David Redfern, Managing Director of DSR Tax Claims, provides PMF’s readers with his guide to business taxes for those taking their first steps into entrepreneurship.
With so much to consider when starting a business venture, how to pay business tax will most likely be low on your list of priorities due to its complicated and complex nature.
How you will pay tax will depend on the structure of your business. Depending on your business set up, you may find that you are paying familiar taxes. Sole traders and partnerships will pay taxes on their profits through the Self Assessment system.
David commented, “Self Assessment is the most familiar method of paying tax to HMRC outside of the PAYE (Pay As You Earn) system, which you will be used to if you are paid by an employer. Sole traders and business partnerships pay any income tax and National Insurance by submitting a Self Assessment tax return by the 31st January deadline. HMRC then calculates what is owed and issues a tax bill. In most cases, you will also be expected to complete payments in respect of your following year’s estimated tax bill”.
Entrepreneurs need to register for Self Assessment with HMRC by October 5th following the tax year in which they start their business, so for any budding business moguls starting out in the 2019/20 tax year, you will need to register for Self Assessment by October 5th 2020.
If you have decided that a limited company set up better suits the nature of your business, you will pay Corporation Tax on your taxable profits rather than Income Tax via Self Assessment. Once you have registered your company with Companies House, you will also need to register with HMRC for Corporation Tax, and you must register within three months of commencing business activity.
David noted, “When HMRC refers to commencing business activity, it doesn’t just mean trading – as in buying or selling – it means any activity which has a business purpose, such as employing staff or advertising your business, even if you aren’t actively trading at that point”.
HMRC doesn’t calculate your Corporation Tax bill; you are responsible for reporting your taxable profits to HMRC and paying your Corporation Tax bill based on those profits. Taxable profits include any profits made by trading, as well as profits made from the sale of assets or any investments your company has made.
David added, “As Director of a limited company, you will also be required to submit a personal Self Assessment for your own income from your limited company or any other forms of income you receive. Whilst your Corporation Tax bill is payable in line with the accounting period of your company, your Self Assessment deadline is January 31st as standard.”
In addition to Income Tax or Corporation Tax, your business may be liable to Capital Gains Tax on any gains made on chargeable assets. For sole traders and partnerships, this will be paid as Capital Gains Tax. However, for limited companies that pay Corporation Tax, chargeable gains will make up your taxable profits and be paid for in your Corporation Tax bill.
On this matter, David explained, “Capital gains, or chargeable gains, refer to any profits your business makes on the sale of its assets – whether these are physical assets such as property and buildings, financial assets such as shares or investments, or intangible assets such as your trademark or any intellectual property rights you may own. If you sell any of these and make a profit, you may have to pay tax on that profit.”
For would-be entrepreneurs, as well as the taxes they might be liable to pay, there are also avenues of tax relief that might be applicable to their circumstances. David concluded, “Tax relief exists in order to make legitimate tax efficiencies and shouldn’t be confused with tax avoidance or evasion. HMRC allows a number of tax reliefs which may be applicable to business start-ups, depending on their situation. Limited companies can use capital allowances to lower their Corporation Tax liability by offsetting the costs of capital purchases, and both sole traders and limited companies can offset their losses against their profits, although there are different methods of doing so depending on your business set up. In addition, there are a number of industry-specific reliefs which may apply to your business, such as reliefs for research and development, or for businesses within the creative industry.”
David also advised new business startups to explore their financial options prior to making big decisions on their financial set up.