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Small Businesses and Their Tax Responsibilities

Updated on October 10, 2015

Five taxes every small business owner needs to know about

If you run any type of business, you will need to know a bit about taxes, as you will need to pay some at some stage. With the abundance of different taxes and tax rules in the United Kingdom, it can be difficult to know what each tax is, and whether it applies to you. You need to be confident that you are handling everything above board. There is nothing worse than an unexpected fine from HMRC. Nevertheless, whether you hire an accountant or not, you still need to be aware of the taxes you are subject to. A basic understanding is essential. Keeping that in mind, let's have a look at the five taxes that every small business owner should know about.

Business Rates

Business rates is essentially the equivalent to council tax. You will need to pay this type of tax if you have a business that operates from either a rental properties or your own office space. There are several buildings that are exempt from business rates, thus it is worth checking this out before you go ahead and pay. For example, the likes of farm buildings are often eligible for business rates relief. What happens if you run your business from home? Well, as you already pay council tax, you won’t have to pay business rates too unless you have employees working from your home.

VAT

All businesses are subject to VAT if they make sales that account to more than £82,000 per annum. The standard rate for VAT at present is 20 per cent. However, there are some companies that are entitled to a reduced rate, typically of five per cent. It is vital to note that you will need to register your business for VAT.

National Insurance

Next we have National Insurance, which is paid to the government and can be slightly confusing for business owners because there are several different classes of national insurance. Class 1 applies to employees that have a salary that is in excess of £8,060. If this applies, then you will have to deduct NI contributions from your employees’ wages. Class 4 NI applies to businesses that have made more profit than £8,060, and this is worked out as a percentage of the said profit. Class 2 is a weekly contributed for businesses that make more than £5,965, with weekly contributions being £2.80. Thus, whether you pay Class 2 or Class 4 is determined by the amount of profit you make.

Corporation Tax

Corporation tax is currently set at 20 per cent, and all limited companies must pay this rate on their profit. There is no threshold for this tax – as soon as you make a profit you must start paying it.

Income Tax

Last but not least, we have income tax. If you are a limit company, you may pay income tax on any dividends or salary you take from the business. If you are a sole trader, you need to pay income tax on our profits once you have hit the personal allowance rate, which is currently set at £10,600.

Structuring Your Payroll for Efficiency and Competitiveness

It can be hard to stay up to date with the trends in accounting practices, especially if you run a small business. However, this is fundamental if you want to achieve high levels of efficiency and ensure that your business is competitive. Keeping that in mind, let’s take a look at some of the best ways to run your payroll.

Office automation

More and more businesses are embracing the benefits technology brings, and they are automating a lot of their payroll processes so they can enhance efficiency at their business. Day-to-day payroll tasks can now be automated with the right software. This gives you the opportunity to focus on the core aspects of your business that actually make you money.

Non-compliance is costly

With every year that passes, it seems that the government is demanding more and more information from businesses, and because of this non-compliance is proving to be more costly than it ever has been. You need to make sure you handle everything above board. For instance, you now have to provide real-time notifications whenever you pay your employees. By hiring a professional accountant, you can ensure you keep on top of all of this so that you don’t end up having to pay an unexpected fine.

Moving into the Cloud

What does Cloud mean? This means that you use the Internet to run software and store data, which more and more people are doing when it comes to payroll software. This is more efficient and provides greater freedom, as it means your employees can access the system no matter where they are, and they can use any device to do so.

Move to mobile

There is no denying the fact that one of the biggest trends this year is the move to mobile. This is something we are seeing across all businesses and all industries. Nowadays, access to important information and date is available via the likes of your smartphone or tablet, and this enhances efficiency in your finance department. If your employees are going to be handling payroll in this way, it is vital to make sure the presentation is right for a small screen. Therefore, you will need to ensure that interaction is more direct, navigation is different and the display works with a smaller screen.

Integration with other systems

A lot of companies are integrating their payroll system with other software, such as HR systems and banking. This allows for better clarity regarding the overall performance of your business and it allows you to reach higher levels of efficiency. You are now able to access everything online from the same place, and you eliminate work duplication as well.

A guide to PAYE compliance for Intermediaries

The UK government introduced new legislation concerning PAYE, which affected all intermediaries, with recruitment agencies included. An intermediary is an individual or agency that makes arrangements for a person to work for a third party. The new rules mean that all intermediaries now have reporting commitments in regards to non-PAYE employees, and these must be fulfilled every quarter. In instances where you do not operate PAYE on the workers’ payments, you need to return details to the HMRC. While this is required every three months, it is up to you how frequently you send and upload documents.

