Part one: Record keeping & Bookkeeping
Part two: Credit, VAT & National Insurance
Part three: PAYE & Credit Control
Tax on Business Profits
If you operate your business as either a sole trader or partnership then you are liable to pay tax and national insurance on the profits of the business irrespective of how much income you take as a salary - usually called drawings. Tax is generally payable in two instalments, these are known as payments on account. Payments of tax are made in both January and July of each year and are based on the previous year's profits.
Limited companies currently pay their tax in full 9 months after the end of the accounting period.
What ever your legal structure it is important to put money aside to pay your taxes. Late payment of tax will always incur interest charges and may lead to legal proceedings being taken if payment is not received at all. To determine what monies need to be put aside to cover your taxes speak to your accountant.
National Insurance
As a sole trader or partnership you also need to make National Insurance contributions.
These fall into two categories:
- Class 2 contributions - these are currently paid as a fixed weekly rate of £2.65 and are usually paid monthly via standing order.
- Class 4 contributions - these are profits based contributions are charged at a rate of 9% of profits subject to exclusions and maximum contributions. Any class 4 contributions due are calculated as part of your Self Assessment Tax Return and will be advised by either your accountant or H M Revenue & Customs.
It is possible to claim either an exemption from or defer payment of these contributions. However, it suggested you speak to either your accountant or H M Revenue & Customs before doing so.
Value Added Tax (VAT)
If your business sales exceed the annual VAT limit, currently £77,000, then you must register for VAT. There are various rates of VAT information on which can be found in more detail at www.hmrc.gov.uk.
You must issue VAT invoices which clearly state your VAT number and VAT details need to be entered separately into your accounts.
If you are required to charge VAT on your sales to customers, you are then entitled to reclaim any VAT you pay to your suppliers, the net amount only being paid to H M Revenue & Customs.
Like all taxes you must register your business for VAT at the right time. Failure to do so will result in a penalty. As a rule of thumb at the end of each month you must look back at your sales for the preceding 12 months, if the income is in excess of £77,000 you must register immediately. If turnover is less than £77,000 but you think that it will exceed it in the coming month, then again you must register immediately. If you are in any doubt contact your local VAT office.
Of course like all taxes there are a number of schemes available to small businesses reduce the administrative burden placed on them. For more detailed information please see the Customs & Excise website or contact your local office.
