Tens of thousands of ambitious entrepreneurs embark on a new business venture each year in the UK, but according to official statistics around 50 per cent of them fail. Much of that is down to poor financial planning and a failure to understand what tax breaks you are entitled to.
The tax rules for small businesses are a complex area and really, the best thing to do is seek financial advice from a qualified chartered accountant. Despite popular belief, the money accounts can save you pay the fees for themselves.
If you are a little apprehensive hiring an accountant will eat into your budget, we have prepared an overview of the tax platforms and pitfalls you should look out for when starting up a new business.
Types of businesses
The first thing you need to decide is what type of business you intend to trade under; sole trader, partnership or limited company. Each has different tax liabilities together with legal standing.
The biggest difference is that the owners of limited companies are not liability for debt if the business is wound up. Sole traders and partnerships on the other hand could lose their house if you need to sell it to cover debts accrued by your business.
Limited companies also allow you to benefit from dividends instead of receiving a salary. Because dividends bear a lower rate of income tax and avoid national insurance contributions shareholders in a limited company pay less tax than if you were a sole trader or partnership.
Claiming business expenses
Expenses incurred during the course of your business can be claimed back if it is not considered taxable by HMRC. The list of non-taxable allowance is quite exhaustive, but includes general items like mileage, rent and utility bills. However, there are many others depending on your individual circumstances which is why seeking professional advice is beneficial.
If you were using tools or other equipment before you officially set up your business and registered it with the authorities, a prior hobby perhaps, you are entitled to claim tax-free duties on tools of the trade that generously date back seven years.
For example, if you purchased a drill in 2008 for odd jobs around the home, but now use it to fit kitchen cabinets, you can claim the cost of the drill as a non-taxable expense. You may have to provide receipts for the same, but for new starters this is not always investigated.
Registering for tax
Anybody opening a business for trade in the UK is required by law to register the business name with Companies House and HMRC. The type of taxes you have to register for depends on the legal status of your business and your annual turnover.
Everybody is required to fill in a Self-Assessment tax return form, but in addition limited companies have to register for capital gains tax and firms with an annual income of £79,000 are required to register for VAT. Failure to complete the forms correctly incur a £100 fine.
For an in-depth discussion about tax savings for small businesses call Taxaccolega today on 0800 0235 234 or email email@example.com