Launching a business can be a step into the unknown. As well as finding customers, handling finances and hiring staff, you need to take time to understand any legal obligations facing your startup.
But making sure your business meets legal requirements can help it grow by protecting it against expensive mistakes.
According to research carried out by YouGov for LawBite opens in new window, SMEs lose more than £13.6bn each year failing to care of legal issues, with disputes costing £1.7bn and issues relating to employees and contractors costing £1.6bn.
Starting a business doesn’t come with a set of instructions.
We know that understanding the many different types of financial product in the marketplace can be difficult.
Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.
What are the legal factors affecting business?
UK law applies to all aspects of running a business, and each business owner will face specific legal rules for their business and industry.
For example, the legal requirements that affect a petrochemical company may be very different to those a taxi service must comply with.
There are, however, legal issues common to most businesses.
Tax and National Insurance legal factors
If your business earns revenue, makes a profit opens in new window or pays staff opens in new window, there are legal factors affecting business governing the payment of tax owed to HM Revenue & Customs (HMRC).
This differs depending on how your company is structured.
Sole traders – If you become self-employed (even if self-employed on a part-time basis or in addition to being employed with another business) you will have to register with HMRC within relevant timelines. You can register online with HM Revenue and Customs (HMRC) opens in new window. Once registered, for each tax year (April 6 to following April 5) you must complete an annual self-assessment opens in new window, and pay any due tax and National Insurance (NI) before the following 31st January.
Limited company – There are specific legal requirements when setting up and running a limited company opens in new window. You must register your business with Companies House opens in new window, listing, amongst other things, all directors, as well as persons with significant influence on the business. You must submit annual business accounts and confirmation statements to Companies House.
You must also submit an annual tax return for the business to HMRC and pay Corporation Tax opens in new window within 9 months and 1 day from the end of your financial year, also known as your accounting period.
Whatever your business structure, if you have any staff (or if you run a limited company and draw a salary yourself as director) paid more than £123 a week, you must register for Pay As You Earn (PAYE) opens in new window and submit a payroll report to HMRC each month detailing salaries, as well as income tax and NI owed by both the employee and the business.
Whatever your business structure (and unless yours is a wholly VAT exempt business), if your turnover is greater than the VAT threshold (currently £85,000) in any 12-month period, you’re legally required to register for Value Added Tax (VAT) opens in new window.
Depending on the VAT scheme you apply for, you must file a VAT return every three months and pay the VAT your business has charged on goods or services.
A business with a taxable turnover less than the VAT threshold can still register voluntarily, and there can be pros and cons of voluntary registration – if in doubt you should seek specialist advice.
You can register for VAT on the HMRC website opens in new window.
Employment legal requirements
The legal factors affecting any business expand when you hire staff.
Employment law covers the complete lifecycle of employment – from hiring and contracting staff to redundancy, dismissal and pensions opens in new window.
Your business has a legal duty to, amongst other things, keep your employees safe, treated fairly and with respect opens in new window, with access to statutory holiday, statutory sick pay, minimum wage and pension enrolment, as well as hold Employers’ Liability insurance.
Failing to meet legal requirements can land a business with hefty fines and a criminal prosecution.
Employer’s legal requirements include:
Register with HMRC – You must register your business as an employer with HMRC before paying any staff (or with a limited company paying yourself a salary) more than £123 a week, get expenses and benefits, have another job or get a pension. HMRC opens in new window has guidance on how to register as an employer.
Right to work – Your business has a legal obligation to check that staff have a legal right to work in the UK before employing them.
Employment contract – All employees must have a written employment contractor a written statement of employment terms, including details such as working hours, place of work, salary, contractual benefits such as pension and paid holidays. It should also detail disciplinary and procedures, employment rights, duties and responsibilities. The government has a helpful online guide opens in new window that details what to include in an employment contract.
Minimum wage – This affects every employee, through the amount differs by age for those aged 22 and lower. The National Minimum Wage for those aged 23 and older is currently £9.50 per hour. The government has a minimum wage information website opens in new window that lists how much you need to legally pay your staff as a minimum.
Salary – You’re legally required to provide an itemised payslip to employees. This should show how much they earned in the pay period, how much tax and NI was deducted, any other deductions and their net pay they will take home. It should also list the pay date.
