5 Rules Every Small Trades Business Should Follow
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Picture this: you’ve started your own trades business, got a solid bunch of customers, and are reaping in the money.
Things are going well – you’re getting good reviews, you’re happy with your prices, and you’ve finally saved enough money to replace your rickety old Ford Transit.
But then all the success catches up to you. Even if you haven’t left all your paperwork to the end, you end up getting slammed by your first tax bill. It’s way bigger than you expected and by now you’ve already spent most of what you’ve earned.
HMRC doesn’t play around, but it’s not impossible to be in their good books.
We recently spoke to long-time accountant Jed Eatough, and here are 5 actionable rules that will help you stay on top of things, be less stressed, and run an even more successful business.
Rule #1 – Save 20% of your turnover for tax
Employees in the UK can almost completely forget about tax. Thanks to PAYE, it’s deducted from the salary before it even lands in the bank account. But, as a business owner, things are a little different. We’ve got a full tax guide here, but the short story is that it’s on your shoulders to fill out tax returns.
For new business owners, this can catch them off guard: “People get to the end of the year then realise they’ve not actually put anything aside for their tax,” Jed explains. “In the first year of being self-employed, your first tax bill is the most punitive tax bill you’ll ever get.”
In fact, you can go 18 months before you get handed your first tax bill thanks to the way the tax system works here in the UK (with both payments on account and balancing payments).
What are balancing payments and payments on account?
Balancing payments are payments you owe for the previous tax year.
Payments on account are payments made in advance for the tax year ahead, based on the previous tax year.
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Since a new business has no previous tax year to calculate payments on account, their first bill equals 12 months worth of balancing payment & 6 months payments on account.
Jed’s solution for all this? “Put aside 20% of your turnover to cover your income tax bill, and when it does eventually arrive, you’ll have more than enough to cover your tax.” In fact, you’ll probably have a nice little bonus to pay for a holiday when all the calculations are done and dusted.
Lots of new trades business owners smash through the year, make a bunch of income, and think it’s theirs to spend: “It’s a very easy trap to fall into,” Jed points out.
Rule #2 – Spend 15 minutes a day recording income & expenses
Most tradespeople start their business because they want the freedom to do the work they love – not get bogged down in paperwork.
Think of a typical tradesperson. In Jed’s words: “He goes off and does his day’s work… the last thing he wants to be doing is any kind of paperwork – cause let’s face it: It’s boring.”
But breaking it down into bite size chunks makes all this work far more manageable. “I do tend to recommend what I’d refer to as my 15-minute-a-day rule. If you can just sit down for 15 minutes at the end of your working day and write up a basic cash book of your incomings and outgoings for the day…it saves an awful lot of time and trouble down the line because it’s fresh in your mind.”
15 minutes a day doesn’t sound like a lot. But if you leave it until the end of the week, you’re talking 1 hour and 15 minutes to do the same work. Once a month, and that becomes 6 hours, and once a year – 72 hours.
For Jed, the choice is simple: “If you’re self-employed, I’d defy anybody that can sit down for an hour and a quarter without any kind of interruption.”
Rule #3 – Don’t delay VAT registration
The VAT limit in the UK currently sits at £90,000. But Jed argues you shouldn’t wait until your turnover reaches this figure to register: “You’re better off registering for VAT sooner rather than later,” he says, and there’s a few reasons why.
Firstly, a lot of trades businesses are buying expensive products for their customers (boilers, replacement parts, etc.). “Your customers are going to be individuals who are not going to be able to claim the VAT back,” Jed explains, suggesting that you may as well register from day 1 for this reason.
But there’s more to the story. “You can very quickly get a turnover of up to [£90,000]. If your customer base are private clients who cannot claim the VAT back, and you’ve not registered, it comes to a point where you’ll have to increase your prices by 20%. Your customers aren’t going to like that,” says Jed.
If you register early on, people won’t get upset by the price jump. Otherwise, you’ve got to magic an extra £18,000 just to break even after registering.
The third and final reason is a more practical one from a marketing point of view: “[Being VAT registered] gives your customers a bit of confidence in you. If they come across somebody that’s VAT registered…“this guy must be doing okay for himself.””
Rule #4 – Incorporate when you’re turning over more than your house is worth
This is another question that many business owners come to ask themselves at one point. Many think that incorporating the business will offer them tax benefits but, according to Jed, this is marginal: “The tax advantages are probably just 1 or 2%.”
But when it comes to managing risk, it’s a different story. “There’s a general rule of thumb I personally advise clients. Once you start turning over more than your house is worth, you want to start incorporating your business,” explains Jed.
“They could take you to court and you could lose your home.“
“While you’re a sole trader, all your personal assets are vulnerable. If you incur a bad debt and you can’t meet your bills, technically they could take you to court and you could lose your home,” he continues. Meanwhile, running a limited company means you are limited by the liability of the amount of shares you hold.
Rule #5 – Hire qualified accountants you’re comfortable working with
It’s a great idea to get professional help with your accounts, but take some time to find an accountant who fits your needs. Jed’s advice here is to find someone you’re comfortable working with: “See if you can have an open, honest relationship with them,” he says.
At the same time, you want somebody who is qualified. “Even just an AAT qualification [Association of Accounting Technicians] right through to professional qualifications with ACCA [Association of Chartered Certified Accountants] or the ICAEW [Institute of Chartered Accountants in England and Wales].”
The last thing to look for is experience. Accountants who’ve worked with businesses similar to yours will be able to quickly set up processes and help scale up your business.
No qualifications are needed to start an accountancy firm, so it pays off to know you’re hiring the real deal.
Bonus tip: stay ahead of your work with software
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Between managing teams, dealing with HMRC, and tidying up all the paperwork, small business owners have little spare time to go around.
Designed specifically for heating & plumbing businesses in the UK, Gas Engineer Software is an all-in-one solution. An easy to use platform with everything from quotes & invoices to scheduling and digital certificates means you can keep everything running smoothly under one roof.
Together with the 5 rules above, you’ll be well positioned to grow a successful business and spend time doing what you love.
Next steps:
If you’ve been thinking about implementing software into your workflow to save time, here’s what you can do next:
- Visit our resources centre where you'll find more articles like this one and our free gas rate calculator.
- Start a free trial to see exactly how our software works for your business.
- Watch our video demo to get an idea of how our software works. You can also book a 1-on-1 session with our customer success team for a more personalised experience.
- Know an engineer who's still using paper? Help them and us out by sending our software their way!