Our Small Biz, Small Bitez are a collection of posts on specific topics designed to deliver easy to read info which may not be so easy, but are essential that every entrepreneur knows when it comes to starting a business, such as tax and VAT.
In Accounting 101, we demystify all that accountancy jargon so you can take control of your small business finances.
Steven Marsh of Marsdens Chartered Accountants works closely with us at London Small Business Centre providing pro-bono work to our entrepreneurs. We asked Steven to flag up the absolute key essentials you need to know when it comes to the numbers game but without you having to plough through all the plethora of information that’s out there.
Last year we looked at the difference between a Sole Trader and Ltd Company and how to do your own Bookkeeping. Now we’re exploring how to plan for tax.
Why do I need to plan my tax affairs?
The main reasons are to make sure that you are compliant with the tax rules and that you are setting aside enough money to pay your eventual tax bills. If you fail to plan for these then there could be some nasty shocks waiting for you further down the line!
HM Revenue & Customs (HMRC) are rightfully very strict in terms of setting the rules and ensuring that your correct amount of tax is collected on time and if you do not comply, then they will usually take strong action to ensure that you do and can fine you and issue you or your business with hefty financial penalties….so it is in your own interests to plan your tax affairs and make sure that you get them right.
So how must I comply with the tax rules?
The first point to note is that the onus is on you, the taxpayer, to get things right. It is not a valid defence to tell HMRC that you were “not aware” of the tax rules or that you were “going to get it sorted out in the near future”. There are forms that you have to fill in to notify HMRC that you are in business and to let them know your annual profit or loss and there are strict deadlines to be met. Even if you appoint an accountant and your accountant is late in telling HMRC on your behalf or gets it wrong, HMRC will always hold you ultimately responsible!
So the key to complying is knowledge. Knowing what your obligations are and putting them into practice. This would involve sitting down with your accountant if you have one to ensure that you understand what is expected of you and if you do not have an accountant then please carry out your own research. This could include on line research, speaking to HMRC about your obligations and chatting to other colleagues who are in business who have access to an accountant.
What are some common tax planning points?
The list is quite frighteningly long and an article such as this cannot cover them all but some of the most common things you should plan and notify or submit to HMRC include:
•When you have started a new business and the date you commenced to trade.
•When you have a new source of income.
•Completion of your annual Self Assessment Tax Return and if you are a Limited Company, your annual Company Tax Return and Financial Accounts.
•Registering for VAT when necessary, then completing your VAT Return and paying HMRC the VAT by the due date..
•Submitting Payroll Reports to HMRC if you employ any members of staff for whom you have a duty to put on your payroll and paying over to HMRC the resultant staff deductions for PAYE, National Insurance, Student Loans etc.
•Your own tax payments by their due date.
I will be dealing with VAT and Payroll obligations in future blogs.
And how much tax should I set aside?
There is no single answer to this as the various types of taxes and National Insurance have differing rates and they vary depending upon how much money your business makes. But the answer to the question is vitally important, because if you do not set aside enough for your tax and the due date comes along and the tax bill is higher than you were expecting, then you will have an unpleasant issue to deal with.
The best advice I can give to any business owner regarding this point is not to bury your head in the sand and ignore the question….please seek professional advice so that you are fully aware. Do not leave it to chance…and I am a firm believer in the fact that even if you do have an accountant, do not just assume that your accountant will calculate your tax at the end of the year and let you know; they may very well do so, but by that time it may be too close to the date you have to pay it and if you have not put aside enough money it could be too late. So please ask an accountant to run through the differing types of taxes and tax rates so that you can plan ahead in good time.
How can I determine if I am planning my tax affairs properly?
This is especially important if you are new or relatively new to business. I would advise you to do some of your own research initially in order to ensure you are complying with the tax rules and putting away enough money to pay for your various taxes. You can do some initial research on-line and it is a good idea to talk to as many business colleagues or friends that you know in business and ask them for their take on it. You may get some conflicting replies but at least it will give you a good idea.
Then, once you have established the basics as described above it is a good idea to talk to your accountant, if you have one and ask them to give you a “Tax Healthcheck” which will include running through the likely amounts of each tax you will be liable for, along with their due dates and the deadline dates for submitting your Tax Returns and other forms to HMRC….and if you do not currently have an accountant, it may be worth meeting with a small number of qualified accountants and asking them if they will give you a free initial consultation – many do – and posing these questions.
My overriding message here is that to be forearmed is to be forewarned, so please do not leave tax planning to chance…ask the right questions at the outset, make full notes of the answers you are given and put them into practice to make them work for you.
Make a plan to plan!
Tax is a complex subject and the topics discussed in this article are a basic introduction only. You should always seek appropriate professional advice before trying to interpret anything that has been referred to above.
I hope you have enjoyed reading and learned some interesting facts from the articles I have been asked to write on this Blog and as always, if there are any questions, please feel free to contact me through the Marsdens website.
About Steven: Steven is known amongst his many clients and family and friends, as being the accountant who “eats, sleeps and breathes tax and enjoys explaining to clients little known and easy to implement tax gems of advice that are not always publicised or much known about”. Aside from helping entrepreneurs with their businesses, he’s a serious collector of old comics, cigarette cards, autographs, original artwork, but mainly of rare British Queen Victoria and Queen Elizabeth postage stamps and related items.
Remember: Always seek specific advice for your business and your circumstances before you proceed in order to avoid any costly mistakes!