How to understand your tax obligations

You know the old saying: there’s two certainties in life and that’s death and taxes. If you run a business, the latter can be a bit complicated.

We all grasp the basic idea of personal tax but owning a business means there are several other taxes to consider. What type of business taxes you will need to pay, and when, depend on the structure of your business. You are obliged to know and understand your tax obligations – ignorance is no excuse.

Ruth Smith, business manager at the Cheshire Cheese Company, says: “There’s a number of tax obligations when you’re running a small company, or any company. I guess the main things is to be aware of that so when you’re making a profit, that you’re going to have to pay tax on that.

“You don’t want to wait until the end of the year and realise you’ve actually spent the profit and you have no money to pay your tax bill.”

Paul Donno, the founder and managing director of 1 Accounts, says: “Tax is part of your business and you have to know your obligations. If you don’t pay your tax on time, you will get fined, you’ll get penalties and you will get interest charged to you.

Tax obligations to be aware of

Most sole trader operations are used because it’s not only a more simplified structure in terms of paperwork, but because it’s assumed that most of the income generated by the operation will come from the owner.

As a result, the tax obligation will usually fall under the area of self-assessment. In other words, the income will be quickly taken out as earnings, and most probably be under the threshold when Value Added Tax is due.

Sole trader

If you are a sole trader, you need to register with HMRC and join the self-assessment scheme. This is when you declare your earnings on a yearly basis, working usually from unaudited accounts, and pay the necessary tax. This process has become more sophisticated over the years and you can now pay your tax at different times, via the HMRC platform.

The other two main taxes that businesses must contend with are VAT and corporation tax.

Dealing with VAT

VAT can seem a nightmare for the unwary, so it’s a very good idea to get up to speed with the whole process. Bear in mind that you will have to pay VAT if your business makes more than £85,000 over a 12-month period.

That doesn’t mean to say that you cannot register for VAT if you make less than that – you can do it voluntarily. This is important if you make a lot of purchases, because you can claim back the VAT you pay on those.

Paul says: “If you’re a VAT-registered business, you have to be declaring the amount that you owe the Inland Revenue on a quarterly basis.”

You kick off the process by registering for VAT. You will have to submit a return via the HMRC service, or use accounting software that is HMRC-recognised, which you can use to send your VAT return directly. You must pay your VAT bill electronically, with direct debit being the most popular.

Managing corporation tax

Limited companies pay corporation tax, the rate of which is consistent in the UK at about 20% of profits. You need to take advice from an accountant when you start paying corporation tax as are there are several ways you can reduce your tax burden and professional help is vital.

Refreshing view on tax obligations

Rob Higgs is a mechanical sculptor from Cornwall. He makes sculptures out of mainly rusty bits of junk and all sorts of metal and sells them around the world. His creations fall anywhere between sculpture, art and science.

As for how to understand your tax obligations, he has a refreshing view that will work for some businesses, but not all.

He says: “I try to keep my understanding to a minimum of what I need to know about the accounts because I’m a limited company. I’m legally obliged to have an accountant to back up my figures, so he does the limited accounts.

“I do my VAT returns and sign whatever page he says whatever divides have been issued, but I don’t particularly understand that, or want to spend the time.”

Rob prefers to offload much of the worrying about tax and his obligations to his accountant, thereby allowing him more time for his business and his family. And what’s wrong with that?

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.

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