As a small business owner you need to be aware of tax rules or face potentially expensive consequences. Our essential guide has the basic information to keep you on the right side of the HMRC...
Starting up: inform HMRC
When you become self-employed or start a new business, you must inform Her Majesty’s Revenue & Customs (HMRC) within three months or risk a £100 fine.
If you have an accountant you should tell HMRC; you may have to fill in a form authorising him or her to act on your behalf in tax matters
Decide your accounting period
One of the first decisions you need to make is your accounting period. Unlike personal tax, as a small business you can choose the date your accounting year ends.
Unless you have a good reason otherwise, however, the simplest option is to make your accounting period coincide with the tax year.
In the year in which you start, you will be taxed on the period between your start date and the next April 5 (the end of the tax year). This period is known as your basis period.
Your main tax liabilities
There are three main taxes that you need to be aware of: personal tax, corporation tax and VAT.
Personal tax
Your personal tax liability depends on how much salary you choose to pay yourself from the business. You will have the normal personal allowance that you don’t have to pay tax on (this changes every year: in 2008-09 it was £6,035).
What you will pay: 20 per cent on taxable earnings between £5,435 and £40,835; 40 per cent on anything more (2008-09).
Corporation tax
Corporation tax is payable on a limited company’s taxable income and profit. You can deduct a variety of business expenses and capital allowances, but you have to calculate your own company’s tax liabilities, which is why a good accountant is such an asset to a small business.
Payment of corporation tax is due 9 months and one day after a company’s normal due date: usually the last day of the annual accounting period.
What you will pay: There are two rates of corporation tax. For profits earned in 2008-09 the rate was 21 per cent on profits of up to £300,000, known as the small companies’ rate. The main rate was 28 per cent on profits of £1.5m and over. For profits in between these amounts there’s a scheme called marginal relief to ease transition from the lower to the higher rate.
The small companies’ rate will increase to 22 per cent in 2009-10.
Value Added Tax (VAT)
You must register for VAT if your annual sales are over £67,000. It’s sometimes a good idea to register voluntarily if your turnover is lower than this: for example, you can still claim back VAT on purchases even if you don’t make any sales in an accounting period.
What you will pay: The total VAT charged on invoices to your own customers, minus any VAT you’ve paid out on essential purchases.
There are also several VAT accounting schemes, including a flat-rate scheme, which could save you time and money. Read HMRC’s guide to VAT accounting schemes.
Completing your company tax return
Once a year you – or more likely, your accountant – will have to complete a company tax return form CT600 and file your accounts at Companies House. You can do this online. Bear in mind:
- It’s your responsibility, not your accountant’s, to ensure the information is correct; you will have to pay any penalties for mistakes.
- You should keep all records for at least six years, including receipts and invoices.
- The deadline for sending in the return is either 12 months after the end of your accounting period or three months after you receive notice to deliver a company tax return, whichever is later.
- If you file your return late, you may have to pay interest on your tax bill or even a fine.
Tax liabilities for sole traders and partnerships
For sole traders, any profit after the deduction of allowable expenses is taxed as income.
If you are in partnership with others, your tax situation is similar to that of a sole trader. However, you will need to fill in a separate return for the whole partnership, which divides up the partnership profits in line with how each partner earned that money. After that, each partner must complete their own individual tax return declaring their share of earnings from the partnership.