Last updated: 1 May 2024.
Welcome to UK Startup Essentials, where we focus on the key tasks and tedious admin that (like it or not) you need to take care of when launching a new business.
For example, setting up a business bank account, getting insurance and...
Tax...
It’s not the most exhilarating thing in the world. But once you’re set up, it’s just a matter of accounting and submitting your returns.
You’ll need to register for taxes before you begin trading, which involves buying, selling, renting a business property, advertising or employing someone.
And know which taxes you're liable for, when you need to register, and when the payments are due.
Not all taxes apply to all businesses. For example, accounting and paying VAT is only mandatory for businesses with a VAT-taxable turnover of over £85,000.
This guide covers when to register for taxes and how to plan and account for them.
Corporation Tax is levied on the profits of your company. Most businesses are automatically registered for CT after incorporation.
If that's not the case, then businesses must register after the fact within three months of trading. HMRC will then send a letter to your company's registered office with your Unique Taxpayer Reference (UTR).
A UTR is a unique 10-digit number HMRC uses to identify your company. Keeping this UTR safe is paramount, as you'll need it for all future dealings with HMRC.
The rate of CT varies depending on your company's profits and changed in April 2023 (and may change again). The 2023 to 2024 rates are:
It’s your responsibility as the business owner to calculate, pay, and report CT, which involves filing a Company Tax Return.
VAT is applied to most goods and services bought and sold for use or consumption. VAT rates vary, and some goods are ‘outside the scope’ of VAT, so checking what you need to charge and reclaim VAT-wise is essential.
If your company's VAT taxable turnover – the total value of everything you sell that isn't exempt from VAT – is more than £85,000 in a 12-month period, you're legally required to register for VAT.
However, even if you're not legally required to register for VAT, you can choose to do so voluntarily.
Voluntary registration can be beneficial if you sell to other VAT-registered businesses and want to reclaim the VAT or if you want to boost your company's profile by showing your customers that you're VAT-registered.
Registering for VAT involves telling HMRC about your turnover, your business activity, and other business details. After registering, you'll be sent a VAT registration certificate confirming your VAT number and when you'll need to submit your first VAT Return and payment.
If your company employs staff, you must set up a PAYE scheme. PAYE is HMRC's system to collect Income Tax and National Insurance contributions from employment income.
As an employer, you'll deduct tax and National Insurance contributions from your employees' wages or occupational pension before paying them their wages or pension.
Registration involves providing HMRC with information about you, your business, and your employees. You can register up to two months before paying your employees, so it’s vital to prompt here if you intend to employ people.
Meeting tax obligations can feel daunting. However, with a solid plan in place, it’s totally possible to keep on top of your taxes from the outset. From there, it’s a matter of tracking business activities to ensure you’re aware of any new tax responsibilities.
Let's discuss how to account for and submit different forms of business taxes.
For CT, you’ll need to determine how much profit your company has made for each accounting period and then calculate how much tax is due on that profit.
An 'accounting period' is typically 12 months long, aligning with your company's financial year as covered by your annual accounts.
As a business owner, it's your responsibility to calculate, pay, and report this tax. This involves several steps:
Take your company's total income and deduct allowable expenses and allowances. The result is your taxable profit.
The rate you use depends on the amount of profit your company made in the financial year. From 1 April 2023, the small profits rate (19%) applies to single companies with profits of less than £50,000, and the main rate (25%) applies to single companies with profits of more than £250,000.
Multiply your taxable profit by the CT rate. The result is the amount of CT your company owes.
Once you've calculated your CT, it must be paid before your Company Tax Return is due. The payment deadline is usually 9 months and one day after the end of your accounting period.
For example, if your accounting period ended on 31 March, you'd need to pay your CT by 1 January the following year.
Accounting for and paying VAT is slightly different. Once you're VAT registered, you must submit a VAT Return to HMRC, usually every 3 months (what's known as your 'accounting period').
A VAT Return records several things:
By the deadline for submitting your VAT Return, you must also send the VAT you owe from your sales. If you can reclaim VAT, HMRC will usually pay your refund within a few weeks of receiving your VAT Return.
VAT-registered businesses are required to account and pay for VAT digitally via HMRC’s Making Tax Digital (MTD) scheme.
