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It’s not the most exhilarating thing in the world. But once you’re set up, it’s just a matter of accounting and submitting your returns.
You’ll need to register for taxes before you begin trading, which involves buying, selling, renting a business property, advertising or employing someone. And know which taxes you're liable for, when you need to register, and when the payments are due.
Not all taxes apply to all businesses. For example, accounting and paying VAT is only mandatory for businesses with a VAT-taxable turnover of over £85,000.
This guide covers when to register for taxes and how to plan and account for them.
Tax types explained
Corporation Tax (CT)
Corporation Tax is levied on the profits of your company. Most businesses are automatically registered for CT after incorporation.
If that's not the case, then businesses must register after the fact within three months of trading. HMRC will then send a letter to your company's registered office with your Unique Taxpayer Reference (UTR).
A UTR is a unique 10-digit number HMRC uses to identify your company. Keeping this UTR safe is paramount, as you'll need it for all future dealings with HMRC.
The rate of CT varies depending on your company's profits and changed in April 2023 (and may change again). The 2023 to 2024 rates are:
- Taxable profits above £250,000 are subject to an upper limit of 25%.
- Taxable profits of £50,000 or less are subject to a lower limit rate of 19%.
It’s your responsibility as the business owner to calculate, pay, and report CT, which involves filing a Company Tax Return.
Value Added Tax (VAT)
VAT is applied to most goods and services bought and sold for use or consumption. VAT rates vary, and some goods are ‘outside the scope’ of VAT, so checking what you need to charge and reclaim VAT-wise is essential.
If your company's VAT taxable turnover – the total value of everything you sell that isn't exempt from VAT – is more than £85,000 in a 12-month period, you're legally required to register for VAT.
However, even if you're not legally required to register for VAT, you can choose to do so voluntarily.
Voluntary registration can be beneficial if you sell to other VAT-registered businesses and ant to reclaim the VAT or if you want to boost your company's profile by showing your customers that you're VAT registered.
Registering for VAT involves telling HMRC about your turnover, your business activity, and other business details. After registering, you'll be sent a VAT registration certificate confirming your VAT number and when you'll need to submit your first VAT Return and payment.
Pay As You Earn (PAYE)
If your company employs staff, you must set up a PAYE scheme. PAYE is HMRC's system to collect Income Tax and National Insurance contributions from employment income.
As an employer, you'll deduct tax and National Insurance contributions from your employees' wages or occupational pension before paying them their wages or pension.
Registration involves providing HMRC with information about you, your business, and your employees. You can register up to two months before paying your employees, so it’s vital to prompt here if you intend to employ people.
Company directors and shareholders typically need to file a Self Assessment tax return to report income which isn’t taxed at source.
You can register for Self Assessment online on the HMRC website. Once registered, you'll receive a letter with your Unique Taxpayer Reference (UTR) and instructions to activate your account.
After activation, you'll be able to file your tax return, pay your tax bill, or claim a refund online.
Accounting for and submitting your taxes
Meeting tax obligations can feel daunting. However, with a solid plan in place, it’s totally possible to keep on top of your taxes from the outset. From there, it’s a matter of tracking business activities to ensure you’re aware of any new tax responsibilities.
Let's discuss how to account for and submit different forms of business taxes.
For CT, you’ll need to determine how much profit your company has made for each accounting period and then calculate how much tax is due on that profit.
An 'accounting period' is typically 12 months long, aligning with your company's financial year as covered by your annual accounts.
As a business owner, it's your responsibility to calculate, pay, and report this tax. This involves several steps:
1. Calculate your company's profits
Take your company's total income and deduct allowable expenses and allowances. The result is your taxable profit.
2. Apply the Corporation Tax rate
The rate you use depends on the amount of profit your company made in the financial year. From 1 April 2023, the small profits rate (19%) applies to single companies with profits of less than £50,000, and the main rate (25%) applies to single companies with profits of more than £250,000.
3. Calculate your Corporation Tax
Multiply your taxable profit by the CT rate. The result is the amount of CT your company owes.
Once you've calculated your CT, it must be paid before your Company Tax Return is due. The payment deadline is usually 9 months and one day after the end of your accounting period.
For example, if your accounting period ended on 31 March, you'd need to pay your CT by 1 January the following year.
Value Added Tax (VAT)
Accounting for and paying VAT is slightly different. Once you're VAT registered, you must submit a VAT Return to HMRC, usually every 3 months (what's known as your 'accounting period').
A VAT Return records several things:
- The total sales and purchases your company made during the accounting period.
- The amount of VAT your company owes on sales.
- The amount of VAT your company can reclaim on purchases.
- The total VAT refund from HMRC if your company is owed one.
By the deadline for submitting your VAT Return, you must also send the VAT you owe from your sales. If you can reclaim VAT, HMRC will usually pay your refund within a few weeks of receiving your VAT Return.
VAT-registered businesses are required to account and pay for VAT digitally via HMRC’s Making Tax Digital (MTD) scheme.
Pay As You Earn (PAYE)
Operating PAYE as part of your payroll involves calculating and deducting the tax and National Insurance contributions due from your employees' wages each pay period.
