UK Business Blog

Tax: Intro

"I'm trying to!"

All UK tax is dealt with by the HM Revenue & Customs (HMRC). For businesses in the UK there are quite a few different taxes to adhere to and confusingly all with different terms and conditions and form numbers. Knowing which ones to pay is half the battle, once you know which ones you need there are a plethora of helpful websites available administering relevant deadline dates and providing links to extra help, should you need it. One of the most useful is the HMRC website itself.

If you are unsure about any taxes, it is advisable to seek a second opinion as incorrect or late payments are penalized. The HMRC tries its best to promote the simplicity of taxing, and they associate themselves with the slogan “Tax doesn’t have to be taxing”, which is irritating because actually it is complicated, but I do love a good pun.

The top tip for dealing with tax is plan ahead and prepare for tax within your businesses budget.  Being hit with a nasty tax surprise can be awful for a business, and it is annoying being charged for missing a deadline, maybe even more annoying than a delayed Tube? On some tax payments the HMRC pay interest on early tax payments and offer refunds, known as ‘credit interest’, if you navigate the tips and tricks well, tax won’t be as awfully daunting as you expect. Hey, that should be their new slogan!

Katie Jamieson

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Tax: NI and NICs

National Insurance (NI) is needed to use the PAYE system.  As an employer, you must also pay National Insurance Contributions (NICs) on the earnings you provide to your employees. Earnings include not only cash amounts but benefits, such as providing your employees with company cars. This is paid by employees and employers and there are different types of NICs to pay, depending on whether you are a limited company or a sole trader and considering how much you earn.

UK employees earning over a certain amount and working over specified duration of hours have to pay NI through the PAYE system. If you’re setting up in the UK and not living here, you won’t be expected to pay employee NICs, as you’ll be paying the relevant equivalent in your home country.

As an employer your main responsibilities are:

• To deduct and pay the employer and employee Class 1 NICs due on your employees’ earnings through your payroll.
• To pay employer Class 1A NICs after the end of the tax year on benefits you have provided to your employees.
• To pay employer Class 1B NICs after the end of the tax year if you have agreed a PAYE Settlement Agreement with HM Revenue & Customs.

Katie Jamieson

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Tax: VAT

 You may need to register your business for Value Added Tax (VAT). 

You can register for VAT if you’re in business and you are any of these:

• An individual.
• A partnership.
• A company.
• A club.
• An association.
• A charity.
• Any other organisation or group of people acting together under a particular name, such as an educational or health institution, exhibition, conference, etc.

For VAT purposes, the individual or organisation that is in business is known as a ‘taxable person’.

You can’t register for VAT if any of these is true:

• You sell only goods or services that are exempt from VAT – insurance, finance and credit, education and training, fund raising events by charities, subscriptions to membership organisations, selling, leasing and letting of commercial land and buildings – but this exemption can be waived.
• You aren’t in business according to the definition that HM Revenue & Customs (HMRC) uses for VAT purposes – a continuing activity involving getting paid for providing goods or services – in money or another form of payment such as in-kind or barter.

If your sales are over £73,000 for the previous 12 months then you will have to register for VAT. There are three different types of VAT.

• The Standard Rate, 20%, is the most common rate, applied to most goods and services.
• The Reduced Rate, 5%, is charged on fuel and power used in the home and by charities, renovation and alteration of dwellings, women’s sanitary products.
• Zero Rate, 0%, is applicable to most food (but not meals in restaurants or cafes and hot take-away food and drink), books, newspapers, young children’s clothing and shoes, exported goods, most prescriptions dispensed to a patient by a registered pharmacist and most public transport services.

For items which are standard rated or reduced rated for VAT, VAT is charged to the buyer (output tax) by the VAT registered seller. This VAT is reclaimed by the VAT registered buyer (input tax) after goods and services are purchased. If you are registered for VAT, generally you charge VAT on your business sales and reclaim VAT on your business purchases. The difference between the VAT you charge and the VAT you are reclaiming is the amount of VAT you must pay to HMRC. If the value of the VAT you reclaim is more than the value of the VAT you charge, then HMRC pays you. If you are not registered for VAT, you do not charge VAT on your sales. You still pay VAT on your purchases and you cannot reclaim this VAT.

Katie Jamieson

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Tax: PAYE

Alongside Corporation Tax, limited companies and organisations also have to participate in the Pay As You Earn (PAYE) scheme. PAYE is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employees’ pay as they earn it. The term ‘employee’ also refers to directors of limited companies.

As an employer, you’ll have to register with HMRC, stating that you are an employer and you’ll have to deduct tax and NICs from your employees’ pay each pay period and pay Employer’s Class 1 NICs if they earn above a certain threshold. This is usually done online and like other taxes, it carries a penalty for late payment.

Katie Jamieson

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Tax: Corporation Tax

Corporation Tax is a tax paid by limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies. This tax is paid on trading profits and investment profits (except dividend income which is taxed differently) and capital gains – known as ‘chargeable gains’ for Corporation Tax purposes. UK-based companies must pay the tax on all taxable profits – wherever in the world those profits come from. However, if a company isn’t based in the UK but operates in the UK as a permanent establishment (an office or branch) they’ll only have to pay Corporation Tax on any taxable profits arising from their UK activities (because you’re probably paying other taxes in your own country).

Corporation Tax - probably more than £200.

As with other UK taxes there are strict deadlines and severe punishments if Corporation Tax is not paid and filed correctly – more than just a slap on the wrist. Unlike other taxes, such as VAT, the deadline for Corporation Tax is before the deadline to file a Company Tax Return. Generally it must be paid by 9 months after the end of a company or organisation’s Corporation Tax accounting period and filed by 12 months after the end of a company or organisation’s Corporation Tax accounting period. You got that? Maybe get your diary out and write it down now.

Some of this can be done online, though the SA700 form (Non-Resident Company tax) cannot be.

You are also given the option of Corporation Tax Self Assessment, which basically means a company calculates their own Corporation Tax instead of HM Revenue & Customs working it out. Companies choosing this option are more likely to be investigated, to make sure everything is above board but it does give you a longer deadline. Self-Assessing is done using a Company Tax Form.  

Small companies Corporation Tax rate is currently 20% of profits – this has been cut from 21%, as of 1^st April 2011.

Katie Jamieson

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