When you start a business there are (unfortunately) a number of taxes and cash flow issues to think about.
But with an accountant’s help you can set up a smooth-running system to keep HM Revenues & Customs happy.
There are four main types of tax that apply to the majority of businesses: income tax, national insurance, corporation tax, and VAT.
To keep cash flow stable the general rule is to save around 20-25% of your turnover to meet income tax and national insurance liabilities.
Income tax
If you, as the business owner, are registered as self-employed then you will need to complete a tax return every year. You can either work out how much tax you owe on your own or fill in a form and submit it to HMRC.
Tax returns are issued in April every year and cover the previous year, from 6 April to 5 April.
For your employees you can establish a PAYE (Pay As You Earn) system. PAYE is applied to all salary and wages, overtime, shift pay, bonuses, expenses, statutory sick pay and maternity pay, and redundancy and compensation payments. It is the employer’s responsibility to deduct tax from wages and pay it to HMRC.
If you pay too little income tax, or pay it too late, you may incur interest.
National insurance
National Insurance Contributions (NICs) go towards contributory benefits such as the NHS and state pension. Again, it is the employer’s responsibility to collect the deductions and pay HMRC.
NICs have different rates of contribution. Class 1 NICs are calculated by earnings; Class 2 are for the self-employed and paid at a flat rate; Class 3 are voluntary contributions and are paid at a flat rate; and Class 4 are for self-employed people who have made less than a certain amount in a year.
Corporation tax
This is paid by limited companies and is based on their profits. It is not payable by the self-employed.
First off you must tell the HMRC that your company exists, after which it keeps records of all company expenditure and income.
There are two rates of corporation tax: the small companies’ rate and the main rate. Small companies pay corporation tax on profits up to £300k; the main rate taxes profits of £1.5m and above. If you fall between the two you can opt for marginal relief.
VAT
Value Added Tax (VAT) applies to most transactions that involve the transfer of goods or services.
You must register your business for VAT if you supplied services worth £61k in the previous 12 months. If you’re below the threshold then you can register voluntarily. This will give you increased credibility, but it means you’ll need to start keeping VAT records.
You will need to keep records of the VAT you charge on sales, which is output tax. Similarly, keep records of VAT paid on purchases, which is input tax.
When a business pays more output than input tax the difference between the two must be paid to HMRC as VAT. If there has been more input tax paid then HMRC will refund the difference.
Standard VAT is 17.5% and the reduced rate is 5% (which applies to domestic fuel or power, installation of energy saving materials, renovation and alteration of dwellings, women’s sanitary products and children’s car seats), while some other things are exempt. (A full list of exempt products and services is available on HMRC website.)
Businesses usually account for VAT on a quarterly basis. When you register you will be assigned a tax period by HMRC.
All of your return can be done electronically. Bear in mind that HMRC intends to phase out all paper communications and replace them with electronic reminders.
Doing business online generally makes no difference to the taxes you have to pay. The only significant difference is that digitised products are classed as electronically-supplied services for VAT and customs duties. These include websites or web-hosting services; downloaded software (including updates of software); downloaded images, text or information, including making databases available; digitised books or other electronic publications; downloaded music, films or games; electronic auctions; and internet service packages.
Other taxes
Business Rates are non-domestic rates paid to fund local services such as the police and fire service. The amount you have to pay is based on your premises and there are varying bands of payments, set out by the Valuation Office Agency.
Stamp duty is charged on transactions regarding the transfer of land, assignments of leases and transfers of chargeable securities such as shares in companies. It is calculated using the amount paid for the transfer and is paid by the purchaser. If this applies to you then you must inform HMRC by filing a return.
Capital gains tax is charged in respect of gains made from selling or disposing of assets. This can include shares, machinery or even the business itself. It can be complex and depends on your circumstances.
Tax breaks
It is important to be aware that new businesses are entitled to certain tax breaks. This could include capital allowances for equipment and premises, tax relief for research and development, or stamp duty relief. To find out exactly what you’re entitled to, you can download a guide from the HMRC website.
You can claim capital allowances, which apply to capital tax, on certain purchases and investments. This means you can deduct these costs from your taxable profits and therefore reduce your tax bill. You can claim for plant, machinery, buildings and research and development. The amount deducted depends on what you’re claiming for.
You may benefit from tax allowances and tax relief on research and development. Relief is only available to companies subject to corporation tax, while allowances are available to all businesses.
This article provides an overview of UK business taxes. It is worth finding out more at the HMRC website as well as the Business Link website, which has a helpful tool whereby you input your circumstances and it calculates which taxes apply to your business.
You can phone, email or write to HMRC, or even arrange to drop into one of their centres where you can talk face-to-face with an expert.
