Businesses within the UK, whether they be larger corporations or smaller limited companies, are required to pay tax to HMRC based on the threshold of their annual turnovers.
Levied by the government, the main form of this tax is known as VAT or Value Added Tax. With the risk of heavy financial penalties for evading VAT payments, tax is applicable to most goods bought and sold within, and imported into the UK. The standard VAT rate is 20%, however there is a payable reduced rate of 5% and 0%, as well as tax exempt items such as educational goods and antiques.
Whilst the turnover threshold for VAT is currently £85,000, there are some benefits to registering to pay VAT voluntarily.
For instance, in voluntarily opting to pay VAT, a business can improve credibility with competitors by portraying a higher gross income than they actually accrue whilst being able to reclaim any overpaid taxes and the end of the tax year. Whilst VAT must be paid by business on any goods sold, bought and/or hired, it can also be reclaimed on items bought for business purposes when filing taxes.
The downside to registering to pay tax before you meet the required threshold, is opting into filing paperwork before you have to, such as a quarterly tax return, alongside higher business costs.
However, VAT is not the only tax payment applicable to businesses operating within the UK:
Derived from income and capital transactions, corporation tax is applied to any business registered within the UK, and charges a main rate of taxation of 19% against company profits. However, this is due to go down to 17% as of April 1st 2020.
The Patent Box Scheme allows businesses that sells patented goods or services, to pay tax at a reduced rate of 10% on the worldwide profits of their income.
Businesses can also declare a dividend in order to be paid from the accumulated post-tax profit or their own company.
Whilst we’ve covered the bases in regards to paying taxes as a business, as an employer further costs can be taken from your business in the form of PAYE tax and national insurance contributions.
PAYE Tax, known as pay as you earn tax, means employees have to deduct tax from the salaries of their employees.
National Insurance Contributions:
National insurance contributions are paid by both the employee and employer at a rate of 13.8% of each employee’s gross monthly income.
Understanding tax as a small business can be an overwhelming process. Consolidating all of the costs that affect your bottom line, and taking on the responsibility of that as both a business director and often an employer, can take time to compartmentalise into a system that works month in, month out; so that quarterly or yearly tax returns and employee payrolls become mangeable.
Additionally, learning how to pay yourself as a director of a business, is something else to understand and is not typically established without understanding these other elements.
With this framework, small businesses have a starting point to jump from in understanding VAT and tax in the UK, and seek further financial advice.
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