Tax Basics for Small Businesses Posted: March 28, 2017 @ 7:47 am

Sole Traders:

If you are practicing as a sole trader you will need to pay income tax on the company profits, this is calculated by completed a Self-assessment at the end of each tax year. You can either complete this yourself or you can hire a bookkeeper or accountant to do this for you.

If you are self-employed and employed this will not affect your tax code for your employer but you will need to declare all this income and the tax already paid on your self-assessment.

Partnerships:

If you are trading as a partnership one of the members of the partnership will be the nominated partner for tax purposes and will be responsible for submitting the partnerships tax return which will include all details of income and expenses incurred by the partnership as well as how the profit will be divided.

Each partner must also submit a self-assessment in the same way as a sole trader does.

Again, you can do this yourself or hire a bookkeeper or accountant to do it for you.

Limited Companies:

If you register as a limited company, you will need to pay corporation tax on the company profits and file a self-assessment stating the salary or dividends you take from the company. If the company pays you a salary, then you will need to set up appropriate pay roll to process the tax and national insurance implications at source whereas as if you only take dividends this can be handles through your personal self-assessment.

Tax Basics for Small Businesses

VAT:

All businesses with a turnover of over £83,000 must also register for VAT. You then have a few options of which VAT Scheme to operate under.

Standard Scheme – VAT is reclaimed on qualifying purchases and paid on sales and services provided. VAT returns are submitted quarterly and payable quarterly as are refunds due to you.

Annual Accounting Scheme – If your taxable turnover is estimated to be less than £1.35 million next year then you are eligible to use the annual accounting scheme. You can then continue to use it until your turnover exceeds £1.6 million. You pay in 9 monthly or 3 quarterly instalments based on your VAT bill for the previous year or your estimated VAT liability if you are in your first year. You complete one VAT return per year, you then pay what you owe or claim what your owed in one payment This can be useful for smaller businesses as it aids cash flow if you are likely to owe VAT but might be unsuitable if you are likely to be reclaiming VAT.

Cash Accounting - You can use Cash accounting if your taxable turnover for the year is below £!.35 million and can continue to use it until your turnover exceeds £1.6 million. You still need to submit Quarterly VAT returns and this scheme cannot be used the flat rate VAT scheme.

Standard VAT accounting charges VAT at the point the sale is made which may not be the same time the sale is paid for, this is true in companies that offer credit. Cash accounting works differently in that VAT is not accounted for until it has been paid. This can be beneficial to companies who sell on credit but do not buy on credit meaning they can claim the VAT on purchases as soon as they are paid for but don’t end up with a VAT liability for sales that haven’t been settled yet.

There is no need for bad debt relief because if a customer doesn’t pay you, you don’t pay the VAT. If you make most of your purchases on credit this scheme may not be suitable as it may hinder cash flow.

Flat Rate Scheme – If your taxable turnover is less than £150,000 you could opt for a flat rate scheme where you pay a set percentage on your turnover based on the type of business you are operating. This is a more simple approach to VAT and start-ups can take advantage of a 1% reduction in their rate for their first year.

For more information, visit: Linghams.