Tax Success: Five tips to prepare small businesses for the next tax season

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Date: 7 April 2022

Person calculating tax on calculator

As a business owner, getting to grips with your tax responsibilities requires you to be one step ahead. Preparing your small business now for upcoming tax deadlines means higher levels of accuracy, and fewer sleepless nights. In short – it's in your best interests to prepare for those upcoming deadlines.

Remember, different taxes have different schedules and deadlines, but the last tax year ran from 6 April 2021 to 5 April 2022. If this is your first year of business, then the following information can help you feel better prepared for the upcoming tax season.  

What is corporation tax?

Corporation tax is based on a company's profit. To calculate this, you must compile all your annual data relating to income and expenses. To complete this, you need to bring together all your figures and submit them into a CT600 form. This then finalises how much your business owes in tax, as well as if you need any relief on expenses. This is a legal requirement and there are specific deadlines and penalties for failing to file on time.

However, corporation tax isn't the only thing you need to think about. Here's a list of the taxes that may apply to your business:

  • Corporation tax - these are taxes on your company profits. This must be paid nine months and one day after the end of your accounting period. Your accounting period is most commonly your financial year.
  • National Insurance - this is taken via your income. The self employed pay this at the same time as self-assessed tax via a self assessment tax return. The deadline for this is the 31st of January following the end of the tax year. Employers and employees pay their NICs automatically via payroll.
  • Income tax - Employees pay income tax via PAYE (Pay As You Earn) and it is taken directly from your wages. The rate depends on what salary bracket you fall into. The self employed report their income and expenses via self assessment and pay the tax at the same time as national insurance: 31st of Jan, the year after the end of the tax year.
  • VAT - Value Added Tax is paid by VAT registered businesses. The registration threshold is £85,000, but businesses can register voluntarily in order to claim back the VAT they pay on goods and supplies. It is unlikely you have reached the registration threshold yet, as a new business, but if you are, click here for more information.

How can I pay less tax?

You can try to legally reduce the amount of tax you pay through tax planning. With tax planning, you could take advantage of available tax exemptions, rebates, allowances, and deductions to reduce your overall tax liability. 

Tax avoidance, while not illegal, is morally dubious. One example of tax avoidance is using overseas tax havens, but this tactic is more often used by large, multinational corporations than small businesses. Although this practice isn't necessarily against the law, it's seen as unethical because these businesses aren't paying their fair share of tax. This means there's a greater tax burden on ordinary, honest people.

On the other hand, tax evasion is illegal. You must never lie about your income or expenditure on your tax return to evade tax. If you're caught committing tax fraud, HMRC will issue a hefty penalty, or you could even face a prison sentence in serious cases. 

What happens if I can't pay my taxes? 

If you find yourself in an unfortunate financial situation and you can no longer pay your taxes, here's what could happen and what you need to do.

If you fail to pay your corporation tax or VAT, HMRC will issue penalties and could send bailiffs to seize your business' assets. If you miss the corporation tax return deadline by just one day, you'll face a penalty of £100, which will continue to increase if you don't submit the documents. Any late tax payments will incur interest, and if you don't pay at all, HMRC will send enforcement officers to collect the tax or your assets. For late or incomplete VAT payments, you could enter a surcharge period and face extra fees.

To avoid this, you must notify HMRC as soon as possible if you're having trouble with paying your taxes. Communicating with HMRC will show that you're not deliberately avoiding payment, which could make it easier for you to work together to find a solution. One option is to ask for a Time to Pay (TTP) arrangement where you can pay your outstanding tax bill in monthly instalments, up to a maximum period of 12 months. However, to be granted this arrangement, you must be able to present financial forecasts and demonstrate how you're going to improve your cash flow. For example, you could show how you're going to cut costs, restructure the company or sell assets for example.   

If this fails or you're denied the extra time to pay, you could then use a Company Voluntary Arrangement (CVA) to pay your debt. With a CVA, an insolvency practitioner will work out the terms of the arrangement and create a payment schedule. 75% of your creditors must agree to this arrangement for it to be accepted. Failing this,  liquidation could be your only option, which will mean the closure of your business. Creditors' voluntary liquidation (CVL) is preferable because you can choose your insolvency practitioner and have more control over the process. If you don't opt for this when it's clear that your company is failing, HMRC may issue a winding-up petition, leading to compulsory liquidation. 

Before you contact HMRC when you can't pay your taxes, you may want to seek advice from an insolvency expert first, so you know what your options are. This will help you prepare a plan that you can show to HMRC to negotiate a TTP arrangement.

How can I be prepared for the next tax year?

