Insurance · 6 March 2017

Last minute legal questions before you start trading

Legal questions
VAT responsibilities and client payment terms are some of the legal questions frequently left unanswered

For the final article in his series covering the bases of starting a new business, Grid Law founder David Walker provides answers to the common legal questions asked by new founders.

After deciding to start a business, the next most significant milestone for any business owner is the day they actually start trading. There’s so much to do leading up to this point, and at the last minute there are usually some legal questions for me. So, to wrap up this startup series, I thought I would answer some of the most common questions now.

What information should I include on my invoices?

The following information should be contained on all invoices:

  • Your name, address and contact information. If you’re a sole trader you can give your trading name too. If you’re a limited company you should state the full name of the company as set out on your certificate of incorporation
  • Your client’s name and address
  • The date of the invoice
  • The date that the products or services were supplied
  • A clear description of what products or services were supplied. It’s a good idea to itemise your invoice so that it’s clear, for example, the quantities of each product supplied and their individual prices
  • The total amount being charged
  • If any discount is being applied, how it’s calculated
  • The date that payment is due
  • A unique invoice number that follows on from the last
  • Limited companies should also include their company number and if you decide to include the names of the directors you should include all of them.
  • Details of how payment can be made (NB. if you can give your clients a choice of payment methods it can help prevent late payments)

Sometimes, clients will want you to provide additional information with the invoice. For example, you may have to quote a purchase order number or attach time sheets to the invoice.

If your client has any special requirements, find out what they are in advance and then make sure you stick to them. Otherwise, your payment could be unnecessarily delayed.

If you are VAT registered, you should also include the following information on your invoice (this is in addition to the information above):

  • Your VAT number
  • The amount being charged excluding VAT, the amount of VAT being charged and the total amount including VAT
  • The “tax point” (this is the time of supply if it is different from the invoice date)
  • The rate of VAT charged

Should I register for VAT?

VAT registration is compulsory when your taxable supplies (basically anything you sell that is subject to VAT) reaches the VAT threshold in any 12-month period (currently £83,000). If you are trading below the VAT threshold then registration is voluntary.

So, why would a business below the threshold choose to register for VAT?

First, it may help to give a positive first impression of your business. If your clients are mainly other businesses, they will probably be VAT registered and expect you to be too. This may help your business appear bigger and more established than it actually is.

Next, registering for VAT can make a big difference to how competitive your prices are. Your business clients will be able to reclaim the VAT on any purchases they make from you so for them, the VAT position is neutral.

However, if your clients are mainly consumers who are not VAT registered they won’t be able to reclaim the VAT you charge. Therefore, charging VAT could make your products or services more expensive and less attractive. If you try to remain competitive by charging a VAT inclusive price instead, this will significantly reduce your profit margins.

If you do register for VAT, a significant advantage is that you will be able to reclaim any VAT you pay on purchases. (This could help restore some of the lost profit margin of charging a VAT inclusive price, but it will very much depend on how many purchases you make.)

Depending on how many sales and purchases you make each quarter, you may receive a refund from HMRC or you may have to pay them the difference in the VAT you have collected on their behalf.

Most businesses will have to make a payment to HMRC each quarter and you must always make sure you budget for this. Don’t run your cash flow so tight that you cannot afford to make the payments or you will face legal action to recover it.

Finally, you will have to make a quarterly VAT return which will add to the administrative burden of running your business. However, in the grand scheme of things, it’s not a particularly onerous task and you may delegate it to your accountant. Just make sure you are organised and keep your bookkeeping up to date as you do not want to incur any penalties for filing your VAT return late.

What payment terms should I specify?

This is assuming you’re not, for example, a retail business where customers pay for their purchases there and then

Most business failures are because they run out of cash when their clients don’t pay on time. So, my advice is to keep payment terms as short as possible. Some clients will expect 30 days to pay because that is “the norm”, but don’t be afraid to ask for at least part of a payment up front and then charge instalments as a project progresses.

Whatever payment terms you choose, keep careful records of the invoices you submit, when they are due and have a proper credit control system in place to follow up if they become overdue. For more information on this, please see my previous article on tackling unpaid invoices.

Also, your payment terms are just one of the terms that will need to be agreed between you and your clients. For many businesses, using standard terms and conditions of business will be a huge benefit for them. They will save you time, help you comply with the law and often protect you from being sued. For more information on this, please see my previous article on why standard terms and conditions are the unsung saviours of your business.

What title should I use on my business cards?

Before deciding what title to put on your business cards (or the business cards of your staff), think about why you want to put a title on them. For example, are you trying to establish credibility, describe your position/seniority within the business or give your job title so people know what you do? Perhaps it’s a combination of these?

Knowing the reason will help you decide the most appropriate title for you. Most of the time you have complete flexibility as to what title you choose (just look at LinkedIn to see how creative some people can be!) but there are some rules to follow.

The most important point is that the title you give yourself must not be misleading.

The most common example I see of this is someone using a title of “director” when they are not actually a director of a company registered at Companies House.

Sometimes, people will have the title of say “account director” or “creative director” when they are not actually a proper director. Instead they may be a head of department or a manager and this is therefore misleading.

There’s no obligation to put any title if you choose not to. You could leave it off your business cards so you can best describe yourself according to the situation you’re in.

These are just a few of the legal questions I’m regularly asked when someone is setting up a business and preparing to start trading. I’m sure you will have more legal questions, and if you do, please feel free to email me at editors@businessadvice.co.uk and I’ll be delighted to answer them for you.

Catch up on the rest of David Walker’s startup series:

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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