Tax and what it means for your business
The UK has an eye-watering 17,000 pages of tax legislation. Centuries of exemptions, incentives and political meddling have made tax incredibly complex.
This post breaks down the main taxes small business owners need to think about and provides a useful starting point for new businesses or a handy refresher those already trading.
The tax rates and definitions in this article were accurate as of August 2020. The tax code changes regularly. We strongly advise you check government guidance and speak to an accountant.
Value Added Tax (VAT)
VAT is charged on goods and services. Small businesses need to register to pay VAT when they go over or expect to go over the £85,000 threshold. VAT taxable turnover means the total of everything sold in a 12-month period that isn’t VAT exempt.
Payment is made every quarter through a VAT return. Businesses also pay VAT when purchasing products or services. The amount owed is the difference between the VAT charged and paid. If you’ve paid more VAT than you’ve charged you can reclaim it.
The standard rate of VAT is 20%. However, there are numerous exceptions for individual products. This is particularly for businesses that deal with food and drinks. For example, restaurants charge VAT on everything eaten on their premises and hot takeaways but don’t charge VAT on cold takeaways.
It's worth reading the content’s page of HMRC’s guidance to see if any of these exemptions are likely to impact your business. There are also specific VAT rules for charities and builders.
Read more of the government’s advice on charging VAT.
Pay as You Earn (PAYE) for small businesses
HMRC collects National Insurance and Income Tax through PAYE. National Insurance payments help staff qualify for state pensions and other benefits. It’s broken down into different classes based on employment status and how much people earn. Income Tax depends on the amount earned.
Small businesses paying employees through a payroll need to make deductions for PAYE. Payroll software will help you calculate PAYE and report this information to HMRC.
Employer’s National Insurance contribution is paid on top of the amount collected through a staff member's PAYE.
PAYE payments are made to HMRC on a monthly basis. However, if you expect to pay less than £1,500 a month you can arrange to pay quarterly by contacting HMRC’s helpline.
HMRC has a great step-by-step guide to setting up payroll when you're ready to start hiring staff.
Small businesses need to understand their responsibilities for staff pensions. It's worth looking into this when you start thinking about hiring staff. The Pensions Regulator has lots of useful advice.
Paying Corporation Tax
Your business is successful and you've made a profit; great news! Unfortunately, the taxman wants you to pay tax on that too.
Corporation Tax is charged on trading profits, investments and profits made selling assets.
Limited companies are responsible for calculating and reporting corporation tax. You should register for Corporation Tax when you set up your business. This can be done at the same time as registering for PAYE.
Once registered, HMRC will send you a request to deliver a Company Tax Return. You must pay your Corporation Tax nine months after the end of your accounting period. HMRC may charge interest on late payments.
Business rates charged for shops and restaurants
Business rates are charged on premises like shops, offices, pubs and warehouses.
Business rates are calculated using the “rateable value” of your location. This is the amount it's assessed to be worth on the rental market. A multiplier is then applied to this value. Properties under £51,000 receive a lower small business multiplier (£0.491 in 2019-2020, rather than £0.504).
Business rates are set by the government and collected by local councils. They will send you a business rates bill in February or March each year.
It's easier to understand with an example. Here's one helpfully provided by HMRC:
“Barbara has a business in England. The rateable value of her business is £10,000, so she uses the 2019 to 2020 small business multiplier (49.1p) to estimate her business rates as follows:
£10,000 (rateable value) x £0.491p (multiplier) = £4,910 (basic business rates).”
It's worth calculating your rate if you're thinking about moving into new premises. Check out HMRC’s guide for England and Wales, MyGov.scot’s guide for Scotland and Northern Ireland’s Department of Finance’s guide.
Small business rate relief applies to companies with one location (although there are exceptions) and a rateable value of less than £15,000). It’s a tiered benefit. No rates are paid on properties with rateable values of £12,000 or less. The relief goes down from 100% to 0% for properties with a rateable value of £12,001 to £15,000.
We hope this post has helped clarify the situation and introduces you to the main business taxes you need to know about. The Gov.uk and HMRC websites have detailed advice, which will help you move forward.
We have included as many useful links as possible. It's important to consider seeking advice from an accountant or adviser too as tax can become complicated.