What is a Start-Up Business?

The true definition of start-up is disputed by many with some claiming it’s a state of mind, and others believe to qualify as a start-up, you must offer something unique and meet the needs of the people.

In layman’s terms, the Merriam-Webster dictionary defines a start-up as ‘the act or an instance of setting in operation or motion’. It is the process of turning your business idea into a reality.

Tips For Success

Whether or not your start-up comes to fruition is dependent upon two things.

The first is you. You must have a strong work ethic and resilience; you’re battling against thousands of other start-ups for funding and market-leading expert backing. Have belief and confidence that your business will succeed, and this will resonate with those you’re pitching to. Remember, they’re buying into you as a person as well as your business idea.

The second is the idea. When thinking of a new business idea, undertake extensive research, analyse to see if there are any gaps in the market where a consumer’s needs aren’t being met. Also look to see if there any prospective competitors already offering a solution. If you find a gap with no competition, it can make the process a lot smoother overall. But, if there is, it doesn’t mean that you must leave your business idea dead in the water, but rather find the USP – unique selling point – and lead with that. Tell others why yours is superior and how it’s different to what’s already available.

Forbes compiled a list of 25 top tips for a start-up success. Some of the most notable being:

  • Solve a real problem and meet real needs with your product
  • Choose your team wisely
  • Have a roadmap
  • Form relationships and network
  • Be patient and enjoy the process

Is There Any Difference Between a Start-Up Business and an SME?

Without expertise, a start-up and SME – small and medium sized enterprises – can look very similar, both are built from the ground by an entrepreneur to fill a gap in the market. But they are in fact very different. The main discrepancy is that a small business is not a new idea and often works within a local region e.g., a florist or bakery. They work on a slow and sustainable growth pattern and rely more on predictability and building a trusted, loyal consumer base i.e., locals to the area. An SME is likely to continue for years and will be passed down through family generations as a legacy.

A start-up is much more explosive in its approach and aim to have huge impact in the market. They’re founded upon creating something new, exciting and promise to become the solution to your lifelong problem. In start-ups, the race is on to scale quickly to outpace potential competitors.

Who and what you surround yourself with when creating your startup is very important. The reason being your idea is unique, and should there be a team conflict, one party may attempt to steal the idea and market it before you do. It is therefore very important to ensure you take all the legal action required.

Don’t Forget

Always, always, protect your intellectual property. Intellectual property protection encompasses the subjects of trademark, copyright, patents, and trade secrets. Formulating a plan from the outset, before intellectual property is utilised, is critical.

As an entrepreneurial start-up ourselves we, Motion Paradox, understand first-hand the importance of a clear and structured operational and legal strategy. Our intellectual property protection will stop you from falling prey to your own success. We offer a range of bespoke solutions at any stage in your growth and development to negate the effects of a motion paradox – a certain critical juncture is reached where growth becomes static, scaling untenable and capital fundraising difficult, because, without structure and governance, an already successful company cannot easily and effectively continue to move forward and transform.

When is a Start-Up no Longer a Start-Up?

There is no expiry date on the title start-up, but it is not a title entrepreneurs want to retain for too long; remaining a start-up is a sign of an unsuccessful business. Once the start-up has found a proven successful business model, and has sourced the correct products, it is no longer considered a start-up, but rather a company.

Examples of Once Start-Ups, Now World Renowned, Successful Companies

  • Lyft – founded in 2012 as an alternative to Uber, it is worth £1.8 billion ($2.5 billion US dollars)
  • Snapchat – founded in 2011 as a picture messaging app, it is worth £11.5 billion ($16 billion US dollars)
  • Honest Beauty – founded in 2011 offering eco-friendly baby products, it is worth £1.2 billion ($1.7 billion US dollars)

IR35 – Will It Affect You?

Keep hearing the term “IR35”, but still puzzled as to what it is and, most importantly, how it affects your business? In a nutshell, IR35 is tax legislation designed to combat tax avoidance by workers, and the firms hiring them, by ensuring contractors pay broadly the same tax and NICs as employees if they are “inside IR35”. It’s essentially an employment status test for tax which determines whether a contractor’s engagement points towards employment or self-employment; and it is about to change.

