Tax Requirements for Small Businesses in the UK

Many large corporations have an army of internal accountants who can organise their tax affairs for them. Simply put, small businesses don't have this luxury, so it is imperative that entrepreneurs who run small and medium enterprises (SMEs) have at least an overview of the UK's tax system. It is possible to have an external accountant come into your office to do certain tax matters for you, like organising your books, working out your VAT return or conducting payroll calculations. However, it is better to have as much knowledge as you can take on board whilst continuing to run your business. The benefits of this are twofold.

Firstly, you will have a better understanding of your legal responsibilities. It is the owner of a business who will get into trouble with the taxman if tax affairs are not conducted properly, after all. Secondly, knowing how the tax system works in the UK will help you to keep oversight on any accounting activity that is conducted on your behalf, either by your own staff or by sub-contractors. Business owners who are simply not interested in accountancy and tax matters leave themselves wide open to fraudulent activity - although, in fairness, this is rare. By understanding company tax law, you end up understanding your own business that much better.

Sole Trading Tax Issues

For self-employed people, even those who do a normal job as well as working for themselves, a declaration must be made to Her Majesty's Revenue and Customs (HMRC) as a sole trader. If you don't declare your status or income, then you are simply in breach of tax law. Generally speaking, you need to register online and inform HMRC of when you started trading and of your trading name. This could simply be your own name. HMRC will then require you to fill out a self assessment tax return each year. To do this effectively, you must have a record of all of your business expenditure as well as the income, or turnover, you have generated. Certain allowances are made for any business for things like equipment, rent and heating. A trained accountant will be able to help you with these details. Once you have entered all the data that is required of you, an operating profit figure is generated and a proportion of this will be designated as your income tax issue. Once the return is completed a bill for your annual tax is generated.

Directors And Tax Returns

Company directors are usually - but not always - the owners of limited liability businesses. Some small firms are limited companies which have registered at Companies House. If you are a director of a business, then you are also designated by HMRC as an employee of that business. However, like a sole trader, you will be required to fill out a self assessment tax return and there are special sections that are given over to company directors which must be completed.

National Insurance Contributions

Self employed people who run businesses need to pay National Insurance contributions, just like everyone else. If you are paid a salary, then this must be deducted from your pay, just like a normal employee. Working out how much National Insurance to pay to HMRC depends on how much each employee earns. Accounting software can usually makes these calculations for you and there are many payroll sub-contracting companies up and down the country who can also help you. Many SME owners choose to use them.

Self employed people, either sole traders or those who work in a partnership, may well have no salary and simply have an income that relates to the amount of money the business generates. Under such circumstances, you can pay your National Insurance contributions bi-annually. HMRC used to do this quarterly, but now only issue two invoices for National Insurance per year. The rate is fixed and does not depend on your income. If you earn only a very little from your business, it is possible to apply for an exception.

Local Business Tax

If you run your business from a dedicated premises, rather than your own home, then you will probably be liable to pay local business tax. This collected by your local authority in just the same way as council tax is collected. Before signing any lease, work out the amount you will have to set aside for business tax. Remember that it is calculated on the 'rateable value' of the premises - which was the old tax system - not the amount you spend in rent.

Value Added Tax

Value added tax - or VAT - needs to be paid once a business' turnover reaches a certain level. All of your sales, for both VAT-able services and products, must include this element on your invoices along with the VAT number which is assigned to your business. VAT is currently set at 20 percent for most things. Remember that you can offset the amount of money you need to pay in VAT from what you have spent on it, so keep receipts for anything you buy for your business.

Need Help?

Although you can manage your own taxes, most businesses hire an accounting firm to ensure they remain compliant with the various tax regulations and filings. No matter where your business is located you can find local business accountants offering a range of services for various fees. If you are happy to have your accounting handled remotely you can usually get a better price from tech savvy accountants that make the most of software and other online work practices. Northants Accounting provide the full range of accounting and business start up services for micro and small businesses.

Further Reading:

Business Tax Guide