These deductions must be sent to HMRC on or before each payday, usually with the help of payroll software to automate calculations and reporting.
The frequency of these payments to HMRC depends on the size of your payroll and the scheme you're on – you could be paying monthly, quarterly, or annually. If you usually pay less than £1,500 per month, you typically pay quarterly instead of monthly.
For Self Assessment, you're required to keep accurate records of your income and expenses throughout the tax year. You then use these records to complete your tax return. The tax year runs from 6 April one year to 5 April the following year.
Your Self Assessment tax return must usually be submitted by midnight on 31 January following the end of the tax year. So for the tax year ending 5 April 2023, for example, you'd need to file your tax return and pay any tax owed by midnight on 31 January 2024.
It's advisable to start the process well in advance of the January deadline, especially if you’ve not registered yet.
Ensuring you keep thorough records throughout the year will make the process of filling in your Self Assessment tax return more straightforward. HMRC charges penalties for late tax returns and payments, so stay on top of Self Assessment deadlines.
Tips for handling taxes
Managing your tax obligations is crucial to running a successful business. Staying on top of responsibilities from the start provides the firm footing required to grow your business without delay or complications.
Here are a few pointers for efficiently handling your tax responsibilities.
1. Understand your obligations
Quick recap: CT applies to all limited companies, whereas VAT, PAYE and self-assessments only apply in specific circumstances.
2. Keep accurate records
Maintaining accurate and organised records is a legal requirement and makes your life easier when it's time to calculate and submit your taxes.
Keep track of all invoices, receipts, expenses, and bank statements. This is considerably easier if you maintain a separate business bank account (and this is typically considered mandatory for limited companies).
Consider using accounting software to automate this process and ensure you have real-time access to your financial records.
HMRC’s Making Tax Digital scheme now requires all VAT-registered businesses to digitally account for and submit their taxes through HMRC-approved software. This is set to expand to Corporation Tax in the future.
3. Plan ahead
Cash flow management is critical for small businesses. Unexpected tax bills can disrupt your cash flow, so put money aside to cover your tax bills.
4. Use available allowances and reliefs
There are many schemes for simplifying tax accounting and streamlining operations for smaller businesses. Moreover, tax relief schemes and allowances are designed to cut taxes for certain activities.
For instance, you can claim allowances for equipment and machinery used in your business under the capital allowances scheme.
VAT schemes, such as the Flat Rate Scheme, are designed to simplify VAT reporting and potentially save you money.
5. Stay up-to-date.
Tax laws, allowances and rates frequently change. April 2023 ushered in major changes for Corporation Tax, for example. It's essential to stay up-to-date with changes to meet your obligations and avoid paying more tax than necessary.
6. Consider hiring a professional
Tax can be complicated, and mistakes can be costly. Hiring a tax advisor or accountant could prevent future headaches and free up your time so you can focus on running the business. After all, they're the experts in this space!
If you're still with us so far, kudos! Tax is not a thrilling topic and there's a lot to take in. To help you understand what tax obligations look like in practical terms, here is a hypothetical example.
Tax case study: Tom, the tech entrepreneur
Let’s break down tax obligations for a new founder in the tech industry. Our example, Tom, is an ambitious tech entrepreneur who has just launched an app development company. Operating as a limited company, his team designs and develops mobile apps for clients.
Tom needs to register his company for taxes. After incorporating his business, he received a letter from HMRC containing his company's Unique Taxpayer Reference (UTR).
Based on his projections, Tom's company is set to be profitable from the start. Therefore, he promptly registers for CT within three months of starting his operations to avoid any penalties.
Tom's business model anticipates his taxable revenue to surpass the VAT threshold of £85,000 within the first year of operation. As a result, he registers for VAT. This complies with the law and allows him to reclaim VAT on eligible business expenses, ultimately reducing his business costs.
Tom's team is small but growing. He registers as an employer with HMRC and sets up a PAYE system. This allows him to deduct the correct amount of income tax and National Insurance contributions from his employees' wages.
As a company director, Tom has income not taxed at the source. He registers for Self Assessment, which requires completing a yearly tax return. This will detail his income and capital gains and enable him to claim tax allowances or reliefs.
Accounting and submission
With all registrations in place, Tom now focuses on the ongoing task of accounting for and submitting his taxes.
- He knows he must pay his CT bill before his company's tax return is due, typically nine months and one day after the end of his accounting period.
- Being VAT registered, Tom must typically submit a VAT return every three months.
- Tom sends taxes to HMRC through his PAYE system every time he pays his employees. He integrates this process with his payroll software to streamline operations.
- Lastly, Tom is aware that his Self Assessment tax return is due by midnight on 31 January following the end of the tax year.
Get it sorted
Registering for tax may seem tedious, but think of it as one more step towards establishing and growing your business. Once you’re set up and build a solid, dependable tax routine and accounting strategy, it’ll become second nature.
And with strong foundations, your business will be in the best possible position to do great things.
Our platform streamlines the process of getting your startup off the ground with a guided incorporation flow, co-founder prenups and access to essential business document templates.
And when it comes to rewarding your growing team with shares and getting your cap table in shape, we can help with that too. Book a free consultation with an equity consultant to see what Vestd can do.