Complying with the law might seem a little bit daunting, especially to those who are new to running a business. But most people find it straightforward and painless.
Taking the necessary steps to get it right can give you peace of mind, which will leave you free to get on with running your business.
What follows is basic legal information about tax, VAT, health and safety, the environment, planning permission, licensing and data protection. Although useful, it is intended only as a basic introduction. If you are ever in any doubt, seek professional legal advice or contact the relevant agencies.
Tax for the self-employed
Self-employed people pay tax on their business profits, not on what they pay themselves. Profit equals revenue less allowable expenses (excluding your salary).
You usually pay tax on profits for a 12-month accounting period, after filing a self-assessment tax return.
The HM Revenue & Customs (HMRC) tax year runs from 6th April to 5th April. Tax is due in two equal installments: on January 31st (during that tax year); and July 31st (after the end of that tax year).
These interim payments are based on the previous year’s tax liability. A balancing payment is due on the following January 31st, to adjust the difference between amounts paid and the tax due as a result of actual profits.
NEED TO KNOW
The self-employed pay flat-rate Class 2 NICs throughout the year, followed by Class 4 NICs related to their profits.
Flat-rate Class 2 National Insurance contributions (NICs) must be paid throughout the year. Additional NICs (Class 4) related to your profits are then made, which are collected with your tax. The self-employed pay less NI than employees, but they receive significantly fewer benefits.
Tax for Limited Companies
If you set up a limited company (and are therefore an employee) you pay tax on your income every time you are paid. This is called PAYE (Pay As You Earn). You have to deduct tax and NICs from your salary through your company’s payroll, which you have to set up. Your business also has to pay employer’s NICs for its employees.
Your company’s profits each year will be liable to corporation tax. Your profit is your sales income less expenses. Companies have to calculate their own corporation tax and then make a payment to HMRC. Companies with profits of more than £1.5m pay corporation tax in quarterly installments, while other companies pay nine months after the accounting year-end.
Accounting for Tax
When calculating profits, HMRC has strict rules on what can be counted as a business expense. Ask an accountant or HMRC for comprehensive information, but allowable expenses include the costs of goods bought as stock and then resold; rent and running costs for premises; marketing costs; and financing costs.
Costs that are not allowed include personal expenses (e.g. travel to work); living expenses or clothes; money spent entertaining clients; and fines (e.g. parking tickets).
When working out your profits, you cannot count the cost of purchasing premises and equipment as an expense.
You claim capital allowances on these, which allows you to deduct a proportion of the cost from your taxable profit over several years.
The allowance is calculated as a fixed percentage of an item’s value and is subtracted from the item’s value each year. Capital allowances range from 4% to 100%, depending on your type of business and what you are buying.
Capital Gains tax (CGT) is a tax on a successful investment (e.g. property, shares or sale of a business). If you sell something for more than you paid for it, CGT might be payable.
CGT will not usually be payable on the sale of your home (although you could end up paying some if you claim some of your mortgage payment as a business expense).
Limited companies pay corporation tax on capital gains because these are treated as part of the company’s taxable profit. Self-employed people pay CGT at their top rate of income tax. There are allowances and exemptions.
Provided you have informed HMRC that you have started your business, you can claim expenses incurred before you started trading as allowable expenses in your first year. There are exceptions, such as training courses and the cost of forming a limited company.
Value Added Tax
VAT is a transaction tax on the sale of goods and services. If your business sells products or services at a total value worth more than the amount set by the Government, VAT registration is compulsory. In the 2016/17 tax year, this threshold is £83,000.
Businesses collect VAT on the Government’s behalf. All businesses pay VAT on most purchases (‘input tax’).
Registered businesses charge VAT on their goods and services (‘output tax’). The VAT-registered business must pay HMRC the difference between output tax and input tax.
Businesses with a turnover below the threshold can register voluntarily, but be careful. If your customers are not VAT-registered, in effect, you will be raising your prices to them by 20%, because they cannot claim the tax back.
There are detailed and complicated regulations surrounding VAT, including different rates for various types of products or services and when the tax has to be paid.
Fines for late payment or procedural failures can be severe. If need be, seek advice from an accountant. HMRC also produces a wide range of helpful information. To find out more visit the HMRC website. A range of forms can be downloaded, too.