Business & Company Tax

  Introduction - shareholders and directors of new business start-ups need to educate themselves about the tax implications of running a new business.  Nobody likes form filling, calculating or paying tax, yet we all accept that the country needs to fund its spending priorities through the tax system.  Tax is inevitable and its impact on profitability must be addressed from the very outset.  Failure to take advantage of any allowances and special awards offered from the government is heresy. With this in mind, the following article provides an overview of the types of UK company tax most organisations (and the controlling Director/ shareholder owners), will need to calculate and play on a regular basis.  It is very important that business owners seek professional advice from a regulated tax accountant with regard to the topics highlighted below...

  Choosing the Appropriate Company Legal Structure - the goal of business owners should be to minimise the company tax bill, without letting the tax system's rules and regulations dictate the overall shape of the company structure or behaviour of its owners.  Tax is just one aspect of understanding the overall profitability and day-to-day business finances of an enterprise, and so shouldn't become the overriding factor when choosing the legal form of the company to create.  With this in mind, there are different tax rates and thresholds depending on whether the company is a sole trader or partnership or limited liability company.  For risk takers who want to maximise their earnings potential but are prepared to risk losing their personal assets (such as their home), in the event of business failure, a sole trader status may be more appealing.  For people who want to separate the liabilities of the company from themselves, setting up a limited liability company, (with themselves as a director and shareholder), may seem more of a safe bet. There is also a privacy issue to consider, in that some people may not want their shareholdings and personal details displayed publicly on companies house; all private limited companies must complete an annual return and send it to companies house in Cardiff. This includes a signed set of company accounts. 

  Corporation tax - in the United Kingdom, all companies must file an annual corporation tax return (form CT600) to the Inland Revenue. Businesses that make a profit must pay corporation tax following the annual calculation of company profits for the previous 12 months.  Failure to declare and pay corporation tax, may result in financial penalties. The rate of corporation tax is a percentage of profit and varies according to the size of the company profits.

  Value Added Tax (VAT) - VAT is a tax on the sale of goods and services traded between businesses and /or consumers in the United Kingdom and from countries in the European Union. VAT can be notoriously complicated to unravel for first-time entrepreneurs. Small businesses typically see little added value to their enterprise from VAT and perceive it as nothing more than a tax collection exercises on behalf the government.   In simple terms, VAT is the difference between the values of sales (input tax) minus the value of purchases (output tax).

The rate of VAT varies according to the product or service and is generally thought of by most people as being 17.5%.  Yet there are actually three classes of VAT; standard rate (17.5%), reduced rate (5%) and zero rate (0%). The rate applied to each product or service depends upon its definition, according to an agreed rating structure for the products and services. Sellers of goods and services are legally required to add on VAT on to the cost of the sale. Some products and small business services are exempt from VAT such as insurance, credit, charity fund raising and some member subscriptions.  Therefore, start-up businesses that are thinking about registering for VAT should check with the Inland Revenue to get a written ruling regarding the relevant rate that applies to the products or services they are proposing to market or sell.

The basic process of VAT can sometimes appear confusing.  The amount of tax must be calculated and paid to the HMRC at the end of each quarter.  Every three months, all VAT registered businesses must complete a VAT form and return it to the Inland Revenue and Customs.  On this form business must declare what they have charged their customers, what their suppliers have charged them as a business and the amount of VAT owed to HM Revenue & Customs. If any monies are owed, the VAT payment must be made within one month of the end of the tax period stated on the VAT form.

Businesses that sell more than the minimum sales threshold (which varies over time) must register to charge VAT. Registration can be undertaken by completing a simple VAT registration form.  Following approval, the start-up business will be allocated a VAT registration number.  Businesses that do not meet the minimum sales threshold (currently £67,000 2008/9), may choose to register the VAT anyway, in order to reclaim the 17% VAT on business expenses.  Registration in itself means that businesses are required to publish their VAT registration number on each invoice produced.

  Pay As You Earn (PAYE) Deductions - it is probable you will have to make PAYE payments to the Inland Revenue, if you are receiving a salary or wage as a director of the company, or employing staff.  New business start-ups need to register as an employer in order to receive the appropriate forms with their unique company employer number.  Even if the director is the sole shareholder and sole employee of a limited company, he must still register himself for PAYE via the New Employers Helpline.  The company will then be responsible for deducting income tax and National Insurance Contributions from its employees in order to pay it to the Inland Revenue on a quarterly or annual basis.

  NIC (National Insurance Contributions) - businesses will incur NIC payments, both as an employer and employee. National Insurance was originally created after World War II, by the Labour government of the day, in an attempt to create a welfare state. The original national insurance act aimed to create and fund healthcare, help the unemployed and the sick as well as provide pensions for bereaved families.  Today, national insurance is seen as another tax which employers are responsible for deducting from their employees wages and then paying  to the government. NIC is calculated based on three Government earnings levels:-  the Earnings Threshold (ET), the lower earning limit (LEL) and the upper earnings limit (UEL).  The rate of NIC is therefore a proportion of the income level. It entitles employees to national insurance benefits such as a state pension, jobseekers allowance and healthcare from the NHS.  There are various types of national insurance which apply to different groups of people.  The main types are as follows:-

• Class 1 is standard NIC which is paid by the employer and the employee.

• Class 1A NIC is made by employers who provide 'benefits in kind' such as a company car.  Their contribution must be disclosed on the P11d form.

• Class 2 contributions are usually made by self employed people as a flat rate, either monthly or quarterly.

