Accounting for Startup Business in the UK: A Complete Beginner's Guide

Starting a business is an incredible experience, but the stress of doing your own accounting is often put off. Founders spend the least amount of time possible on accounting because they believe they can make the biggest impact on the business with customers, product, or sales. Failures in accounting for startup businesses can be detrimental. Missing VAT deadlines or having unclear records can result in unexpected tax bills.

This guide provides a simplified version of the accounting processes new UK founders must go through, including choosing a business structure and setting up accounting systems, without using complicated terminology.

Why Accounting Matters From Day One

Founders often think that accounting can be put off until the business grows to a larger size. Startup accounting in the UK is one of those things where the setup can be difficult, but the infrastructure is in place to easily correct any issues that may arise. HMRC and Companies House expect records to be kept accurately from the time the business registration is complete.

Record keeping is only one of the many benefits of bookkeeping. Bookkeeping can tell you if the business is making money and can save founders from making detrimental business decisions. Founders who track this number from the first month of business are typically found to make better decisions regarding the business spending, hiring, and pricing.

Choosing Your Business Structure

How you structure your business will impact almost every decision you make regarding accounting, so this should be determined first.

One of the simpler options is to set up as a sole trader. You would need to register with HMRC and then keep records of your income and expenses and submit a Self Assessment each year. There is less paperwork, however, as a sole trader, you and the business are the same entity, and you would have unlimited liability.

If you set up as a limited company, you would need to file accounts with Companies House each year, complete a Corporation Tax return, and set up a payroll if you pay yourself. This option is better if you intend to raise capital or have other investors, and there are more advantages if your business grows and you make a profit.

Neither option is always better; it depends on how much you expect to make, if you want to have investors, and how much you are willing to do yourself.

Setting Up Your Bookkeeping System

Once the structure is set, the next thing on the to-do list is organizing bookkeeping. This can be as simple as keeping records of:

1. Invoices sent and sales made
2. Business spending (keep receipts!)
3. Transactions in the business bank account
4. Money owed to and by the business

Most founders will have opted for a cloud-based solution over a spreadsheet by this stage, and it's something you should consider doing early on. The best accounting software for startups in the UK (Xero, QuickBooks and FreeAgent) will populate your bank transactions and ease the stress of bookkeeping. Your accountant will also appreciate the software you choose. Make sure it integrates easily with your bank.

Understanding Your Tax Obligations

This is where a lot of new founders get tripped up because the UK tax rules for startups are not obvious.

If you are running your business through a limited company, the current Corporation Tax rates for startups are 19% on profits under £50,000 and 25% on profits over £250,000, with marginal relief tapering the rate between. Your return is due nine months after your company’s year-end; however, the tax is often due sooner.

Startups are required to register for VAT if their taxable turnover in a rolling 12-month period is over £90,000. Many founders tend to register for VAT before hitting this threshold if it benefits their business, as it allows them to reclaim VAT on expenses.

Making Tax Digital applies to self-employed founders and landlords earning over £50,000 and requires digital records and frequent updates to HMRC rather than the current system of an annual return. If you are a sole trader and your income is close to this threshold, it is a good idea to prepare for this change.

When to Hire an Accountant for a New Business

You will be able to do basic tasks yourself in the first couple of months, but most founders will reach a point where bookkeeping takes too much time. It is a good idea to set up your business with an accountant because you will typically need one when you:

1. Approach or hit the VAT threshold and need to register for VAT
2. Run your first payroll
3. Create your first set of annual accounts
4. Need to raise funds as investors will want to see clean books

Accountants do more than just submit returns. They help you with cash flow, warn you of deadlines, and identify reliefs you may be missing.

A Simple First-Year Accounting Checklist

1. To help you stay organized, a basic accounting checklist for the first year of your startup should include:
2. Register with HMRC (and Companies House, if applicable)
3. Open a business bank account separate from your personal account
4. Select and install accounting software
5. Start tracking all income, expenses, and receipts
6. Familiarize yourself with the deadlines for VAT and Corporation Tax
7. Consider when you will hire an accountant

Thinking About Expanding Beyond the UK?

We know that many founders have India on their growth horizons. It is one of the fastest-growing markets for new company formation. If India is on your radar, know that VentureEasy offers the following services to foreign founders:

1. Registration of Indian Subsidiary Companies
2. Registration of Foreign Companies in India
3. Cross-border Tax Planning
4. FEMA/RBI Compliances for Foreign Investment
5. Indian Trademark Registration: Protect your brand in India!

Final Thoughts

Getting accounting for a startup business right doesn't require a background in finance. It requires a specific system, which, if followed religiously, will produce the right results every time. The different elements of a business-bookkeeping and tax obligations - all link together. Decisions made at the start of the journey will likely determine how much time and money a business will spend in the long run.

If you want to know more about the various stages, for example being a sole trader, setting up a limited company, hitting over the VAT threshold, etc., then the team at VenturEasy can help. You can book a 15-minute free call to help you understand your situation and provide a clear path forward on what your business actually needs.

Frequently Asked Questions

Do I need an accountant when I start a business in the UK?

You probably won't need an accountant when initially starting your business in the UK. Many business owners will do the basic accounting themselves for the first few months of their business, as long as they keep organized records from the start. Most business owners will hire an accountant when they begin filing VAT, running payroll, or creating their first set of business records.

What is the difference between sole trader and limited company accounting?

With a sole trader, the business and the owner are the same entity, so the owner reports the business profits through self-assessment, and there is less accounting work. A limited company is a separate entity from the owner, so the company must file annual accounts with Companies House, pay corporation tax, and keep more extensive records.

When does my startup need to register for VAT?

Your startup will need to register for VAT when your taxable income exceeds £90,000 in a rolling 12-month period. Some startups will choose to register for VAT earlier than this if it is beneficial to their business or allows them to reclaim VAT on expenses.

How much Corporation Tax will my startup pay?

Startup companies that have profits less than £50,000 will pay corporation tax at the small profits rate of 19%. If the profits of the company are greater than £250,000, then the rate is 25%. Profits between these two amounts will be taxed at the small profits rate and the higher rate using marginal relief.

What accounting software is best for a UK startup?

Some of the most popular accounting software in the UK are Xero, QuickBooks, and FreeAgent. The best accounting software for a UK startup is inconclusive, as it depends on how the startup invoices, whether the software needs to include payroll, and which accountant the startup uses.