5 Rules Every Small Trades Business Should Follow

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 heating & plumbing 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 and it’s entirely 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. Unfair as it might seem, your first year of being self-employed will come with the most punishing tax bill.

This is because 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).

One way to deal with this is to put aside 20% of your turnover to cover your income tax bill. In doing this, you will 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. The last thing they want to happen is to get bogged down in paperwork. 

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.

Rule #3 – Don’t delay VAT registration

The VAT limit in the UK currently sits at £90,000, but you probably shouldn’t wait until your turnover reaches this figure to register. For a few key reasons, you’re better off registering for VAT sooner rather than later.

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. In other words, some businesses may as well register from day 1.

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 simply gives your customers a bit of confidence in you as it’s a sign of an established and trustworthy business.

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 the difference is marginal: “The tax advantages are probably just 1 or 2%.” 

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. 

This is because while you’re a sole trader, all your personal assets are at risk. Should the worst case scenario happen, you get in debt, and can’t pay your bills, you could be taken to court and lose your home.

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. It’s a great idea to find someone you’re comfortable working with.

But at the same time, you want somebody who is qualified – whether that be an AAT qualification (Association of Accounting Technicians), professional qualifications like 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. 

Bonus tip: stay ahead of your work with software

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.