Small businesses, and the individuals who run them, are subject to a wide array of taxes – from Corporation Tax to National Insurance. This is an overview of the main taxes you will encounter as a small business owner, together with links to our more in-depth guides.
Corporation Tax is a tax on limited companies’ taxable income or profits.
For Corporation Tax, companies have to calculate their own tax liabilities, and are liable to pay the calculated tax to the Inland Revenue without prior assessment.
Payment of Corporation Tax itself is due 9 months and one day after the company’s “normal due date” – usually the last day of your annual accounting period.
The Small Companies Tax Rate is currently 20% (2013/14).
The main rate of Corporation Tax (for profits of £300,000 or more) is currently 23%, and will be reduced to 21% (April 2014) and 20% in the following year. The two rates of CT will be aligned for the first time in decades.
Read more in our dedicated Corporation Tax Guide
Value Added Tax
VAT is a tax on the final consumption of certain goods and services in the home market but is collected at every stage of production and distribution. Most business-related goods and services will therefore be subject to VAT. There are several UK VAT rates, the standard rate being 20%.
Companies should register for VAT if the value of their taxable supplies in a 12 month period is greater than the current VAT registration annual threshold of £79,000 (from 1st April 2013). Businesses should also register for VAT if the predicted value of their taxable supplies in the next 30 days alone is expected to exceed the annual VAT threshold. It is important to remember that turnover is the amount of money going through the business, not just the profit.
All VAT-registered businesses must submit their quarterly VAT returns online, and settle any outstanding tax liabilities electronically.
Read our dedicated guide to Value Added Tax.
Alongside the main VAT rules, some small businesses may be better off by operating within the flat rate VAT scheme which has been running since 2002.
In essence, instead of paying Customs the total VAT charged on invoices minus any input VAT you may reclaim, you charge a fixed percentage of your gross turnover and pay that amount to Customs each year.
Businesses may have to pay Stamp duty for transactions on the transfer of land or interests in land; grants or assignments of leases; and transfers of chargeable securities such as shares in companies.
These are split into two different types of Stamp duty. The first, Stamp duty land tax is applicable if you rent or buy premises, and can catch small businesses out when they are first establishing roots.
The second, Stamp duty reserve tax, may apply when you purchase shares or other securities.
Read our dedicated guide to Stamp Duty.
National Insurance is a deduction from earnings, set up originally to fund various State benefits such as the NHS, the State pension and other welfare-related schemes. In reality, it is just another tax.
Sole traders pay income tax on their business profits (as self-employed individuals). In addition to PAYE (income tax), they are liable to pay National Insurance contributions (NIC’s).
Unlike sole traders, for tax purposes, if you are a director of a limited company, you are an ‘employee’ of the company. You are therefore liable to pay Class 1 NIC’s on your earnings. The limited company is also liable to pay Class 1 NIC’s as your ‘employer’.
During the 2013 Budget, the Chancellor announced that all businesses will be able to benefit from a Employment Allowance from April 2014, whereby they will be able to reclaim up to £2,000 in Employers’ NICs, which represents a significant tax break to businesses with employees.
Read our dedicated National Insurance Guide.
Pay As You Earn is a scheme operated by HM Revenue & Customs to take income tax from employees as they earn it.
If you run your business as a sole trader, then you are self employed and not affected by PAYE. You will self assess your income and complete a tax return.
However if you run a limited company and draw a salary, then you are an employee (even if you are a director). You need to understand PAYE and what your obligations as an employer are. It’s a deeply complicated subject with many rules, and you would be well advised to get professional advice on your particular situation.
You should note that from 6th April 2013, all payroll data must be submitted to HMRC in ‘real time’, rather than simply at the end of each tax year. Ensure that your software provider and / or accountant is aware of these ‘Real Time Information’ changes.
Read our overview of the PAYE Scheme.
Capital Gains Tax
From 6th April 2008, the Government has applied a flat 18% CGT rate on business disposals, however the so-called “entrepreneurs relief” scheme was conceded which applies a 10% rate on business disposals made by business owners – up to a lifetime allowance of £5m (this limit was increased to £10m in 2011).
Read our Entrepreneurs’ Relief Guide
The system of tax relief on investment in business equipment can be complicated. As a rule of thumb, when your business makes a significant investment in capital equipment, you cannot normally set the entire purchase cost against that year’s profits. Exceptions to the rule can include instances when the value of the purchased item is small, or a particular tax relief applies.
The cost of buying more expensive items is written off against company profits over a number of years, using the Capital Allowances System.