If you run a small or medium-sized business, it is essential that it is HMRC compliant and you are paying the right amount of tax.
Read this article for advice on being and staying compliant as your business grows. Learn about the taxes you need to pay and stay on top of. And discover how accounting software can help you stay on top of legislation.
What does it mean to be HMRC compliant?
All businesses and individuals in the UK have a responsibility to ensure they are paying the right amount of tax to HMRC and claiming the correct amount of benefits.
It also means making sure you keep up to date with the latest regulations so your business continues to stay on the right side of the law and you don’t get any penalties.
How does HMRC check that your business is compliant?
HMRC acts on the assumption that everyone is honest in their tax affairs. But to make sure that everyone meets their responsibilities, it carries out routine checks – this could be to investigate specific tax returns, or to prevent tax evasion.
A visit from HMRC can take place in your home, at work or at your accountant’s office and afterwards, you will receive a letter with the results.
Tax compliance checklist
To assess if you are tax compliant, HMRC will want to check the following:
- The taxes you pay
- Accounts and tax calculations
- Your self-assessment tax return
- Your company tax return
- PAYE records and returns
So even if you are not due a visit from HMRC, if you keep on top of these factors in the everyday running of your business, you will be fully prepared should it want to run a check to see if your tax affairs are in order.
What if you are not tax compliant?
One benefit of having a compliancy check is you may find out you’re actually owed money. If you’ve paid too much tax, you will get a rebate, plus interest on the amount you’re owed.
However, if you haven’t paid enough tax, you’ll be given 30 days to pay the additional amount, plus interest from the date the tax was due.
You may also have to pay a penalty. HMRC will consider:
- Why you underpaid or claimed too much tax back
- Whether you informed them about the situation as soon as possible
- If you’ve been helpful during the check
You can also receive penalties without going through a compliancy check, for example filing your tax return late or making an error on an official form.
What taxes will you pay as an SME or business owner?
Value Added Tax (VAT)
VAT is a tax on certain goods and services. It is compulsory to register if your turnover is greater than the current VAT threshold, which is £85,000.
You must submit your VAT return online and pay electronically. When you make a payment depends on the scheme you are on.
This is deducted from all employees’ earnings. If you’re a sole trader you will pay it on your business profits.
It is deducted from your staff salaries and you must pay HMRC by the 22nd of the following month.
Pay As You Earn (PAYE)
PAYE takes income tax from your employees as they earn it.
Real-Time Information (RTI)
RTI means you need to submit your payroll data each month when you pay your team, rather than at the end of the tax year.
If you have other income outside your wages, you must report it in a self-assessment tax return and file it online. HMRC uses self-assessment to collect income tax and you need to file your tax return after the end of the tax year.
The deadline to submit your paper self-assessment tax return is midnight on 31 October. If you’re submitting it online, you have a bit longer – midnight on 31 January. If you fail to submit it by the latter deadline, you will face a penalty.
It helps to know what allowable expenses you can claim for too.
Taking care of tax if you’re self-employed
Getting your taxes right is vital. Read this guide for support with Self Assessment, and learn how Making Tax Digital will change how you manage your tax returns from April 2024.
This is for transactions relating to land and property. Stamp duty is usually due within 30 days of the transaction being made, and the rates depend on whether you are paying stamp duty land tax or stamp duty reserve tax.
Capital gains tax
This is a tax on the profit when you sell an asset that’s gone up in value.
How do you pay your tax?
You are required to pay your tax electronically if you are:
- A large employer (an employer with 250 or more employees)
- A VAT-registered business
- A company or organisation liable to pay corporation tax
You can do this by direct debit. Register at HMRC to pay taxes online.
Make sure you give the correct reference number when making a payment to HMRC. This could be your VAT number, the PAYE number issued to your business or the 17-character reference printed on the payslip for your corporation tax.
Write it exactly how it is shown in official correspondence. Don’t include any extra spaces or characters, otherwise it might not be recognised by the system and you could be fined.
When do you pay your tax?
Cleared funds must reach HMRC by the seventh calendar day after your standard due date. Plus three days if you’re paying by direct debit.
Employers PAYE and National Insurance contributions
When paying electronically, payment is due either monthly or quarterly and cleared funds must reach HMRC no later than the 22nd of the month following the end of the tax month or quarter to which it relates.
Payment is generally due annually. It must be paid electronically. It is due nine months and one day after the end of the company’s accounting period.
These payments are due by 31 January and 31 July each year. Even if you have no payment to make, you must let HMRC know.
How can accounting software help you stay tax compliant with HMRC?
It’s important to have a good record-keeping system in place for your business, ideally from the point that you first start it. Using online accounting software can help you do this.
By law, all businesses need to keep the records and documents upon which the figures in your tax returns are based. They should be complete, readable and accurate.
By using accounting software, you will be organised from day one, with each transaction recorded. Even if a transaction is deleted for some reason, this is still recorded.
What records do you need to keep?
- Sales and takings, including cash receipts. This could be till rolls, sales invoices, bank statements and paying-in slips.
- Purchases and expenses, including cash purchases. This could be receipts, purchase invoices, bank and credit card statements, motoring expenses and mileage records.
- VAT sales and purchase invoices, import and export documents, delivery notes.
- Payments made to all subcontractors for work done and materials subcontractors have purchased.
- Details of assets, liabilities, income and expenditure plus business records such as bank statements and paying-in slips, accounts books, purchases and sales information.
- All PAYE records, including payments made to employees, deductions for income tax, National Insurance contributions, student loan payments, employee benefits and expenses, and statutory payments.
Stay up to date with legislation
Legislation is always changing and your business needs to keep up. Good accounting software will keep you up to date with the latest legislation for accounts and payroll, whether it’s changes to VAT, pensions or auto-enrolment.
If you use cloud-based software, means your data will be protected by bank-level security, so you don’t have to worry about taking backups or losing any information. Essential when you are making sure you keep comprehensive records of your accounts.
Pay the right amount of tax
Good accounting software will keep you up to date with the latest regulations relating to tax and will calculate the right amounts accordingly. You can keep track of your expenses and overheads, which can help reduce your company’s tax burden.
Final thoughts on being HMRC compliant
Staying on top of your business admin is one of the biggest challenges of being a business owner. However, it’s important that you do so. And making sure your business is HMRC compliant will go a long way to keeping you on track.
Make sure you dedicate time to staying on top of your taxes and keep good records so when the time comes to file a tax return, for example, you have the necessary information to hand.
And as your business grows, it’s important to stay on top of legislation so you are doing the right things at the right time – and keeping HMRC happy in the process.
Small business guide to VAT
Managing VAT can be a pain for many small businesses - but it doesn't have to be! Everything you need to register and submit VAT and staying compliant is right here.