When starting a new business you may feel overwhelmed by the amount of different taxes that you need to be aware of, report on and pay.
The following is a brief introduction to the various types of small business tax that you will encounter and need to have a working knowledge of.
VAT – Value Added Tax
For most businesses it is compulsory to register for VAT if the turnover of the business is more than the VAT threshold (currently £77,000). However, there are some exemptions to this, for example health providers, insurance providers, rental of domestic property. We recommend that you check with HMRC or your accountant to check the specific HMRC VAT guidance for your sector.
Businesses can voluntarily register for VAT if they are under the threshold, as there may be some advantages to doing so in specific circumstances. For example; when a business starts up it may have a large amount of purchases which incur VAT, by registering for VAT the business can reclaim the VAT on the purchases.
VAT Checklist
- Ensure you are charging and reclaiming VAT correctly, by understanding the differences between, standard, reduced rate, zero and exempt VAT. (A future VAT specific log will be published to explain the differences).
- Ensure you file your VAT return and make payment (if required) on time. Your VAT registration will state the first period for VAT, the first period could be 1 to 4 months, and then the returns will be quarterly.
- File your VAT return online.
- Check if Flat Rate VAT is appropriate for your business here: Pros And Cons Of Flat Rate VAT
PAYE & NI – Pay As You Earn & National Insurance
If you employ staff you will need to run a PAYE (payroll) system. PAYE (income tax) is deducted as appropriate from the employee, as is employee NI and employer NI is charged to the employer. This is calculated monthly and should be paid across to HMRC by the 22nd of the following month, however, if the payroll is small may be paid quarterly.
If you have a lot of low paid or part time staff there may not be much PAYE and NI to pay, however, a nil return still needs to be filed. If there are statutory payments to be reclaimed example, SMP (statutory maternity pay), SSP (statutory sick pay) and/or SPP (statutory paternity pay), you may even be in a rebate position, and you can apply to HMRC for this to be paid to you.
Payroll Checklist
- Either use some user-friendly software for payroll e.g. moneysoft, sage payroll, QuickBooks payroll or ask your bookkeeper/accountant to run your payroll for you. There is free HMRC software available which may be suitable for you, however, we find the aforementioned software packages much easier to use.
- Keep all employee records.
- If using a contractor rather than employee ensure that they have a service contract with you to prevent any future PAYE issues.
Corporation Tax
If you are running a limited company you will need to be aware of corporation tax. The rate for small businesses is currently 20%. This tax is calculated upon the net profits of the business. We recommend that you use an accountant to prepare your corporation tax return and statutory accounts, as the rules are complex for calculation and regularly are amended.
Corporation Tax Checklist
- Be aware of capital allowances. These allowances vary from year to year so make sure you are aware of current and future rates, before making any large capital purchases. Also ensure you accountant keeps you up to date with special incentives e.g. 100% capital allowances on fuel efficient cars.
- Corporation tax returns need to be filed 12 months after the company year/period end.
- Corporation tax needs to be paid 9 months and 1 day after the company year/period end.
- If you borrow money from your company you may incur a 25% corporation tax charge, check with your accountant to ensure you are managing money extraction from your business efficiently.
CIS – Construction Industry Scheme
This is relevant to businesses in the construction sector. A detailed blog on this tax can be found here: What Is CIS?
CIS Checklist
- Check if you can apply for gross status, as this will improve your cash flow.
- There are differences for CIS if you are a sole trader, partnership or limited company. If you are a sole trader or partnership and you have CIS deducted you reclaim it or it is setoff via your personal tax return, if you are a limited company you report it via your P35 (PAYE annual return) and it is then offset against your PAYE and subcontractor CIS payments or you receive a rebate.
- If you using subcontractors check that they can be classed as self-employed and not employees
Personal Tax
Whether you are a company shareholder/director or a sole trader/partner you will probably need to file a personal tax return.
If you are a sole trader / partner you will need to pay class 4 NI (9%) on your profits and income tax, and also class 2 NI, although if your profits are small you may qualify for exemption. If you are a director/shareholder you will need to pay regular PAYE and NI on any salary received from the company, dividends are subject to income tax, however, under the higher rate tax threshold you may not have any personal income tax to pay. More details on extracting money from your business can been seen here: Extracting Money Tax Efficiently
Small Business Tax Top Tips
It is very easy to get behind with small business tax requirements due to the amount of administration required, the following are a few tips to prevent any negative impact upon your business.
- Put together a calendar of the key tax return and payment dates to ensure that none are forgotten.
- Estimate how much your tax payments will be and put money aside for them, so that any bill won’t be a nasty shock.
- Don’t ignore any requirements, as you are putting your business at risk.
- Don’t try to do everything yourself, appoint a competent bookkeeper and accountant to ensure that you get professional assistance and advice.
For further tax information please see our tax advice services page.