Business Tax – an overview
At Yorkshire Powerhouse, we provide advice to startups, and small and medium-sized businesses to support them and help them grow.
An element of that is to be as tax efficient as possible. This is not only about reducing the overall tax burden, but also making sure that there are no nasty tax surprises. Paying tax is painful, but without planning, an unexpected tax bill can be catastrophic.
As a business owner or company director, knowing whether or not you’re paying the right amount of tax can be tricky. The finer details are probably best left to your accountants, but it’s still really important to have a broad understanding of the different taxes which you will encounter.
This guide will use straightforward terminology to explain the main types of taxes that can affect your business, giving you a brief overview of what they are and how they’re calculated and what the main pitfalls of them are. Below, we’ll look at:
- Corporation Tax
- Personal Taxes
When you should start paying these taxes depends on your business and individual circumstances, whether you are a sole trader or a limited company, how much profit your business generates, and your annual turnover.
1. VAT – an overview
VAT came to the UK in 1973 when we joined the EU – even though we have now left the EU, sadly we have not left VAT….
For an idea of importance to the treasury, in 2021-2022 VAT accounted for £157.5 billion from VAT, for a comparison corporation tax was £67 billion.
With the Treasury (and by default HMRC) needing as much money as possible to recover from covid, the Ukraine crisis, rising inflation and interest rates – VAT is now more important than ever. This means that businesses must be more careful than ever to make sure it is correctly calculated.
Do you have to register for VAT?
Many businesses decide to register for VAT before their turnover reaches the £85,000 threshold. The main reasons are as follows;
- The perception is that your business is bigger than it is and has a turnover of at least £85,000 – even though it might be much less than this.
- If you are normally trading business to business then it is likely your customers will also be VAT registered, so there is no increase in cost to them.
- If you have paid VAT on your purchases, then you can reclaim this VAT.
However, if your vatable turnover is over £85,000, then you must VAT register. Vatable turnover is normally sales – but do take great care with this if you are involved in sectors with trickier rules e.g. construction and property rental.
VAT is usually paid quarterly, but it doesn’t necessarily run in line with your financial year, depending on when you registered. However, this can be changed so your VAT periods and accounts are in sync. In order to calculate the amount that you have to pay, you subtract input tax (the amount you can reclaim from purchases) from output tax (the tax you charge customers on sales) and pay (or reclaim) the difference.
Amount to pay to HMRC = Output Tax – Input Tax
With Making Tax Digital now in full force you must file your return online and normally via accounting software e.g. Xero, Sage, Quickbooks etc.
I have heard there are different schemes available – what are they all about?
The good news is that there are a number of different schemes available to certain companies that meet specific criteria. In general, they help with cash flow or paperwork – as opposed to reducing the amount of VAT to pay.
We will now have a look at the 4 main schemes;
Your VAT is simply the difference between your invoiced sales and your purchase invoices received. This is then paid across to HMRC.
For smaller businesses (sales less than £1.35 million) it is calculated as the amount of VAT received on sales and paid on purchases as opposed to invoiced. This makes no difference to the amount of VAT payable overall, but if customers take 60 days to pay, then you only pay the VAT on that invoice when it is paid. This can make a huge difference to your cash flow.
There is no requirement no notify to HMRC that you are using this scheme. If you are thinking of changing from standard to cash (or vice versa), then please, please take advice from your accountant – as you need to take into account VAT on receivables and payables. It is not as straightforward as it might first appear.
Flat Rate Scheme
The flat rate scheme was brought in as being simple, but sadly it is anything but. The amount you pay is based on the industry you operate in. You pay a flat rate of VAT that is calculated as a percentage of your turnover including VAT. This is less than the standard rate of 20%, however, you can’t reclaim VAT on purchases so you definitely need to be cautious about whether you’ll be better off or not. In order to use this scheme, you must first obtain permission from HMRC.
Annual Accounting Scheme
In this scheme, you provide just one return per year to HMRC and make equal payments throughout the year. The amount you pay is calculated based on the previous year’s VAT liability and can help some companies with cash flow management. The difficulty with this is that if you are growing rapidly, then the following year you will have a large increase in VAT which you may not have budgeted for.
2. Corporation Tax
Welcome to this introduction to corporation tax, which hopefully you will find useful.
At its simplest, corporation tax is only paid by companies that are registered in the UK. If you’re operating as a sole trader or partnership you don’t need to worry about corporation tax.
