Setting up a business in the United Kingdom

Setting up a business in the United Kingdom
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Updated 2021-09-03 12:09

The United Kingdom's entrepreneur flair has resulted in many referring to it as a nation of shopkeepers. Entrepreneurship is continually contributing to the British economy and the country's commercial profile. The government has also been of help, making it easier to nurture the national entrepreneur market and encourage citizens to set up their own businesses. As such, the overall process of setting up a business is hassle-free and straightforward. However, the steps you need to take to set up your business depend on the sector you want to penetrate, the size of your business, and where you want to operate your business from.

First things first

Before you set up a business, you should conceive the business idea, think about how you will finance it, and focus on creating your business plan. Conducting market research will help you understand whether there's a gap in a specific sector and how you can feel it. Also, it would be best if you decided on whether you want your business to be online (and most likely run from home) or have a physical presence.

Tip:

You should think of your business plan as the map of your business that should entice audiences into your products and services. Your business plan should outline the problem that your business solves, how your business is different from the competition, the story behind the establishment of your business, and the business structure.  

Business structure

The business structure will determine your business's legal status and the tax payments you ought to make. You can register your business as a sole trader, a partnership, a limited liability partnership (LLP) or a limited company. Each business structure has its pros and cons, and it's up to you and your partners (if you have any) to decide what's the most suitable for your situation.

A sole trader is the simplest and most common type of business registration. Suppose you register your business as a sole trader. In that case, you are the business, meaning that the law will not differentiate you from your business. Hence, if, let's say, your business is sued, you are personally sued and your assets (e.g. property, car, etc.) could be used to pay the debts. Generally speaking, setting up as a sole trader is easy. However, growth opportunities are limited because banks and investors prefer limited companies, which are considered more credible.

Here are some of your responsibilities as the owner of a sole trader company:

  • Keep a record of business expenses and sales
  • Carry out your tax return self-assessment yearly
  • Pay your income tax with Class 2 and Class 4 national insurance and use the HMRC's calculator for budgeting this

A partnership is no different to a sole trader. However, the business is run in collaboration by more than one person. Before sealing a partnership, try to evaluate the other person or people as much as possible and consider the qualities you want them to have (e.g., passion, responsibility, creativity, open-mindedness, etc.). You don't have to be friends with your partner(s), but there has to be a significant level of trust and confidence that they work towards the best interest of your business.

On the other hand, a limited company has a separate legal identity from its directors and shareholders (owners). This is a good option for riskier business plans. Also, limited companies don't pay income tax as sole traders do but 19% corporation tax on their profits, which is paid as soon as the business starts making profit. Limited companies are entitled to tax deductions, meaning they are more tax efficient and profitable. However, setting up a limited company is more challenging since it requires more documents.In addition, a limited company's director has fiduciary responsibilities they have to meet by law. Last but not least, limited companies must disclose the company's earnings publicly for transparency reasons. 

Good to know:

A sole trader has to file a self-assessment tax return every year for the previous tax year. A sole trader's tax returns are not public, and business figures are private.

Good to know:

In a partnership business, if one partner vanishes or dies, the other partner or partners will have to pay the business's debts. 

Good to know:

When you register a limited company's name, nobody else can use it.

Useful links:

Set up as a sole trader

Assessment tax return

Register your business in the UK

To fully register your business and ensure you pay the correct tax on your earnings, you must register your business with the HM Revenue and Customs (HMRC). After that, you will receive confirmation and your unique tax number. It is a requirement for all industries to pay a yearly tax sum, which starts in April of the preceding tax year. The amount you earn and the type of company you own define the value of your tax. For more tax information, visit the HM Revenue and Customs and the local council office. If you are not in the UK yet, you can contact the Chambers of Commerce in your country.

Good to know:

You are expected to pay income tax when you have earned more than £11,500 in a financial year.

Having a business means that you will have to insure it against risks such as damage, legal fees, employees' accidents, etc. There are different types of insurance depending on the type of business you have. If you have set up a sole trader business as a self-employed, a good solution is to purchase self-employed health insurance for access to health professionals. If you have employees, it's a legal requirement to get Employer's Liability (EL) insurance. The policy you will purchase from an authorised insurer must cover you for at least £5 million. This insurance will pay for your compensation to an employee who was injured at work or became ill due to the type of work they did for your business. For every day that you have been running your business and employing employees but haven't been insured, you may pay a fine of £2,500. Employer's Liability is an expensive insurance. Hence, you may want to hire an insurance broker to help you buy it.