Operating PAYE as part of your payroll involves calculating and deducting the tax and National Insurance contributions due from your employees' wages each pay period.
These deductions must be sent to HMRC on or before each payday, usually with the help of payroll software to automate calculations and reporting.
The frequency of these payments to HMRC depends on the size of your payroll and the scheme you're on – you could be paying monthly, quarterly, or annually. If you usually pay less than £1,500 per month, you typically pay quarterly instead of monthly.
Company directors and shareholders are typically required to file a Self Assessment tax return to report untaxed income.
You start by signing up online with HMRC and get a Unique Taxpayer Reference (UTR) and instructions. Once activated, you can file your taxes, pay what you owe, or claim refunds online.
To do your Self Assessment, you need to keep good records of your income and expenses all year. The tax year goes from 6 April to 5 April, and your tax return is typically due by 31 January the following year. It's smart to start early, especially if you haven't signed up yet.
Keeping thorough records makes filling out your tax return easier. HMRC doesn't like late returns or payments, so keep on top of those deadlines.
Managing your tax obligations is crucial to running a successful business. Staying on top of responsibilities from the start provides the firm footing required to grow your business without delay or complications.
Here are a few pointers for efficiently handling your tax responsibilities.
Quick recap: CT applies to all limited companies, whereas VAT, PAYE and self-assessments only apply in specific circumstances.
Maintaining accurate and organised records is a legal requirement and makes your life easier when it's time to calculate and submit your taxes.
Keep track of all invoices, receipts, expenses, and bank statements. This is considerably easier if you maintain a separate business bank account (and this is typically considered mandatory for limited companies).
Consider using accounting software to automate this process and ensure you have real-time access to your financial records.
HMRC’s Making Tax Digital scheme now requires all VAT-registered businesses to digitally account for and submit their taxes through HMRC-approved software. This is set to expand to Corporation Tax in the future.
Cash flow management is critical for small businesses. Unexpected tax bills can disrupt your cash flow, so put money aside to cover your tax bills.
There are many schemes for simplifying tax accounting and streamlining operations for smaller businesses. Moreover, tax relief schemes and allowances are designed to cut taxes for certain activities.
For instance, you can claim allowances for equipment and machinery used in your business under the capital allowances scheme.
VAT schemes, such as the Flat Rate Scheme, are designed to simplify VAT reporting and potentially save you money.
Tax laws, allowances and rates frequently change. April 2023 ushered in major changes for Corporation Tax, for example. It's essential to stay up-to-date with changes to meet your obligations and avoid paying more tax than necessary.
Tax can be complicated, and mistakes can be costly. Hiring a tax advisor or accountant could prevent future headaches and free up your time so you can focus on running the business. After all, they're the experts in this space!
If you're still with us so far, kudos! Tax is not a thrilling topic and there's a lot to take in. To help you understand what tax obligations look like in practical terms, here is a hypothetical example.
Let’s break down tax obligations for a new founder in the tech industry.
Our example, Tom, is an ambitious tech entrepreneur who has just launched an app development company. Operating as a limited company, his team designs and develops mobile apps for clients.
Tom needs to register his company for taxes. After incorporating his business, he received a letter from HMRC containing his company's Unique Taxpayer Reference (UTR).
Based on his projections, Tom's company is set to be profitable from the start. Therefore, he promptly registers for CT within three months of starting his operations to avoid any penalties.
Tom's business model anticipates his taxable revenue to surpass the VAT threshold of £85,000 within the first year of operation. As a result, he registers for VAT.
This complies with the law and allows him to reclaim VAT on eligible business expenses, ultimately reducing his business costs.
Tom's team is small but growing. He registers as an employer with HMRC and sets up a PAYE system. This allows him to deduct the correct amount of income tax and National Insurance contributions from his employees' wages.
As a company director, Tom has income not taxed at the source. He registers for Self Assessment, which requires completing a yearly tax return. This will detail his income and capital gains and enable him to claim tax allowances or reliefs.
With all registrations in place, Tom now focuses on the ongoing task of accounting for and submitting his taxes.
Registering for tax may seem tedious, but think of it as one more step towards establishing and growing your business.
Once you’re set up and build a solid, dependable tax routine and accounting strategy, it’ll become second nature.
And with strong foundations, your business will be in the best possible position to do great things.
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