However, life (and certainly tax) can never be that straightforward. Corporation tax is also payable by any other company that has a UK branch or office or the main management function is undertaken within the UK. Similar to residency rules for individuals, UK-registered companies pay tax based on their global profits, whereas those registered overseas only pay tax on profits generated from their UK profits.
Importantly there is no threshold on profit before you start paying corporation tax. All companies with declared profits below £50,000 per annum pay the same rate of tax regardless of profit – currently, this is 19%. Companies with profits over £250,000 will be taxed at 25%. Profits between £50,000 and £250,000 will be taxed at a marginal rate between the two. It is therefore more important than ever to plan, plan, plan – and well before your year-end.
At the end of each financial year, you have 9 months to submit your accounts to Companies House, and 9 months to pay your tax. The filing date for the corporation tax return is 12 months after the end of the financial year. In other words, small companies (profits of less than £1.5 million), need to pay their tax, before HMRC even know how much it is.
I would suggest that it is much simpler to file your tax return, submit your company accounts, and pay the tax all at the same time.
If you haven’t made any taxable profit in your financial year, you won’t have any corporation tax liability. However, you will still need to inform HMRC by filing a ‘nil return’.
Corporation tax is applied to all the company’s profits – irrespective of the type of income. This will include:
- Profit from trading (e.g. sales)
- Income generated from company investments (e.g. rental income from property)
- Money associated with selling assets for more than you originally paid for them (e.g. equipment or machinery).
In addition, there are various allowances and reliefs that can be used to reduce the amount of corporation tax payable. These include capital allowances, research and development, patent box reliefs etc.
It is more important than ever to plan for the future, plan for what your corporation tax liability might be, and then plan how to reduce it.
If in doubt – talk to an accountant and plan.
3. Personal Liabilities and Personal Taxation
In the UK, everybody who earns over the Personal Allowance (£12,570 for 2022/2023, but you can check rates on HMRC) must pay income tax. You also get a tax-free allowance for income relating to savings interest and dividends (if you own shares in a company).
There are three main scenarios where individuals pay income tax;
- If you’re a sole trader or a partner in a partnership
- If you’re the director of a limited company
- If you’re an employee
If you’re self-employed:
Sole traders generally complete an income tax Self Assessment each year and will pay income tax and national insurance directly to HMRC. To do this you must keep accurate records of your income and expenditure and then fill in the online form by 31st January (for the tax year that ends the previous April). As a sole trader, you should keep track of your expenses, such as materials purchased for work, rent, bills, professional fees etc. These are then deducted from your sales and you pay tax on the remainder.
As a director of a limited company, you also have to register for a Self Assessment Tax return, but in this case, you pay income tax on the money you have drawn as a salary from the company, as well as any dividends you have received.
Employing other people:
As your business grows and you begin to take on staff, many aspects of your business will become more complex. There are more managerial details to consider relating to the well-being of your staff, such as employment law and health and safety. You’ll also need to think about certain financial aspects; from payroll and PAYE, through to Employer’s Liability Insurance and workplace pensions.
Taxing your employees:
When you start taking on staff, you’ll need to set up a payroll system, which you can do yourself or with the help of an accountant. Like with your accounts, you need to keep accurate records of your payroll and submit them to HMRC. Employees are taxed “at source” via the Pay-As-You-Earn scheme (PAYE), so their Income Tax and National Insurance Contributions are taken from their wages directly. There are other deductions that can be taken from staff wages directly, such as Student Loan Repayments and Child Maintenance.
Now that workplace pensions have come into force, employers must automatically enrol their staff into a pension scheme. As an employer, you’ll have to set up an auto-enrolment scheme and include your eligible staff. You should then write to your staff explaining how auto-enrolment applies to them and detail the contributions you will make towards their pensions. The current minimum is 8% of which at least 3% must be paid by the employer, with the other 5% normally being paid by the employee. The employee contribution is deducted from their monthly pay.
The government will also contribute to your employee’s pensions by providing tax relief on employee contributions.
As ever, if your tax is complicated and technical (and unless your affairs are straightforward) I would always recommend talking to an accountant – even if it is just for peace of mind that you are on the right track.
Your business and circumstances are completely unique to you, so the best advice we can give is to speak to an expert in accountancy and taxation.
Taxation can be complicated and challenging to get right … find an expert (an accountant or taxation expert!) who can support your business and work with you for the future growth you aspire towards.
Thinking about tax at Yorkshire Powerhouse
Have you any questions?
Here at Yorkshire Powerhouse, we’re happy to help as much as possible – is there anything else we can do to help you, do you have any further questions or can we help introduce you to an expert – please let us know:
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