), and are unique to you and your business. It is worth getting them professionally drafted by a solicitor. 

Employing Staff

Hopefully your business will get to a stage where you will need to take on staff to deal with all the work you are generating. There is a lot of employment legislation with which you will have to comply, and it is well worth taking time to study a useful information leaflet
Employing Staff - Regulatory Requirements  - DTI Publications - tel 0870 150 2500.

In addition there is some very helpful Frequently Asked Questions answered on the Business Link website under the Starting Your Business/People/Employing Staff headings. Here are just a few pointers -

• employment contracts - All staff who are employed for more than a month are legally entitled to a written statement of their main employment terms. This is a minimum requirement and it is good practice to give all employees a full written contract
• minimum wage -  Under the National Minimum Wage Act the current minimum wage is £3.70 per hour (rising to £4.10 on 1 October 2001, and £4.20 on 1 October 2002). For 18-21 year olds the rate is £3.20.
• part-time workers - Under the Part-time Workers Regulations part-timers must be treated no less favourably than their full-time counterparts.
• sick pay - If an employee is sick for less than 4 days they are not entitled to Statutory Sick Pay (SSP). If for more than 4 days they are entitled provided they are not excluded (eg over 65; pay is less than required to make National Insurance Contributions; on short term contract - 3 months or less; pregnant employees. Sick Pay is recoverable from the Government.
• parental leave - Employees with at least one year's service are entitled to take 13 weeks unpaid leave for each of their children until they reach the age of 5. Fathers are currently not entitled to any additional Paternity Leave, but will be from 2003.
• maternity leave - see Legal Basics - Employment 
• insurance - see below

Trademarks, Copyright & Patents (Intellectual Property)

If you have a distinctive style or mark then it may well pay you to consider registering it as a trademark. A trademark is any sign which can distinguish the goods or services of one trader from another. Registering it will prevent others from using a similar style. You'll find more details on the Patent Office website.

You can find out more about copyright and patents too, on the same site. Copyright automatically arises to prevent certain types of work from being copied without permission - eg films, books, videos, photographs, web pages. Patents need to be registered to protect inventions and processes from being copied by competitors.

Insurance Issues

If you have employees then you must take out Employers Liability Insurance, and display the certificate where your employees can see it. You'll find a guide here

You will also have to deal with National Insurance Contributions for any employees. For employees aged 16 or over, employer and employee NICs become payable once earnings exceed the Earning Threshold (£87 per week from April 2001).

Tax

The Inland Revenue provide a number of information leaflets about tax specifically for start-ups on their site. There is also the Employer's Helpline (0845 60 70 143) where you can find out answers to specific tax and NI questions you may have.

VAT is dealt with by HM Customs & Excise. You must register for VAT if the value of your taxable supplies in the last 12 months has exceeded £54,000.

Company cars

From 6 April 2002 the charge on the benefit of a company car is graduated according to carbon dioxide (CO²) emissions.

This tax charge replaces the previous scheme which included reductions for business mileage (including those for second cars) and for older cars. These reductions no longer apply.

Charges

1. For cars with a petrol engine with an approved CO² emissions figure, the charge will build up from 15% of the car's list price in 1% steps, dependent upon the level of emissions, in accordance with the following table:

• The exact CO² figure is rounded down to the nearest 5 g/km

• The price of the car, for tax purposes, is the UK list price of the car on registration plus car tax, VAT, delivery charges and relevant accessories.

For example:

2002/03 car benefit charge for petrol car with approved CO² emission factor of 222 with list price of £18,000 is calculated as £18,000 x 26% = £4,680

2. For cars with diesel engines the following supplements will be added:

• Diesel cars achieving the clean level of Euro IV standard emissions will not be subject to the above diesel supplements.

For example:

Car benefit charge for diesel car (Euro IV not achieved) with approved CO² emission factor of 187 and list price of £15,000 is calculated as £15,000 x (19 + 3)% = £3,300

3. Cars with no approved CO² emissions and cars registered before
1 January 1998 are taxed according to engine size as follows:

Fuel Benefit

Where an employer pays for any fuel used privately by an employee, there is an additional scale charge based on the size of the car's engine. Scale rates for the tax year 2001/02 are as follows:

Scale rates for 2002/03 will be announced in the Budget.