Workplace pension – Under the Pensions Act 2008, UK employers must put eligible staff into a workplace pension scheme opens in new window, either from their first day at work or postponing for up to three months (staff have a right to opt out). Both you and your staff must pay into the pension scheme for as long as the employment lasts, with minimum contribution rates (currently 8% of their earnings of which at least 3% must come from you as the employer).
Employers’ Liability – When your business employs staff (including part-time or temporary staff), you must hold valid Employers’ Liability (EL) insurance. There is a minimum amount of cover required (currently £5 million) and be purchased from an authorised insurer (the Financial Conduct Authority (FCA) has a list of these). It covers legal costs and compensation if your business is sued by an employee who is injured or becomes ill as a result of working for your business. The fines are steep for not holding insurance, so don’t dodge buying a policy: you can be fined £2,500 for every day you do not have EL insurance, and fined £1,000 for not displaying your EL certificate.
Health & safety (H&S) – As a business, you are legally required to provide a safe environment opens in new window for staff to work in. This can be environmental – such as keeping staff safe from hazardous materials opens in new window or continual loud noise – or staff-related such as bullying and discrimination. The Health & Safety Executive opens in new window has a comprehensive guide to H&S laws that affect business. You may also need to conduct regular risk assessments, display a Health & Safety poster and have policies for recording injuries to staff.
Data and marketing legal factors affecting business
Data protection in the UK is governed by the General Data Protection Regulation (GDPR) opens in new window, an EU regulation which has remained part of UK law following Brexit. It places legal requirements on how businesses acquire, use, and store personal data, i.e. information that relates to identified or identifiable individuals, for example employees, customers, contractors and suppliers both past and present.
UK GDPR sets out key principles underpinning the processing of personal data, including that businesses must:
- have an appropriate and lawful basis for processing personal data (e.g. the person has consented) and it must be fair and done transparently
- be clear about what its purposes for processing are from the start
- take all reasonable steps to ensure personal data it holds is not incorrect or misleading
- not keep personal data for any longer than it needs to.
GDPR requirements apply to all businesses, although there are some exceptions for SMEs. Get to grips with understanding GDPR opens in new window and follow our GDPR compliance checklist opens in new window to ensure your business is taking steps to being GDPR compliant.
There are hefty fines for non-compliance. A GDPR breach can result in a fine of up to 4% of total worldwide turnover of your business or £17.5 million – whichever is higher. The Information Commissioner’s Office opens in new window has a guide to GDPR regulations.
Trading regulations and legal factors affecting business
Depending on the nature of your business, there will be a catalogue of legal factors relating to how you trade.
Legal issues range from consumer law opens in new window through to financial services regulations and rules governing weights and measures.
As many businesses sell directly to the public, laws that govern consumer rights are important to know.
Consumer rights laws are designed to protect consumers from buying goods not fit for purpose or not as described, and give them the right to return faulty goods for repair, replacement or refund.
The law differs depending on whether goods are bought in a shop or online.
If selling occurs online (or over the phone or by mail order), you’ll need to offer a cooling-off period of 14 days to allow a consumer to change their mind.
There are two key legal factors affecting business that affect selling goods and services to the public:
Consumer Rights Act – This governs how you describe and sell goods and services, ensuring they’re of satisfactory quality and fit for purpose. If they don’t meet the requirements, consumers can get their money back. Which? magazine has a good overview of the Consumer Rights Act.
Consumer Contracts Regulations – These govern how you sell goods or services at a distance from the consumer, such as online or over the phone. Consumers generally have more rights, including the ability to reject the goods as unwanted and get a refund. Which? magazine has a guide to Consumer Contracts Regulations opens in new window.
A raft of other UK laws may affect your business, from copyright law designed to protect brands to patent law that protects intellectual property and inventions.
Other legal requirements may apply depending on the nature of your business, such as the need to hold a licence to sell alcohol or operate a tattoo parlour.
Catering businesses face a range of legal factors affecting business in terms of food safety and hygiene.
Key regulations include the Food Standards Act 1999 governing food businesses in the UK.
Catering businesses across the United Kingdom will need to comply with The Food Safety and Hygiene (England) Regulations 2013; The Food Hygiene (Scotland) Regulations 2006 (as amended); The Food Hygiene (Wales) Regulations 2006; The Food Hygiene Regulations (Northern Ireland) 2006.
To find out which laws apply to your business, visit Gov.uk opens in new window.
It may also be worth talking to a solicitor who specialises in commercial law to ensure you’re fully up to speed on legal factors affecting business in your industry.
Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or its subsidiaries or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.