Business Tax & Company Tax

Choosing the Appropriate Company Structure - The goal of business owners should be to minimise the company tax bill, without letting the tax system's boundaries dictate which company legal framework to adopt. There are different tax rates and thresholds, depending on whether the company is a Sole Trader or Partnership or Limited Company. So your first action should be to meet with a qualified accountant, to discuss which kind of company formation is most appropriate to your needs. This in turn, will lead to questions related to how the tax system will affect your future business operations. The main areas to examine are likely to encompass the following business taxation issues...

Corporation Tax - In the United Kingdom, all companies must file an annual corporation tax return (form CT600) to the Inland Revenue. Following an annual calculation of company profits for the previous 12 months, businesses that make a profit must pay Corporation tax. The rate of corporation tax is a percentage of gross profit, and varies according to the amount of declared profit.

Value Added Tax (VAT) - VAT is a tax on the sale of goods and services traded between businesses and /or consumers in the UK and from countries in the European Union. In simple terms, VAT is the difference between the values of sales (input tax) minus the value of purchases (output tax). There are three classes of VAT; standard rate (20%), 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 all products and services. VAT registered sellers, are required to add on VAT on to the cost of each sale.

Some products and services are exempt from VAT (such as insurance, credit, charity fund raising and some member subscriptions). Therefore, owners thinking about registering for VAT, should check with the Inland Revenue to get a written ruling. This ruling will dictate the rate that applies to the products or services the applicant is proposing to sell.

Every three months, all VAT registered businesses must complete a VAT form online submit it to the Inland Revenue and Customs. In principle, each 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 must register to charge VAT. Registration can be undertaken by completing a basic 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 £73,000 of cumulative sales), may choose to register the VAT anyway. This allows them to retrieve the 20% VAT on business expenses. Businesses that are 'VAT registered', are required by law to display their VAT registration number on each invoice they produce.

Pay As You Earn (PAYE) Deductions - If you are receiving a salary or wage as a Director of the company, or employing staff, it is likely you will have to make PAYE payments to the Inland Revenue. 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 also the sole shareholder and sole employee of the company, he must still register 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.

National Insurance Contributions (NIC) - Businesses will incur NIC payments, both as an employer and employee. Employers are responsible for deducting National Insurance Contributions (NIC) 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 calculated as a percentage of the income level. There are different types of National Insurance which relate 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.
• 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).

Tax on Dividends - Dividends are a popular alternative to salaries for small businesses, where the Director is the only shareholder and employee. The setting of income allowances and tax bands, is used by the Government to influence the behaviour of small-business owners. Most changes occur annually through the budget. 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 is highly dependant upon the short to medium term financial objectives of the controlling shareholder. Dividend payment tax is calculated on the distribution of net 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 an asset at a profit, the amount of gain between when it purchased the asset and when it sold it, is taxed according to the capital gains tax rules. It is charged at a flat rate of 18% for all capital gains. There are allowances and exceptions to the rule, with lower rates being applied for smaller companies.

Summary of Annual Forms and Submissions - There are a number of other forms which every limited company must complete by the end of each tax year:-

• P35 employer's end of year return, showing the year's total PAYE Income Tax deductions, National Insurance contributions and recovered statutory payments for all P11 employees.
• P60 is an end of year summary for each employee.
• P14 employer's end-of-year summary for each employee.
• 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 - To simplify the end of year accounts, it is essential to keep well organised paper-based records. Your 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. Make sure all invoices and receipts are filed chronologically and in logical sections. This will help make the end of year 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. So Keeping well organised tax records it is vital in order to:-

• Remember and understand what historic liabilities exist that may create unexpected outgoing in the current fiscal year.
• Comply with the legal duty that all businesses must keep tax records for at least a six years. It is possible the taxman may investigate the business.
• 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.

Minimising Business 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. The following examples are some straightforward steps owners can take to minimise their business tax bill:-

• 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 are not sure whether an expense item is permissible, keep the receipt anyway. This will give your accountant a chance to inspect its validity, 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 regular pension contributions, allowable expenses go up causing taxable profit to go down.
• 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 - employees may choose to receive non-cash benefits, as opposed to a salary. These may include a company car, gym membership and so on.