Tax Issues for a Startup Business
Have you recently incorporated a business or just started a new business? If the answer is YES, then it is important that you are made aware of the key tax consequences/issues that you may face going forward.
Here we will outline a number of the key tax areas which you will need to consider whilst running your new multimillion (hopefully) pound business.
The obvious starting point is Corporation Tax. This is a tax on your company’s profits for it’s financial year. When looking at your annual income and expenses, it is important to separate those expenses that could be deducted against your profits from those that cannot be deducted.
HMRC do not allow you allow all of your expenditure to reduce your taxable profits as they have strict rules on what can be deducted. The phrase which they typically use is: ‘is this expenditure incurred by the business wholly and exclusively for the purpose of business?’. If not, then it is most likely that the expenditure that the business incurs will not be allowable.
It is also common for HMRC to not allow businesses to deduct those expenses that contain an element of duality (i.e. a business trip expense that was incurred but contained elements of personal and private use as well). In these situations, HMRC will typically not allow a deduction for this expense.
A list of common disallowable expenses are:
- Depreciation on capital assets – as company’s can control their depreciation policies and therefore would be able to manipulate and accerlate the depreciation figure on an annual basis, HMRC do not allow this (NOTE: Companies can benefit from Capital Allowances [LINK] instead, which is the ‘tax equivalent’ of depreciation.
- External (or third party) Entertaining – although many see this as vital for the business and winning new business, HMRC’s view is that this is not wholly and exclusively (W&E) for the purpose of trade.
- Personal Expenses (for example professional fees in relation to your self-assessment tax returns) – as this is a personal item of expenditure, this will fail the W&E test and as such is not allowable (also see the note re duality of purpose above).
This is by no means an exhaustive list of disallowables.
Once all expenses have been analysed and correctly allowed or disallowed within your tax calculations, this will leave a figure taxable to corporation tax. At present, the rate of tax is 20% (however this is set to be reduced in the coming years).
Once the Corporation Tax Liability has been calculated, the due date for the payment of this tax is 9 months and 1 day after the end of the accounting period in question. For example, if you have a 31st December 2015 Year End, the payment of the tax liability in relation to this year end will be payable to HMRC by no later than 1st October 2016.
Similarly, the submission of the tax return is due 12 months after the end of the accounting period in question. Further to the above example, the return will be due for filing by 31st December 2016. It should be noted that HMRC now no longer accept paper submissions of Corporation Tax Returns.
If however, during the opening years of trading a business is not in a profitable position, the trading losses that are accumulated within the business are not all bad news. This is because HMRC allow business to carry forward these trading losses to be offset against future trading profits (from the same trade). This will reduce any future profits and as such, reduce the amount of tax payable going forward. It must be noted that there are specific times when these losses may be ‘lost’, this is particularly true is there is a significant break in trading, or a major change in the nature of the trade.
PAYE and NICs
Is your business going to be hiring employees? If so, it is highly likely that you will need to consider operating a payroll.
Whilst operating a payroll, your employees are likely to be paid on a monthly basis (weekly or daily if your industry requires you to do so). This will be in accordance with their employment contracts that are required when you hire an employee.
As such, rather than each employee receiving a gross salary and then paying HMRC an amount of money in PAYE and NIC (Class 1 Primary) on their own accord, HMRC view all employers as ‘collectors’ on their behalf. In essence, this reduces the risk of HMRC not receiving the correct taxes from individual employees.
By operating a payroll scheme, as the employer, you will deduct the necessary PAYE and NIC taxes from each employee’s GROSS salary and once you have deducted these amounts, you will pay them the NET amount.
The amount of PAYE and NIC that you deduct is then paid accross to HMRC each month. HMRC require employers to make this payment by the 19th day of the following month of the payroll month in question (however, they do allow an additional 3 days on top of this if the employer pays electronically). If however your quarterly PAYE and NIC liability is less that £1,500 per quarter, it is possible to elect to make payments on a quarterly rather than monthly basis.
There is an additional NIC which employers pay on individual employee’s salaries – this is called Employers ( or Class 1 Secondary) NIC. This typically reflects the additional cost of employing an individual as this is an additional 13.8% NIC charge on the employees gross salary. Again, this is paid over to HMRC with the other PAYE and NICs that are calculated on an individuals GROSS salary.
It should be noted that if you as a company provide benefits and expenses to employees, there may be additional PAYE ad NICs (Class 1A NICs) payable on an annual basis.
Value Added Tax (VAT)
There is a common belief that as soon as you operate a business, you are required to charge VAT on all of your sales – this is incorrect!
Since it’s inception to UK tax law in 1973, VAT has become one of the most complicated areas of tax. However, to keep things simple, we will just look at the basic ins and outs.
VAT is only chargeable by a UK VAT Registered business.
In the UK, as mentioned above, not all business will need to charge VAT. At present, if a business is to exceed the VAT registration threshold, they are then required by law to register for VAT. This threshold is currently set at £82,000.
Just to keep things simple, HMRC have 2 tests to determine whether a business has exceeded the VAT registration threshold and depending on which test is passed. Although these won’t be discussed in detail here, the two tests are the future test, and the historic test.
Once taxable sales have exceeded this threshold, the business must register immediately with HMRC for VAT and then from the date of registration, must charge VAT accordingly and complete the necessary VAT requirements set out by UK law.
If however, your taxable turnover does not exceed this threshold, your business may wish to consider voluntarily registering for VAT (NOTE – you may only be able to register for VAT if you are genuinely making taxable supplies whether these are standard, reduced or zero rated supplies. If you are making exempt supplies, you will not be eligible to register for VAT).
As a VAT registered business, there are a number of advantages and disadvantages.
- Your business will now be able to reclaim VAT on any purchases made in relation to your taxable supplies.
- By being VAT registered, the size of your business is now disguised to external consumers and investors.
- Voluntarily registering will avoid the risk of late registration at a later date.
- Your business will now need to make sure that you correctly account for VAT on all sales invoices going forward.
- Your business will now have to file quarterly (or monthly if you elect to do so) VAT returns to HMRC and pay the associated VAT across to HMRC.
- All in all, most business will need to carefully consider their VAT position as this is the area which is most likely to cause businesses the most confusion.
Why is personal tax a company issue? Although not directly a company issue, I agree, it is important that you are made aware of this requirement.
Most new business owners and directors are unaware that by becoming a director of a UK Limited Company, it is a requirement by law to file a UK self-assessment tax return (this however is only one of the main criteria which requires an individual to file a self-assessment tax return).
Within the self-assessment tax return, directors will need to declare all applicable sources of income and gains (UK and outside of the UK depending on whether you are resident or not), and in addition to this, your directorships to UK Companies.
These are simply a few of the key areas of tax that you will need to take into consideration when incorporating your new business and whilst you continue to operate. Arranging a meeting or call with a specialist tax adviser is highly recommended so that you understand in more detail the particulars of operating a business and ensure you have covered all areas going forward.