Independent retail: It’s time for the nitty-gritty as we get to grips with VAT, insurance and company registration in part four of our guide to setting up your own shop.
You’ve got a great concept, the business plan is sorted and the lease is signed on the shop of your dreams. Next it’s time to consider the legal and compliance issues affecting every business. Do you need to register for VAT? What are the advantages of becoming a limited company? Is it best to work with an accountant? What level of insurance do you need? Fear not, Drapers has the answers.
Protecting your assets
First and foremost, you need to protect yourself. A limited company is a separate legal entity, so this means that if the business fails the owner’s personal assets are not at risk.
All limited companies are registered with Companies House, the governmental registrar of businesses, and pay corporation tax of 20% on profits of £300,000 or less. If profits exceed £300,000, the rate is 21%. The owner can take money out of the business as a salary or share dividend (a payment made to shareholders) or combine the two, which is what Sue Sugden, co-founder of lifestyle boutique Cashmere Goose in Hook, Hampshire, chooses to do. Registering as a limited company meant all three directors - Sugden and friends Clare Sly and Ginny Young - were equally free from personal liability.
Discussing her goals with an accountant helped Gillian Franks, owner of kidswear independent Pixie in Hale, Cheshire, decide to become a limited company. “I was comfortable the structure would protect me if things failed. I was putting my life savings into the venture and had to accept they were at risk, but I wanted to control further exposure.”
Meanwhile, suppliers often check a business’s performance on Companies House. Start-ups with no history may have to pay for stock up front before they build solid financial records and suppliers are willing to offer 30- or 90-day payment terms.
For Bobby Lane, partner at chartered accountancy firm Shelley Stock Hutter, registering a business adds credibility. “Post-recession, suppliers are more nervous, especially when supplying independents. A new company might have nothing filed for 18 months, so suppliers probably wouldn’t give them credit [so they will have to pay up front]. Your credit rating is built up as you file accounts.”
Franks found suppliers prefer limited companies. Shriti Sood, owner of menswear store Banana Connection in Waltham Cross, Hertfordshire, says most wholesalers want a registered company, “rather than someone who dips in and out of the industry”.
By contrast, sole traders are not registered on Companies House, so owners are personally liable. All earnings are classed as personal income so, like any other individual, sole traders pay 20% tax on annual income of £10,000 to £31,865. The rate rises to 40% for incomes of £31,866 to £150,000 (although most people only pay this rate on income over £41,865) and up to 45% for income above £150,000.
How to register
To become a limited company, you can send a form to Companies House, register via the website or use an independent formation agent. Online registration costs £15 versus £40 for the paper version, while a formation agent would charge a fee from £16 to £200.
To register, the owner needs to provide the company address and name, which cannot contain any “sensitive” words, for example implying a connection to the government.
Alan Hawkins, chief executive of the British Independent Retailers Association, advises checking available names on Companies House’s WebCheck service to avoid being accused of trading on an existing retailer’s reputation.
A limited company must have at least one director aged over 16 and be able to list its shareholders and share capital, the funds raised by issuing shares for cash.
Getting vat ready
Do you have an annual turnover of more than £81,000? Then it’s compulsory to register for VAT with HM Revenue & Customs. Start-ups expecting to earn this amount can register voluntarily. VAT of 20% is charged on all garments and accessories, although kidswear and babywear are exempt.
VAT-registered businesses can claim tax back on business-related goods or services, such as stationery or computer equipment.
There can be some advantages for fashion retailers, says Paul Riley, a deputy director at HMRC. “If you sell young children’s clothing and footwear, you may be able to claim back VAT. If you purchase EU products, your supplier won’t charge you VAT if you provide your registration number,” he says.
Every three months, VAT-registered businesses provide HMRC with evidence of total sales and purchases, the amount of VAT owed and whether VAT can be reclaimed from the government.
Finding an accountant
Identifying any financial skills gaps initially could help in the long run, advises Lane. “The accountant can manage the day-to-day financial management, as well as legal and compliance issues, such as ensuring the company is tax efficient. They can also help to determine the level of mark-up needed to make a profit,” he adds.
Viren Shah, financial director at mainstream womenswear brand Viz-a-Viz, believes employing the services of an accountant with independent retail experience can be a distinct advantage. “You may initially wish to approach an external accountant before considering employing an internal one,” he suggests.
Hawkins advises looking at the ICAEW (Institute of Chartered Accountants in England and Wales) website to find reputable accountants and asking local businesses for recommendations.
Franks opted for a local accountant with experience of similar businesses. “It was good having someone local as there were quite a few meetings initially and lots of forms to sign,” she recalls. “Having accounts audited imposes certain processes that help me understand how my business is performing.”
The accountant advised Franks on shares and VAT, while she managed the monthly bookkeeping. Sood also works with an accountant, but manages everyday finances using Sage One software.
Choosing a card
Credit cards and pre-loaded charge cards are used in the short term to pay suppliers while awaiting payment from customers, says Stephen Pegge, group external relations director at Lloyds Banking Group. Interest-free periods range from 45 days for credit cards, with staggered repayments, to 36 days for a pre-loaded charge card, after which time full repayment is due.
Shah believes it is important to consider associated fees when deciding on a credit card. “As well as fixed costs, charges might include transactional fees, which vary with card type, charge-back fees, software update fees and minimum charges.”
Lane says start-ups are better off using smaller banks such as Metro Bank, which offers support from a local business manager. He also advises using Acceptcards, an independent advisory service assisting businesses on the best terminals to use in store for card payments.
What type of insurance?
There are various types of insurance to consider. If the retailer is the freeholder, they must insure the property for the full cost of reconstruction, advises Chris Brady, head of the corporate team at broker Jelf Insurance Partnership. If the retailer is a tenant, the landlord will usually be responsible for this.
Stock must be insured at its wholesale cost, while separate contents insurance covers fixtures and fittings. Retailers should pay close attention to clauses in their agreement. They might not, for example, be allowed to store stock in a basement and the insurer could refuse to pay if such conditions are breached.
Business interruption insurance covers the retailer for any financial loss incurred by events such as fire, flood or explosion damage, during which time they are unable to trade.
Liability insurance protects employees and the public against injury, illness or death in store. Retailers are most at risk from customer slips and trips, according to Simon Reed, head of business savings and insurance at building society Nationwide.
Retailers will usually buy a package covering all these forms of insurance, although it’s impossible to quote a typical cost, says Brady, as premiums are determined by location and the value of stock, fixtures and fittings.
Franks took out contents and public liability cover on broker advice. “The broker got various quotes for small business packages based on our stock levels and expected turnover. We didn’t go for the cheapest, but the one that dealt most swiftly with claims.”
Sood agrees retailers shouldn’t necessarily pick the cheapest option. “Someone who visits the premises, rather than quotes over the phone, is recommended, as each quote is personalised. We have an old building and manholes within the store, so we ensured we covered any potential damage.”
There is a lot to consider when establishing an independent retail business. Whether that’s becoming a limited company or remaining a sole trader, working with an accountant or doing the books yourself, ultimately it’s about deciding what’s best for you.
Running an indie
Checklist so far
- Work out where you want to be
- Assess the local competition
- Decide on your name and concept
- Formulate a business plan
- Secure funding
- Private investment?
- Register the company
- Find a premises and sign lease
- Think about rent and rates
- Decide on shopfit and interior design company if required
- Find an accountant
- Register the company?
- What about VAT?
- Apply for a credit card
- Take out insurance