Being fully prepared for each tax season will help you avoid any last-minute difficulties with submitting your tax return or making payments. Here, we're going to explore some tips you can use to prepare your small business for the next season of tax.

1. Organise your documentation

From day one of trading, you want to ensure that all of your files, particularly regarding finances, are highly organised to prevent any errors on your tax return. This includes any expenses receipts you can get tax relief on, your invoices, employee wage information, and so on. To streamline this, you should consider investing in tax software that can take some of the pressure off of you. This will allow you keep all of your finances up to date with smart, easy to use technology that is designed for small businesses. This is usually a much more efficient and reliable way of keeping track of everything. Having the right software in place means that you can always stay MTD (Making Tax Digital) compliant. 

2. Hire help

When your tax deadlines draw closer, if you're feeling overwhelmed at the prospect of sorting everything out for the first time, you do always have the option to reach out to an accountant or to get financial advice from somebody with experience. This will put your mind at ease, at least for your first year in business. Although it will most likely come at a cost, if it means you're compliant across the board, it's worth it. 

Having an experienced financial expert on board means they can answer any of your queries and give you clarity on what is needed from you. You can also combine this with the previous point - if you have tax software and somebody from the finance sector on your side, you're in the best position possible. They can utilise your software, meaning the process should be more efficient and simpler all-around. Plus, they should be familiar with the most common types of accounting software, meaning they can talk you through it all.

Something else you could consider is reaching out to a business advisor - there are many free options for this online, and you can probably find a local government organisation to guide you. Whilst finance probably won't be their specialism, they will have tax information to help you to figure it out. Plus, they may have recommended contacts within the finance sector for you to get in touch with.

You could also consider getting legal advisors on board - although they may not have the same knowledge of finance as accountants, they will know what is expected of you regarding the law and your taxes (see more on this above). This is particularly so if you get in touch with a lawyer who cites tax as a specialism. It doesn't hurt to reach out to these contacts to see what they have to offer. By getting in touch with them, you can decide if it'd be beneficial for you to use their services. They may even give you a complimentary consultation. 

3. Check deadlines

Typically, at the end of the financial year, businesses need to provide the government with full annual account details as well as a company tax return form, regardless of whether or not you have any tax to pay. All of the information you need to provide is on the government website. For example, if your business is a brand new PLC, then you're going to want to make a note of the following information from GOV.UK:

Action

Deadline

File first accounts with Companies House

21 months after the date you registered with Companies House

File annual accounts with Companies House

Nine months after your company's financial year ends

Pay Corporation Tax or tell HMRC that your limited company does not owe any      

Nine months and 1 day after your 'accounting period' for Corporation Tax ends

File a Company Tax Return

12 months after your accounting period for Corporation Tax ends

4. Avoid penalties

Following on from the previous point, you need to ensure that you stick closely to all the deadlines. Or, preferably, get your data in beforehand (once the financial period is complete so your data is accurate), to ensure you don't incur any penalties. Again, this applies even if you have no tax to declare, as you are legally obliged to provide the government with your finance and tax information. You can be held accountable and fined even if you're just a day late. This fine then increases as the months go by, so it's best to pay off any tax owed ASAP. However, if you have a 'reasonable excuse' as to why you could not sort your tax return on time, then exceptions can be made. So, this is always something to keep in mind, as you can appeal if something is preventing you from getting everything completed.

5. Forecast

By predicting your tax deductions, budgeting, and income early on, you're allowing yourself to prepare for each possible eventuality. Corporate tax amounts to 19% of your taxable profits, which can add up to a lot of money in the long term. Therefore, you should consider including tax charges within your product or services costs, so that you're not losing out at the end of the financial year. This is particularly important if you're at the stage where you are paying VAT - it may be best just to include this in the price of what you're selling so that you're not losing out.

By having a solid financial plan in place and forecasting your funds, you have a better idea of the future of your business. You'll be able to see when you're in a position to scale and what costs you need to account for as you go. It's sensible for you to be able to see how much you can spend, keeping within a realistic budget.

To conclude, whilst there is a lot to consider with your taxes, it's not anything that you can't manage. With the help of the right software and assistance, you can stay organised and be aware of any looming deadlines. By also making predictions of what's to come, you'll always stay one step ahead, and if any issues do arise, you'll be better equipped to troubleshoot them.

For more information, don't hesitate to reach out to someone from the finance or legal sector. If anything, they can simply point you in the right direction. If it's the end of your first financial year, you don't want to risk the chance of making any mistakes, with the risk of facing a penalty. Now, just make sure you have all the important dates lined up in your diary, and get everything sorted in advance, to reduce any chance of stress.

Copyright 2022. Article was made possible by site supporter Aislinn Carter.

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