Podcast: Tax responsibilities of small business owners

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Tax is a perpetual problem. Calculating it, paying it, and deducting it from your employees’ wages – all of these tasks take time and effort.

But tax can also be confusing, particularly for first-time business owners. So what do you need to do in order to make sure that your tax affairs are in order?

As a [self-employed][2] person, or the director of a company, you’ll be required to complete an annual Self Assessment tax return. Many people believe that this is a long, arduous process, but if you are properly prepared it need not be too difficult.

To begin with, you need to make sure that you are registered as self-employed. You should call the Revenue and Customs newly self-employed helpline to do this. You will need to give them details like your National Insurance number, and the exact date on which you became self-employed. You must do this within three months of your first month of self-employment, or you might receive a fine.

Self Assessment taxpayers have to send in their tax return by 31 January every year. You will then have to pay your tax bill in instalments. On that 31 January you will have to settle your bill for the tax year just gone, and you will also have to make your first payment on account. This is one of two payments that are intended to spread your bill out over the course of the year. Each of the two payments on account is equal to half your previous tax bill.

Limited companies are required to register for corporation tax. When you incorporate your company, Revenue and Customs will be send some details automatically by Companies House. They will then send you some forms to complete, giving them the rest of the information they need. If you don’t receive these forms, they are also available on the HMRC website.

Once you are registered, you will receive a notice from HMRC once a year, telling you to complete a corporation tax return. You will need to complete the form, and send it in with your accounts. It is your responsibility to make sure that this is done on time, and that the information is correct. Inconsistencies or a missed deadline can result in a fine.

It is worth noting that your corporation tax bill is paid before you submit your return, unlike Self Assessment. Your bill is normally due 9 months after the end of your accounting period. This period is normally 12 months long, but it can be shorter if you wish.

At some point you will also need to consider registering for VAT. If your sales exceed the VAT registration threshold over any 12 month period, you are legally obliged to register. That threshold is currently set at £70,000.

But there are circumstances in which it might be beneficial to register voluntarily, before you reach that threshold. If a lot of your expenditures are subject to VAT you might find that you save money by registering. VAT registered businesses can claim a refund from HMRC when the VAT that they pay exceeds the VAT that they charge.

It is worth remembering, though, that VAT registered businesses also have to deal with a significantly increased paperwork burden. Perhaps worse, sudden changes to your cashflow situation can make it difficult to pay your VAT bill – and the taxman tends to take a dim view of late payment. You should therefore think carefully before registering voluntarily.

As your business expands, you may wish to take on employees. In most circumstances this means you will have to register with the taxman.

You will have to register as an employer if you are paying them at or above the PAYE threshold or the National Insurance Lower Earnings Limit. In practice, this means that you must register if you pay your employee £97 a week or more, or £421 a month. Even if you pay them less than this, you must register anyway if they have another job, if you give them employee benefits, or if they are receiving a pension.

You can register as an employer over the phone or by email. The information you are required to provide will depend on the legal structure of your business. Limited companies, for example, must provide the National Insurance numbers and Unique Taxpayer References of each of the directors.

It is worth remembering that directors of limited companies are treated as employees. So, in some circumstances, you might need to register as an employer even if you are the only person working for the company.

Employers are also obliged to operate a Pay As You Earn, or PAYE system. Under this system, employees have the relevant taxes deducted straight from their pay packets. You must also complete an Employer Annual Return no later than 19 May each year.

Newly registered employers will be sent an information pack by HMRC, which includes a CD and booklet explaining how to set up your payroll system and make deductions via PAYE. You will have to tell Revenue and Customs the name of the individual who will be responsible for operating the system when you register.

Taxes and payroll are amongst the most important concerns for any growing company, and you must make sure that you get them right from the very beginning. If you are in any doubt about your responsibilities, make sure that you contact HMRC or your accountant for advice.It is likely that your unsolicited message will be competing with hundreds of others in the inbox of your recipient. So we have compiled a list of top tips to help make sure that your email stands out from the crowd.