- You have to register for VAT if your turnover is more than £73,000
- There are differences between the payable tax for sole traders and limited companies
- Payroll calculators or outsourcing companies can help with PAYE
- The best way to manage tax is to keep good records
When starting out on your own, tax can be one of the most daunting and confusing areas to deal with. But, if you know what you’re doing, tax doesn’t have to be a headache. We asked James Smith, a Chartered Accountant based in Abingdon, Oxfordshire, to take us through an entrepreneur’s tax basics.
What does a business owner need to know about VAT?
The big question to ask is whether you need to register or not. The answer is that you must register for VAT if your annual turnover is more than £73,000. The more interesting question is whether you can still register if your annual turnover doesn’t reach that figure. The answer is that you can, and companies might want to do this if they are business-to-business and most of their clients are VAT-registered. They can then claim back the VAT on their expenses.
The Flat Rate Scheme can help small businesses pay less by calculating their VAT payments as a percentage of their total VAT-inclusive turnover. Find out more on the HMRC website.
Do your tax responsibilities depend on whether you decide to operate as a sole trader or limited company?
Limited companies have to pay corporation tax, whereas sole traders pay income tax – and the way the tax is calculated varies. Being a sole trader is ideal for both startups and small businesses. Sole traders just fill out a Self Assessment Tax Return, which you may be able to do yourself.
A limited company is more complex and suited to an established business or one with a large turnover. Running this kind of company will probably mean taking proper advice from an accountant, as there is a lot of paperwork. You can make the switch to becoming a limited company if you start off as a sole trader, so don’t feel pressured to form a limited company right away.
How do things change once you take on staff?
If you’re hiring, you need to set up a payroll. HMRC’s New Employer Helpline will help you get started – call them on 0845 607 0143. They will be able to answer any questions you might have if you’re nervous about setting up PAYE (pay-as-you-earn). Most companies pay monthly, but very small ones can pay quarterly.
One option is to outsource this to a payroll bureau, which can be surprisingly inexpensive. There are also online payroll calculators that will work it all out for you if you enter the correct information.
How does the location out of which your businesses operates affect tax?
If you rent an office on the high street, you’ll have to pay business rates, which is like council tax for companies. You may also have to pay for a home office if it’s exclusively used for business.
Do you have any general tips on cutting a tax bill?
The best way to save on tax is to keep good records – if you don’t keep your receipts, you can’t claim on them. Just be organised: good records save tax.
James Smith is the author of Keeping It Simple, which helps new businesses with their tax and record keeping. The book is published by Tax Café.