Published on May 24th, 2014 | by Falcon0
Understanding taxes for your small business
The vast majority of small business owners are busy people, who have to keep all kinds of plates spinning in order to ensure their organisation continues to operate efficiently and profitably. One issue that many lose sleep over is their tax commitments. Tax can be a real minefield, especially for newly formed companies, so it’s essential for both small business owners and sole traders to keep on top of their affairs and understand their responsibilities.
HMRC’s own research recently found that small businesses ranked their first tax return as the second biggest challenge they faced when starting up. It was also reported that 49% of business owners who said they understood the current system were still worried that they may have made mistakes in their returns. 64% of those interviewed ranked tax as too complicated to manage alone, so brought in at least some external help.
It goes without saying that tax management can be incredibly time consuming and complex, especially if the business is to avoid paying over the odds, while also avoiding costly disputes and penalties. Fortunately, small companies can outsource their accounts to a specialist company or accountant to ensure all their taxes due are paid correctly and the company is completely tax efficient. Most people would recommend taking this course of action, as tax legislation is constantly changing and difficult to keep on top of. Taking this course of action also frees up the company’s staff to focus on core issues, without worrying about administrative distractions. External companies are also available to help with disputes and situations where companies become involved in a tax case of some description. These tend to be incredibly technical and confusing and are best left to professionals, who understand the system inside out.
The key tax obligation most limited companies have to meet is corporation tax. This is charged on all taxable profits and small businesses currently have to pay a rate of 20%, which covers companies with annual profits up to £300,000. The ‘main rate’, which starts at profits of £1.5 million is currently set at 23%, although that will be dropping to 21% in 2014. Business owners also need to consider VAT, employer’s national insurance contributions and their own income tax commitments. Various reliefs that they may be able to benefit from should also be added to the equation, such as Entrepreneur’s Relief.
One of the most common challenges businesses face is understanding what records they need to keep. The law simply says companies must keep all the records they need to complete their tax return accurately. To calculate corporation tax effectively, it’s important to have a record of any company assets, liabilities, expenditure and income from the past financial year. Stock must also be counted and considered when completing a tax return. Having an administrative staff member who is in charge of record keeping is perhaps the most effective solution. They will be responsible for filing all records, such as invoices and bank statements, in an organised and easily accessible manner as soon as they are received. Staying on top of filing and record keeping is essential, otherwise it can become an overwhelming problem that is increasingly difficult to resolve.