Chris Cooper provides a back-to-basics overview of business tax for start-ups and SMEs.
Do you know your VAT from your Corporation tax? No? That’s understandable – I wouldn’t know my applique from your architrave, but then I’m not a carpenter. Tax is one of those things that can feel daunting, but once you know it, you know it. So, here’s what you need to know…
Types of tax
When you’re just starting out in business, there are two main types of tax to concern yourself with: Corporation tax, which is a tax on your business profits (for limited companies); and VAT, which is a tax on the cost of goods or services sold.
For small businesses that are not VAT-registered or registered as limited companies, the tax you pay is considered personal tax. This means that you won’t pay any tax until you earn over your personal tax allowance. Currently the personal tax allowance for most people is £12,570. Once this threshold is met, the following tax rates will apply:
Basic Tax Rate: 20% (£12,571-£50,270)
Higher Tax Rate: 40% (£50,271-£150,000)
Additional Tax Rate: 45% (over £150,000)
All limited companies in the UK have to pay corporation tax. The current corporation tax basic rate is 25% of your company profits as standard. But, as of April 2023, companies with profits under £50,000 are charged 19% and companies with profits between £50,000 and £250,000 can claim for marginal relief. This is a staged tax rate that’s charged below the basic rate.
Corporation tax is calculated on your business profits, so it takes into account the expenses that your business has incurred. Keeping track of your legitimate expenses is therefore important in order to reduce your tax bill. If you need help to understand what can be legitimately expensed, check out our guide to expenses here.
Many small businesses will only ever register for corporation tax. The main benefit of this is the simplicity of having only one annual tax return to submit to HMRC. However, there are some benefits to also registering for VAT, and if your business grows, you may be obliged to pay it.
The VAT threshold currently sits at £85,000, meaning that if your business takes in £85,000 of income (not profit) within any 12-month period (not just the business year) you will be liable to register and pay VAT. VAT returns are more regular, with four required in any 12-month period. Typically, businesses charge VAT to their customers and this is then set aside to pay HMRC, so your business is usually not actually out of pocket from VAT. Note: VAT is not charged internationally, so you would have no liability to charge or pay VAT for income from overseas customers.
Registering for VAT has its benefits. Not least, you can claim back any VAT paid to your suppliers. It’s also known that many larger organisations will refuse to do business with companies that aren’t VAT registered, using it as a sign of legitimacy. So registering for VAT can give your business a bit more clout. With this in mind, you might decide to register for VAT before you hit the threshold.
Capital Gains Tax
If you sell any of your company’s assets, such as property, sizeable machinery, or trademarks, you may be liable to pay Capital Gains Tax. This is true for sole traders or partnerships, but not limited companies, who would pay this through Corporation Tax. You’ll only have to pay Capital Gains Tax if the gains you make through the sale (after costs of sale and what you paid for it originally are deducted) are higher than the tax-free allowance (currently £6,000 or £3,000 for trusts).
Some companies offer employees taxable benefits. These are things like gym memberships, health insurance, a company car, loans (and much more). The tax due on these benefits is paid by the employee, but as the employer you would collect this tax as a deduction from the take-home pay through PAYE. The amount of tax paid on benefits depends on the benefit. You can find out more info on gov.uk.
Construction Industry Scheme
The construction industry has its very own form of taxation – the Construction Industry Scheme – used to deduct tax payments from subcontractors, paid directly to HMRC by the Contractor. If you work in the construction sector you can find out more here.
Tax returns are used to inform HMRC of your income and calculate how much tax is due to be paid by, or refunded to your business.
Depending on what type of tax your business is registered for, you’ll be required to provide one return (corporation tax) or four (VAT). Note that if your business is VAT-registered you’ll still have to submit a corporation tax return and pay tax on your profits. If you fail to provide a tax return by the HMRC deadlines they will fine you, and it can sting. Here are the current late penalties for Company Tax Returns.
While they may seem daunting, tax returns are actually fairly simple calculations using your figures of income and costs. You’ll be required to declare your income and expenses, and while you don’t have to provide receipts or proof in the return itself, if your business is audited you must have these available. For this reason, it is essential that you keep record of all of your invoices and receipts.
Now you know the basics of business tax, but if you’re unsure of any aspect of tax or tax returns, speak to a bookkeeper (like myself) or accountant. We’ll be happy to answer your questions and help make tax simple, so you can focus on what you do best.