The new legislation is a clear message from the government that they are cracking down on those who are cheating their way out of paying taxes through reporting as non-PAYE, for example, as self-employed. It is the responsibility of intermediaries to take action and comply with the new rules that are in place. But, how do you go about it? Well, the first thing that needs to be done is that you need to get to grips with the legislation that is in place. There are many ins and outs, and thus it would be wise to book an appointment with your accountant, or if you do not have one, now is the time to invest in fixed fee accountancy services.

Once you have got to grips with the new reporting rules that are in place, the next thing to do is demonstrate proactivity. You need to show that your business is aware of what is required, and that you are taking active steps to make certain that you are compliant. You may think that it is better to hide your head in the sand and act none the wiser if questioned about the regulations, yet this is not advised. You need to show yourself as a credible and trustworthy business, and the only way to do this is to make an effort.

There is no denying that putting in the effort to report all of your non-PAYE employees can be time-consuming. However, failure to do this could bring about much bigger problems, and it is not worth the risk. After all, this is your responsibility, since you have the duty to provide all of your customers with the correct information about the workers you deliver. When it comes to the payment status of workers, you need to supply sufficient information, and failure to do so could tarnish your reputation and you could miss out on business in the future. Why? Well, if you do not provide the proper information to HMRC, then they will treat the client as your worker’s employer for both national insurance and income tax purposes, and, needless to say, this is something your customers aren’t going to be very happy with.

To conclude, if you run an employment agency or any other type of intermediary service, you need to be concerned with the new legislation that is in place. Failure to do this could result in serious consequences for your business.

Employment Intermediaries Report Template

FIELD
OPTIONAL FIELD
FORMAT
Employment intermediary name
 
1 - 120 characters
Employment intermediary address line 1
 
1 - 35 characters
Employment intermediary address line 2
 
1 - 35 characters
Employment intermediary address line 3
Optional
1 - 35 characters
Employment intermediary address line 4
 
1 - 35 characters
Employment intermediary postcode
 
1 - 10 characters
Worker forename
 
1 - 35 characters
Worker middle name
Optional
1 - 35 characters
Worker surname
 
1 - 35 characters
Worker date of birth
Mandatory if no Worker NI number
dd/mm/yyyy
Worker gender
Mandatory if no Worker NI number
'M' for male or 'F' for female
Worker National Insurance number
Mandatory if no 'Worker date of birth' and 'Worker gender'
2 letters then 6 digits then A, B, C, D or a space, eg QQ123456C
Worker address line 1
 
1 - 35 characters
Worker address line 2
 
1 - 35 characters
Worker address line 3
Optional
1 - 35 characters
Worker address line 4
Optional
1 - 35 characters
Worker postcode
 
1 - 10 characters
Worker engagement details where intermediary didn't operate PAYE
 
A' for Self-employed, 'B' for Partnership, 'C' for Limited liability partnership, 'D' for Limited company, 'E' for Non-UK engagement, 'F' for Another party operated PAYE
Worker unique taxpayer reference (UTR)
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B' or 'C'.
10 numbers
Start date of engagement
 
dd/mm/yyyy
End date of engagement
Mandatory if the engagement ended.
dd/mm/yyyy
Amount paid for the worker's services
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
positive value to 0, 1 or 2 decimal places
Currency
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
GBP' or 'EUR' or equivalent conversion
Is this amount inclusive of VAT?
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
Y' for yes or a 'N' for no
Name of party paid by intermediary for worker's services
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
1 - 120 characters
Address line 1 of party paid by intermediary for worker's services
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
1 - 35 characters
Address line 2 of party paid by intermediary for worker's services
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'A', 'B', 'C', 'D' or 'E'.
1 - 35 characters
Address line 3 of party paid by intermediary for worker's services
Optional
1 - 35 characters
Address line 4 of party paid by intermediary for worker's services
Optional
1 - 35 characters
Postcode of party paid by intermediary for worker's services
Optional
1 - 10 characters
Companies House registration number of party paid by intermediary for worker's services
Mandatory if 'Worker engagement details where intermediary didn't operate PAYE' is 'D'.
2 letters and 6 numbers, or between 6 and 8 numbers

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    • tirelesstraveler profile image

      Judy Specht 22 months ago from California

      Very interesting. I don't think I will be starting a business in the UK anytime soon. US rules are confusing enough.