One of the biggest problems that startup businesses face is that they register or prepare for tax. HMRC do make it relatively easy to register your business online once you have completed a few checks through Companies House with regards to business name. And once you have registered, you can then start looking at tax, what you might need to pay but also any tax credits your business might be eligible for, such as for research and development.
Tax and national insurance
The two basic types of business tax UK currently levy on every type of company is tax and national insurance. Tax is paid on profits while national insurance is paid on profits starting from a lower amount and is paid for employees of the business as well as an employer.
If you are self-employed as a sole trader, then you will pay tax on business profits as well as Class 2 and Class 4 national insurance – employer and employee for want of a different way to put it. When you run a limited company with employees, you must pay income tax through the Pay As You Earn or PAYE scheme and also Corporation Tax as well as national insurance contributions. Depending on the earnings of the business, it may also pay to register for VAT where you submit a quarterly return for payments and receipts of VAT.
The way that you know what tax and national insurance is going to be due when starting a new business UK based is via your bookkeeping. There are lots of different ways to do this from the traditional paper and pen ledger through to simple spreadsheets and onto more complicated account software. But whatever system you use, it should start from day one.
Legally, a business or sole trader much maintain accurate financial records that detail all the money entering and leaving the business. According to Start Up Donut, these records should be kept for at least six years, even if the business stops trading.
The main components of a bookkeeping system include a cash book, a sales ledger, purchased ledger and a wages book. Most of this can now be computerised, although a cash book is often required if the business uses petty cash to buy supplies such as milk and sugar for the office kitchen or occasional office supplies. Some accountancy software can connect to the business’ bank account and automatically record all transactions, allowing you to dictate what they relate to and to exclude any person transactions for a sole trader.
Completing a tax return
Another area that many startups fall afoul of in their first year is completing a tax return. While the self-assessment system makes it theoretically easy to complete the relevant information, see what tax you owe and sort out the payment, the emphasis is entirely on the person completing the form to make sure it is right. If anything goes wrong, you will be liable for the consequences.
For this reason, it can often be a good idea to get someone to either complete the form on your behalf or to double check all the information before submitting it. If the business has appointed an accountant to handle all the bookkeeping issues, then they will deal with this but otherwise, it may be worth seeking a professional for this area.
You can also speak to an expert in tax advice UK rules who can tell you if there are any extras you may be able to claim for or schemes that your business might qualify for that could lessen the tax you need to pay and even get you a tax credit. Examples include machinery, fixtures and fittings for the premises which are claimed as a capital allowance. Money spent to create the business can sometimes also qualify as this type of expense.
Qualifying for R&D tax credit
A perfect example of this is the research and development tax credit scheme the government currently operates. This is designed to give businesses who are working to research and develop things in the area of science or technology a refund of monies paid in this research. The great thing is that the research doesn’t even need to be a success to qualify – but it does need to meet certain criteria to do so.
Again, businesses don’t need to do this alone. There are specialists such as Easy R&D who can look at the work done by the business and advise if it qualifies for the tax credit. If it does, you can claim for expenses such as materials used in the R&D and staff wages when working on these projects. Even a portion of utilities and other expenses can be claimed for and the repayment for small businesses is up to 33% of the qualifying R&D costs.
Registering for VAT
Another big decision that sometimes can affect a startup business in its first year is whether or not to register for VAT. Value Added Tax or VAT is charged on most goods and services in the UK and also on some imported from the EU and outside it. Businesses making more than £85,000 automatically have to register for it.
VAT is something of a cycle – a business pays it on goods bought and charges it on goods sold, for example. The idea is that the two equal out but if they don’t then a business can owe or be owed a payment from HMRC.
There are two main reasons to voluntarily register for VAT if your business doesn’t make this figure. One reason is if customers are predominantly other VAT registered businesses so it makes no real difference whether your business is VAT registered or not. The other is if you often find your business would be in a refund position and by registering, you can recoup this money from HMRC.
Getting the right tax advice is often key for new businesses. It can help understand when you can expand, add new product ranges and try new markets as well as ensuring you are always on top of the amount of tax you will need to pay each year.
Easy R&D have helped hundreds of companies to make R&D tax relief claims. Contact your nearest R&D Consultant to see if you can claim – 0800 195 7516