Forecasts and budgets are hugely important at this stage. You should keep your outlays lean and realistic.
The 12-month cashflow forecast should incorporate:
- Initial investments
- Initial funding from external sources such as bank borrowings or grants
- Initial pre-trading expenditure such as rent deposits and professional fees
- Monthly fee collections which should be calculated on a prudent basis allowing for the time to turn fee income into cash
- Monthly business payments including salaries, pensions and business overheads
- Monthly drawings or salary costs for yourself
- Payments for self-assessment or corporate tax liabilities.
You may wish to extend to a three-year cashflow forecast to illustrate long-term business goals and longevity.
Critical to good cashflow is to have robust policies for:
- Converting work in progress into fees
- How quickly you get those fees paid – (debtor days)
- The method adopted for funding client outlays.
Your forecast for cashflow should be assessed alongside your forecasts for Profit and Loss and Balance Sheet to highlight any potential profitability or funding concerns at an early stage. Once you are trading, we recommend that monthly or quarterly accounts are prepared comparing actual results to the budgeted figures and explanations for any material differences identified, allowing you to take corrective action promptly.
At an early stage we recommend that you contact a bank to ensure you have an operational business account and a client account if you need one. This process can take a number of weeks, so we recommend that you select your preferred bank and make early contact.
Depending on the work you are carrying out, you may also wish to consider if additional banking facilities are required such as credit cards, international payments, overdrafts, electronic banking and Worldpay card machines.
If you are setting up client accounts, it is important that you tell your bank you will need a solicitor account, which is different to a standard business account.
PAYE/Real Time Information (RTI) Registration
You must register for PAYE/RTI as soon as you take on employees and intend to make payments to staff. Registration for PAYE is generally straightforward and involves the setting up of a PAYE online account as well as choosing payroll software. This allows you to record employees’ details, calculate pay and deductions and report to HMRC, which generally would be done on a monthly basis.As well as the amounts of tax and NIC deducted from the employees, employers are also obliged to make an employer’s national insurance payment (contributions begin above minimum salary levels). The net salary payments are generally made at a month end and the tax and NIC deducted should be paid to HMRC by the 22nd of the following month.
As part of the responsibilities of taking on employees, you must set up a workplace pension scheme. Employees are automatically enrolled in this scheme, but they can choose not to join. As part of the rules of the scheme, you are required to make contributions, as are employees.
You should ensure that the additional employer NI and pension costs are incorporated into any cashflow and profit projections you complete.
You must register for VAT when your taxable turnover exceeds the threshold set by HMRC. An accountant can advise on how to register for VAT and whether it is desirable to do so, even if your projected turnover in the first year won’t exceed the VAT threshold. It might be advantageous depending on the clients you will be acting for or if you are likely to incur significant early or pre trading expenditure.
If you decide not to register and you are undertaking legal aid work, you should advise Scottish Legal Aid Board (SLAB) so they do not pay VAT on legal aid fees. If your turnover increases and you do subsequently register for VAT, you must immediately advise SLAB so that VAT can be added to the fees payable to you from then on.
Making Tax Digital (MTD)
Making Tax Digital (MTD) is a Government initiative which enables you hold an HMRC digital account where you can check your records and manage your filing of returns and VAT information. It is mandatory for the majority of VAT-registered businesses above the VAT threshold. If you are VAT-registered with a turnover less than the VAT threshold, you are exempt from MTD reporting.
HMRC has issued a list of software providers that can offer MTD compatible systems. Compliant software should be able to record and preserve digital records and send and receive VAT return information to and from HMRC. Where this capability is not available, bridging software can be purchased to enable you to link digitally to HMRC’s systems.
We recommend that you ensure your accounts management software is able to deal with the current and ongoing requirements of MTD.
See HMRC approved software suppliers
Corporation tax and income tax
You should make provision for tax liabilities in your cashflow and profit projections. The nature and timing of payment of tax liabilities depends on your business structure.
- Sole trader or partnership – the individual(s) concerned will be required to make payments of tax and NIC under the individual self-assessment tax regime. These payments are due at the end of January and July each year and are based on taxable profits which are calculated from your accounting profit as adjusted for certain items.
- Incorporated practice – corporation tax payments are due nine months after your year end. These payments will be a % of taxable business profits which are based on the firm accounting profit, also adjusted for certain items.
Individual directors are likely to be employed by the firm and receiving a salary from it. However, as shareholders, you may also choose to receive dividend payments which will form part of your individual taxable income. The directors/shareholders will also be required to complete personal self-assessment tax returns which will incorporate the salary and any dividends paid by the company and which may generate further personal
Whatever the structure, registration with HMRC for self-employment/self-assessment or corporation tax is essential at an early stage. We recommend you take advice from an accountant in good time prior to commencing trade when considering business structures and the tax impact of these.
Accounts management software
Many practice management systems provide functionality for both firm accounts and client accounts. However, some of the newer systems on the market require a separate firm accounting system to integrate with the practice management and client account side. Although these systems may provide a flexible solution for some firms, you do need to consider how they integrate, e.g., including compliance with the Making Tax Digital (MTD) regime, while also ensuring they comply with our accounts rules (which differ from other jurisdictions).
Spend some time with your case management system supplier, planning the installation and ensuring the system controls and setup best match your business profile and needs. Ensure that your contract covers issues relating to cyber security and that the supplier can articulate their cyber security credentials and the business continuity plans in the event of an outage, particularly for cloud-based systems.
It’s worthwhile considering at the outset how your system can record/store/delete data in line with the General Data Protection Regulations (GDPR) and AML compliance, so they don’t have to be built in later.