If you're starting a business, one of the critical elements to get right is your tax arrangement. Getting your taxes wrong can mean unnecessarily inconveniencing your business by limiting your cashflow, or being hit with a large tax bill when your tax is later correctly calculated.
The first thing to establish is whether your start-up is a limited company, or if you're operating as a sole trader. This can have different tax implications so it's important that you know what you're setting up your start-up as. From there you can deal with the list of taxes that businesses must pay.
Here we take a look at six tax issues to get right:
1. Don’t be afraid to get specialist tax help
The first thing to note is that tax and financial matters can be complicated, especially if you're relatively new to running a business. If you need assistance with taxes, then you should look into it as soon as possible. Feeling secure that you're paying what you should be can put your mind at ease.
“Most new business owners have specialist skills but may not be fully up to speed on tax,” says Oliver Spevack of chartered accountants OS Accounting. “The wider ranging regulations and requirements of starting up a business are something that they hope to learn along the way, but this can be challenging for those without expert knowledge."
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2. Corporation tax
All limited companies are required to pay corporation tax—but it's important to understand the details of the tax to ensure that you're not paying too little (or too much). It's calculated as a percentage of a business’ profit; the money that a business makes after deducting allowances, tax relief, and expenses like salaries.
The current rate of corporation tax is 19%, but this is due to drop to 18% in the financial year starting in April 2020. However, this can change with government policy, so it's important to stay up to date with how much you owe.
You're required to charge Value Added Tax (VAT) on any products or services that your start-up sells—and this applies to the vast majority of products and services in the U.K., although there are a number of exemptions or lower VAT rates depending the specifics.
Businesses can be VAT registered at any time; however, it becomes a legal necessity when your turnover goes above £85,000 per year. VAT is charged at 20% of the price that a customer would pay for the service or product. It should be charged to customers as a separate amount on the invoice that you provide, and then it should be paid on a quarterly basis to HMRC.
4. National Insurance
The next thing to note is relevant to you if your business employs members of staff—in this case you're required to pay National Insurance contribution. This is true for you as the director of the limited company, as you're considered to be an employee of the business. If you're a sole trader you should pay National Insurance Contributions from your income.
Once again this is something that can get a little complicated, with various rates depending on earnings. But it's important that you get this right.
5. Income tax
This is another issue that depends on whether you're a limited company or a sole trader. Sole traders must pay income tax based on the profit of the business when it rises above your personal tax allowance of £12,500. However, as the company director you pay income tax on your salary with the same personal tax threshold.
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6. The available tax incentives
It should also be noted that there are a number of tax reliefs that may be available to U.K. start-ups. The two major schemes that currently benefit start-ups are the Enterprise Investment Scheme (EIS) which offers tax relief on investments in your business. The Seed Enterprise Investment Scheme (SEIS) is aimed at early-stage businesses, with initial tax relief of 50% on investments of up to £100,000 per year.
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