Financial compliance, VAT & record keeping
“About the time we can make the ends meet, somebody moves the ends.” – Herbert Hoover
One thing that is always a prime consideration when running a business is your obligations to compliance, financial regulation and legislation in relation to tax and national insurance (N.I.).
It has to be said that, without exception, to run a business enterprise legally, you have to comply with the various aspects of tax, when and how they apply to your business. Not doing so can be severely penalised and, potentially, cost you your business and worse.
The good news is that there are numerous resources which can be utilised to ensure compliance and make life easier for what is one of the more mundane aspects of running your business. Not least of these is HM Revenue & Customs themselves who, despite popular belief, are extremely helpful (talk to them) and provide things from workshops and advice lines to specialist advisers on subjects such as VAT.
That aside, it is always a worthwhile exercise spending the time to understand your tax obligations prior to setting out on your business venture.
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Financial compliance: Income tax, National Insurance contributions and VAT
If you register with HMRC as a self-employed person (i.e. sole trader or partnership) you will pay tax on any profits your business makes at the end of your trading year. This is not just on any personal earnings but the bottom line on your year end accounts that shows the profit – irrespective of whether you have drawn it as earnings or not.
In addition, as self employed, you will be required to pay Class 2 and Class 4 National Insurance contributions (NIC’s). Any employees within the business should be dealt with, irrespective of the legal entity your business takes, as indicated in the paragraph below on limited companies.
If you incorporate the business as a limited company, you are classed as an employee, which means you must pay income tax through the company’s Pay As You Earn (PAYE) scheme, as well as NICs, (including any employees on your payroll). The company must also pay Corporation Tax to HMRC each year, at the prevailing rate, against their profits after all costs, allowances and expenses have been accounted for and taken off.
In addition, should the business register for VAT, this also needs to be taken into account. Registering for VAT isn’t dependent on the legal status of the business (i.e. sole trader, limited company etc) but on other factors which need to be considered.
There is a turnover threshold at which point the business MUST be VAT registered – currently (2017/18) £85,000. This is turnover (the total amount of business you do within a year) NOT profit. There may be reasons why it’s advantageous to register from the outset but, equally, the opposite could be true.
It’s worth taking the time to consider the pro’s and con’s of VAT registration within the business planning process. VAT is applicable to the sale of most goods and services but there are exceptions and you also need to know if any of these apply to your venture. There are also various options for paying your VAT but the most common is a quarterly return and payment. This has become much simpler through online returns, submissions and payments that HMRC now employ.
Financial compliance: Tax liabilities
It is worth noting and re-iterating at this point that there are very strict compliance laws and rules that all business owners should be aware of to ensure compliance but also to make sure they are tax efficient and pay no more or less than their dues.
Within this, businesses are eligible for a broad range of tax allowances and reliefs. Good examples of this could be capital invested in assets such as machinery and fixtures and fittings for your premises which can be claimed as a capital allowances. From a start up perspective, money you spend before the business is officially launched could potentially be claimed as a pre-trading business expense and notifying HMRC accordingly will ensure you can benefit from any claims made in this way.
To maximise any benefits it is essential to minimise your tax liabilities and to do this effectively will invariably mean engaging a qualified accountant. Although this is a cost (unfortunately they don’t provide their services for free!) a good accountant can help your business maximise its tax efficiency, offer invaluable advice specific to your business and, potentially, save you money.
Accountants can ensure your year end accounts are brought together accurately and correctly, submit tax returns and make dealing with HMRC so much easier. Certainly worth the monthly or annual fee they will charge. That said, accountants always act as an agent for you as the business owner and it is your responsibility to ensure that all financial information is correct and as far as HMRC are concerned, you are legally liable for the accuracy and honesty of anything submitted for tax purposes.
All financial information and accounts must be kept for at least six years – even if the business ceases trading.
To maximise any benefits it is essential to minimise your tax liabilities … to do this effectively will invariably mean engaging a qualified accountant.