Good to know:

You may not need Employer's Liability insurance if you employ a family member or someone who is based abroad.

Useful links:

HM Revenue and Customs

British Insurance Brokers' Association

VAT companies in the UK

Upon earning more than £83,000 in a calendar year, you will be required to register as a VAT company and correspondingly start charging the right amount of VAT for your work (unless you sell tax-exempt products or services). Note that you cannot charge VAT on your invoices before receiving your tax number from the HM Revenue and Customs. The corporate VAT is at 20%.

Your responsibilities include:

  • Keeping your company records and reporting changes to the HMRC and the Companies House
  • Filing of accounts with Companies House and company tax returns with HMRC
  • Pay corporation taxRegister for self-assessment and personal self-assessment tax return yearly (unless it is a non-profit organisation)

Important:

As a sole trader, you don't own a VAT (tax) company. However, if your company generates more than £83,000 in the previous tax year, you will be required to register as a VAT company. The rate is 20% for income below £32,000 and 40% for income higher than £32,000.

Useful links:

Companies House

How to run a business in the UK

One of the first things you could do as a business owner is to hire an accountant to help you declare your yearly revenue and keep you updated regarding the latest tax laws. Also, it would be best if you didn't underestimate your marketing strategy and found new ways to attract customers that will help with the growth of your business. You should be realistic rather than emotional when it comes to your business. Don't hesitate to rebrand your business if  you see that the current brand isn't relevant to the market and your target audience due to external circumstances, the environment, etc. Other actions you should often take as a business owner is to stay informed about the competitors' activities, be creative, and always look for new ways to differentiate yourself from what's out there already. Try to be present on social media and use social media to communicate and engage with your audience, and encourage your audience to be honest and give you feedback. 

Don't neglect your tax obligations, which may come up at any time of the year, not just at the end of the fiscal year, when you have to file your taxes. Have a record-keeping system to have access to information at any time, and be organised when you will have to do your annual self-assessment. Ideally, you should use separate bank accounts for business purposes and personal expenses. Remember, you're entitled to tax deductions only for expenses that were spent for business purposes. There are lots of accounting programs, software, and apps to choose from to keep track of your income and outgoings. Keep business records dating several years ago because this will be helpful and time saving in the case of tax investigation. 

Good to know:

For limited companies or LLPs, it is essential to open a corporate bank account to conduct transactions with customers or business partners.

Good to know:

A UK company can have its bank account opened in another country.

Good to know:

The local council and Chamber of Commerce provide advice, mentoring programs and financial support for your projects. You might also be eligible for several grants and bursaries available for business in the UK. Still, it depends on your location, the products or services you are offering, and your profile (group, young people, financial background, etc.).

Useful links:

Setting up a business

Registering V.A.T company

List of global locations

Find a council near you

Types of grants and funding

The benefits of self-employment

Being self-employed involves some risks and a lot of hard work. However, there are great benefits of being your own boss. For example, you decide where and when to work, and you decide with whom you want to work and the partnerships you want to develop. You charge the amount you think matches the type, size and quality of work you do.

Good to know:

You can work full-time for an employer and run your own business in the evenings.

Setting up a business as an expat

A non-resident or non-British can open and own a business in the UK since there's no need to even live in the country to run a UK business. However, what's necessary is to register your business to a UK address for accountability and correspondence purposes. So, you can register your business with Companies House after you have obtained an address in the UK. You can rent a property, use a friend's or family member's property, or the address of someone who agrees to lend you their address to help you register your business. To open a business in the UK as an expat you must decide the business structure (see above), register the business, and apply for a corporate bank account. A lot of the steps are being completed online.

But before you start setting up your business, you must ensure that you qualify for a UK business visa. Since 1 January 2021, EU citizens who arrived in the UK on or after 1 January 2021 also need a visa to run a business in the UK. EU nationals who were living in the UK before 1 January 2021 should look into the EU Settlement Scheme, which is extensively covered on Expat.com's article about professional visas for the UK. There are two types of business visas: the Start-up visa and the Innovator visa, which have replaced the Tier 1 (Entrepreneur) visa. For more information, read Expat.com's article about professional visas for the UK.

Good to know:

People who are currently in the UK with a Tier 1 (Entrepreneur) visa can apply for an extension, but no new visas of this type will be issued again.

Useful links:

Information on work permits

We do our best to provide accurate and up to date information. However, if you have noticed any inaccuracies in this article, please let us know in the comments section below.