Congratulations of getting your small business up, running and making money! However, there is always someone waiting to spoil your day and one to really be on the lookout for it the dreaded Taxman!
But wait, there's nothing to dread - small business tax is actually fairly easy to understand once you've got the basics together... and here are the basics. There are five categories of tax that apply. So, let's get started.
The first two may or may not apply depending on your turnover and the type of business you conduct.
Business Rates
If you're not running your business from home, so maybe an office, unit, warehouse, retail space, high street shop, etc) then you're possibly looking at paying some business rates. This can also apply if you use part of a building for non-domestic purposes - although a small home office is okay, as is selling things by post. If working from home you mainly you need to look out for things like employing other people, commercial conversions to your home, selling goods to visitors to your home.
First thing is to calculate your rate-able value. This can now be done online. The rate is based on the rental value estimated by your council based on April 2015. The value might be out or incorrect so a 'revaluation' can be requested online.
Your business rates bill is sent by the local council, annually around February/March, and you can pay via monthly instalments and even get help to reduce it.
As mentioned above, the calculation may be 'out' so you can request a revaluation to reduce the factors that go into the calculation. Another way is to claim business rates relief. There are multiple business rates reliefs available, one of which is, small business rate relief where you can get up to 100 percent reduction in the bill.
VAT (Value Added Tax)
If your business is turning over the VAT-registration threshold or you have voluntarily registered for VAT, then you need factor VAT when considering business taxes.
It's a two-way street as you can then claim VAT back on any business purchase made, but you also have to charge VAT to your customers and then relay the collected VAT to HMRC.
The VAT threshold for registration is (in 2019) a turnover of £85,000.
Aside from the usual 20 percent (in 2019) VAT rate, VAT rates can vary depending on the type of product/service involved. The methods of accounting for VAT can also vary.
There is the usual method where all transactions are kept track of and then the amount of VAT collected, and the amount of VAT paid by the business is reported back to HMRC. Another is the flat rate scheme. Here you, rather than track individual sales, you just pay a set percentage on the overall turnover.
An example, the flat rate for an advertising company is 11 percent. If that company turns over £100,000 then it would pay £11,000 as a VAT bill. The advertising company, however, still charges 20 percent on it's sales so actually took in £20,000 in collected VAT. If the VAT on the company's purchases is not too high than the flat rate scheme would work out quite beneficial.
VAT returns are sent quarterly but a big change from 2019 is the requirement to digitally (online) file VAT returns using accounting software. The change here is that you must use some form of record keeping software that tracks and also periodically submits your VAT information to HMRC. This is part and parcel of the move from HMRC towards Making Tax Digital.
The old spreadsheet method can still be used to track your VAT inputs and outputs but the requirement to submit digitally needs some form of 'bridging' software that takes the data in the spreadsheet and securely sends it to the Taxman.
The same type of requirement will soon also be required for income taxes, speaking of which...!
Income Tax and National Insurance
Income tax is separately considered when thinking about 'business taxes'. Income is the money you receive personally and is paid under your own tax assessment, not the tax assessment of the business. Although aspects of your pay depending on how you are paid, may have an effect on the tax the business is subject to - for example payroll and employers' national insurance contributions.
Income tax is payable on all income personally received by an individual once any tax-free allowances, reliefs and allowable expenses have been considered.
When thinking about this in a 'small business' context, you would be looking at things like: income tax, national insurance and dividend tax.
If you are running a limited company, then paying yourself a salary equivalent to your personal allowance and the remaining net profits as dividends is generally a tax-efficient method. Your company would use PAYE payroll to pay the salary and you would be liable to the employees income tax and Class 1 NIC, and the company, the employers NICs. If you are a sole trader then your 'pay' would be the profits from the business. You would pay income tax and Class 4 NICs. There is no employer so no employers NICs, but you may have to pay Class 2 NICs depending on your profit amount.
Dividends are profits after all costs (inc. PAYE salary) and corporation tax. The dividend doesn't necessarily have to be the full amount remaining. Profit can be retained. However, whatever the dividend it will be subject to the remaining regular tax-free allowance, as well as a dividend allowance (£2,000 in 2019), and then taxed on your remaining tax bands at lower rates than usual income taxes. These ordinary rate, upper rate and additional/top rate and are 7.5%, 32.5% and 38.1% respectively.
Dividends and non-PAYE income are reported once a year via the self-assessment tax return, until Making Tax Digital comes into force and changes that.
Payments for self-assessed taxes are made using a payment on account system and are twice a year, once in January and the other in July. There are special conditions that can change this schedule.
Corporation Tax
If you are running a limited company and it makes any profits (this is after allowable costs, salaries etc) then your company will be liable to corporation tax. Other taxes like dividend taxes are paid on the dividends declared after corporation tax has been paid.
A CT600 form, otherwise known as the Company Tax Return, is used to submit details of the what the company's income and expenses were. The company will have it's own accounting period (the year end date) and the books you keep track of and submit will be according to this period. Once an accounting period closes, the company has up to 12 months to submit the tax return, but only 9 months to submit the books to Companies House and pay any corporation tax due.
The Company Tax Return, CT600, must be submitted even if there is no profit, the exception being you didn't trade and applied to make the company 'dormant'.
The accounting period can actually be altered but cannot be more than 12 months long. Unfortunately the first accounting period is set by companies house when you incorporate and thus adds up to a month over 12 months. This normally means you have to submit two returns spanning two accounting periods in order to maintain the less than 12 months for each return.
An accounting period can be changed to shorten or increase it as long as the change is made for the company's current or previous financial year. The change to the accounting year end is made via Companies House.