Previously, in the private sector, the responsibility lay with the contractor to determine whether they fell within IR35 (or not), and for accounting their employment taxes and any NICs due to HMRC. From 6th April 2021, the organisation engaging the contractor (or the staffing agency who supplied the contractor to the organisation) will be responsible for determining this, and for deducting tax and NICs from any fee as required. If you hire contractors, this could mean you.

Will These Changes Affect Your Business?

If you engage any contractors to provide services personally via intermediaries (i.e. the worker’s own limited company, a staffing agency, or another person etc.) then these changes will affect you unless you fall into one of the following exemptions.

The changes will not apply to:

  • outsourced services where you are engaging business to business (e.g., cleaning, catering etc.);
  • small companies that satisfy two or more of the following: if you are a business that has an annual turnover that is less than £10.2 million, a balance sheet total of less than £5.1 million or less than 50 employees; or
  • companies based wholly overseas (i.e., with no UK connection).

If an organisation in question satisfies any of these exemptions, then the old rules apply. Small businesses that fall within the exceptions may still be caught, however, if their parent company is deemed a “medium” or “large” private sector company.

What Are Your Obligations?

You must first determine whether the rules apply by asking the following questions:

  • Does the contractor have an intermediary?
  • Is the contractor providing me with personal services?
  • Do the above exemptions apply to my business?

Depending on the answers to the above, you’ll then have to determine the contractor’s employment status (see Determining Employment Status) and notify the contractor of your decision by sending them a “Status Determination Statement”. If you are using an agency you should notify the agency of your decision.

If you’re not working with an agency and you determine that the contractor’s employment status is that of an employee, you will have to deduct PAYE from the fee. You will also have to account to HMRC for employer NICs and possibly the apprenticeship levy (all employers paying a wage bill of more than £3 million per year are required to pay 0.5% of their payroll each month as a levy tax). If you determine that the contractor is self-employed, they will remain responsible for accounting for and paying their taxes to HMRC.

Where an agency is involved, it will be up to them to make the relevant deductions. Make sure you inform the agency of your decision, otherwise the liability to account for the PAYE stays with you. You should also be careful to ensure that the agency is accounting to HMRC properly. If they are not, the liability can bounce back to you even if you have done everything correctly.

Determining Employment Status

As mentioned above, the responsibility for determining the employment status of a contractor (and therefore their tax status) now lies with the hiring organisation. In short, it is your responsibility to work out whether the contractor would be classed as an employee of your business or self-employed for tax purposes. This test usually relates, among other elements, to supervision, direction and control. The legislation in this area can be complicated, so we would urge you in the first instance to seek professional legal and financial advice. HMRC also provides a tool to help find out if a worker should be classed as employed or self-employed: https://www.gov.uk/guidance/check-employment-status-for-tax.

If a contractor is found to be “inside IR35”, they could also be entitled to additional rights as an employee or worker (e.g. minimum wage, maternity pay, protection from discrimination, etc.). It is therefore incredibly important that your assessment is correct.

Get Your Business Ready

To prepare for these changes you should:

  • Determine whether the exceptions apply to your business;
  • Review the employment status of your current contractors;
  • Put in place an assessment process;
  • Ask the intermediary to confirm how they are treating payments to the contractor;
  • Communicate the status determination to contractors, and to any agencies who supplied the contractor to you, before the first payment date that falls on or after 6th April 2021;
  • Keep a record of your decision-making process and any communications with the agencies;
  • Implement a process to deal with disagreements over your determination of a contractor’s employment status;
  • Review your Contractor Agreements to ensure the contractual provisions are legally compliant; and
  • Verify that any agency has applied the new rules when making payments to the contractors.

Failure to comply with your responsibilities may result in a penalty from HRMC ranging between 0-100% of the initial outstanding liability. They may also require you pay any unpaid PAYE tax and NICs, including late payment fines and interest.

Need help or have any queries with respect to IR35? Don’t hesitate to contact the Motion Paradox team now.