• Class 4 contributions are usually paid annually (via the Self Assessment process), by the self employed, (those who make a certain amount of profit in a year).

  Dividends - dividends wrote popular alternative to salaries for small businesses where the director is the sole shareholder.  Various governments have taken different approaches to providing incentives to would-be entrepreneurs through the tax system.  The setting of income allowances and tax bands for different levels of dividend income, have been used by governments to influence the behaviour of small-business owners.  Most changes occur annually through the budget where the chancellor sets out the rules and regulations upon which business must pay its tax liabilities in the future. Though most common question accountants get asked by new business start-up owners is "should I pay myself a dividend or a salary?".  The answer to this question lies in the rues of the taxation system, set out by the government of the day, which presently is increasing overall business taxation and making it harder for entrepreneurs to enjoy the fruits of their labour.  In a technical sense,, dividend payment tax is calculated on the distribution of profits to the shareholders.  When the shareholder receives a dividend from a company it comes with the associated tax credit already attached.  This means basic rate shareholders will not have to pay any additional income-tax.  However higher rate taxpayers will have to calculate income tax associated with the dividend received.

  Capital Gains Tax - if the company sells asset at a profit, the amount of game between when it purchased the asset and when it sold it is taxed according to the capital gains tax rules. Recently the government has simplified the system by providing a 18% flat rate for all capital gains such as property and the sale of businesses.  There are allowances and exceptions to the rule, with lower rates being applied for smaller companies.

  Summary of Annual Form Submissions - there are a number of other forms which each limited company last complete at the end of each tax year.    There are financial incentives to file these forms online on the HMRC.gov.uk website, to improve efficiency of the organisation. To be able to file online, businesses must obtain a PIN number following an application.

• P35 employer's end of year return, showing he year's total PAYE Income Tax deductions, National Insurance contributions and recovered statutory payments for all P11 employees, (deadline for sending to the HMRC 19th May).

• P60 is an end of year summary for each employee, showing how much income they have earned and how much tax paid, in the last 12 months.

• P14 employer's end-of-year summary for each employee, (deadline for sending to the HMRC 19th May).

• P11 employer's return of expenses and benefits for each employee

• P11D or P9D return of expenses and benefits for each employee

• P11D(b) employer declaration of return of expenses and benefits

  Keeping Financial Records - make sure all invoices and receipts are filed by logically sections (and by date order), in a ring binder folder.  This will make the end of year audit and accounting process more straightforward and easier to understand.  Details of any monies withdrawn by the shareholders or directors must be recorded and filed away in the companies filing system.  This will mean the accountant can identify different payments, salaries and sundry expenses accordingly.  Underpinning the end of year 'unravelling' of companies paper-based records, can sometimes by a long and complicated task.  The accountant may ask to see copies of business bank statements to check that all cash, cheques, debit and credit card entries are accounted for, and match up those receipts and expenses to the bank statements entries. Keeping well organised tax records it is vital in order to:-

• Understand any historic liabilities which may impact expenses. Remembering what happened last year can sometimes be complicated to unravel a long time after the event and impact the next annual return.

• Comply with the legal duty that all businesses must keep tax records for at least a six years. It is possible that the taxman may audit the business either randomly or because of some anomaly a tax submission.  

• Provide historic background information to a bank or lender in order to obtain a small business loan and to help reduce and ongoing financial cash flow forecast.  It is therefore vital that businesses keep copies of all invoices that have been sent out, as well as copies of expense receipts from business purchases.  Even if these are for small amounts, it is important to file these way for the end of year calculations.  This ensures that all 'allowable the expenses' can be properly justified and help to to minimise 'taxable profit' accordingly. 

  Minimising Business Taxes - critics have accused some tax accountants of exploiting loopholes at the expense of the taxpayer (using tax rules in a way different from what they were designed to do).  Advocates for avoiding tax liabilities point out that the rules were created by the government in the first place as incentives to motivate entrepreneurial flair and risk-taking. Regardless of the arguments for against, the following examples are some simple steps small business owners can take to avoid paying unnecessary high taxes.  It is vital that any plan designed to minimise tax is first recommended in writing by a qualified tax accountant, who is in the employ of the business.

• Keep all receipts - keep paper copies of all business expenses and receipts, to ensure that all allowable business expenses are maximised and hence taxable profits minimised.  If you're not sure whether or not an expense item is allowable, keep the receipt anyway so your accountant can investigate its authenticity, as part of the annual accounts preparation;  

• Taxable Losses - remember to document and account for any taxable losses, (which may be carried forward), under certain circumstances, to offset against future taxable profits;

• Employer pension contributions - by making a regular pension contribution to the pension, allowable expenses goes up causing taxable profit to go down.  Some self invested pension schemes (SIP) even allow the purchase of commercial property by the business (which may even be used as a business premises). This would have the effect of reducing office rental overheads, while your pension grows tax efficiently;

• Rollover Relief - by reinvesting profits from the sale of one asset into the purchase of another asset, within three tax years, the impact of capital gains tax may be reduced or even eliminated;

• Use Up all Writing Down Allowances - if you are purchasing capital items (such as computers or cars), it is possible to maximise the proportion of the cost of the asset allowable against tax, in that particular year.  The proportion level depends upon the type of capital item This is known as writing down allowance.

• Use Flexible Benefits - where appropriate to the individual, employees or you as business owner, may choose to receive non-cash benefits, as opposed to a salary.  These may include a company car, gym membership and so on.  The downside of this approach is that these will 'represent benefits in kind' and will need to be accounted and paid for via the P11D.

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