These standard charges are subject to Income Tax at the lower, basic or higher rates, depending upon the employee’s overall liability for the year. The tax due is usually collected under the PAYE system via an adjustment to the employee's code number.

Tax-Free Benefits

Car Parking
The provision of a car parking space either at or near an employee's place of work is not currently an assessable benefit.

Pool Cars
There is no tax charge for using a pool car. (A pool car is defined as one where private use is 'merely incidental' to business use, where it is not normally used by any single employee to the exclusion of others, and where it is not normally kept overnight at or near an employee's home.)

'Lower-paid' Employees
The provision of a car for an employee (not a director) who is paid at a rate of less than £8,500 per year including the value of all benefits & reimbursed expenses does not attract any charge to car or fuel benefit.

Business use of an Employee's own Car

Many employees are reimbursed for the business use of their own car. The maximum amount of mileage allowance that can be received without paying tax is as follows:

If more than the above 'approved mileage allowance payment' (AMAP) is received, tax is payable on the excess.

Reporting Details

Provision of company cars and fuel benefits must be reported on a form P11D/P9D for directors and relevant employees.

Mileage payments in excess of the approved allowances must also be reported on form P11D/P9D. The individual then makes a claim for the approved allowance by completing the appropriate section on his or her tax return.

Self assessment

Many people incur penalties for failing to submit their Self Assessment Tax Return on time.

The SA Tax Return is a comprehensive form, with a number of accompanying schedules - but you need only complete those schedules relevant to your circumstances.

You (or your adviser) must submit your SA Tax Return including the calculation of your tax liability by 31 January of the year following, e.g. the Return covering income for the year ended 5 April 2001 must be submitted by 31 January 2002.

If you prefer, the Inland Revenue will work out your tax liability for you - but you only have until 30 September of the same year to supply all the necessary information and your completed Tax Return.

• There are random checks on completed Tax Returns.

• There are automatic fixed penalties for late Tax Returns.

• There are variable penalties for incorrect Tax Returns.

• There are interest charges (and surcharges) for tax paid late.

If you're an employee:

The PAYE system itself was more or less unaffected by the introduction of Self Assessment but you are subject to SA rules if you need to complete a Tax Return.

Remember, it's up to you to tell the Inland Revenue about anything that may have a bearing on your tax affairs - you cannot use the fact that you were not sent a Tax Return as an excuse. If necessary, you must ask for one.

If your tax affairs are not up to date, you should consider a complete review. Many people on PAYE never complete a Tax Return and never check their codings. As a result, some are paying too much tax. Others are paying too little and are building up a tax problem for the future.

If you have retired:

The deduction of tax at source from most pensions and investments is unaffected by Self Assessment.

You should, however, check to make sure that the right amount of tax is being deducted from your pension(s) etc. as the Inland Revenue will not necessarily do this for you.

There are still millions of pounds of unclaimed tax refunds being held by the Inland Revenue, a large proportion of which relates to retired people.

If you're an employer:

You need to check the requirements to provide information to the Inland Revenue, your employees and your former employees.

You must also ensure that you are keeping adequate and appropriate records.

If you're self employed:

Payments on account of tax liability are due on 31 January and 31 July, with a balancing payment (or refund) to be made on the following 31 January. It is worth remembering that any balancing payment must be made at the same time as the first interim payment for the following year, and that interim payments can be reduced where circumstances have changed.

Self Assessment has also led to more emphasis being placed on the ability to justify the figures included in the business accounts section of the SA Tax Return. You can face a fine of up to £3,000 if your accounting records are considered to be 'inadequate' (see our Quick Guide to Record Keeping).

If you're a subcontractor:

If you're a subcontractor in the construction industry, the recent changes may mean that you are no longer entitled to receive payments without deduction of tax, due to the 'turnover tests'.

Applications for exemption certificates (CIS6) will, in addition, need to be supported by evidence that your tax affairs are in good order and completely up to date.

Avoid trouble with Self Assessment. This means: 

• No outstanding Tax Returns

• No outstanding business accounts

• Maintaining adequate records

• Paying all taxes on time

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