The most unpleasant part of being a business owner is paying your taxes. It’s an undeniable fact. After a year’s worth of hard work and dedication, April rolls around and you have to surrender your money to HMRC. Unfortunately, it’s an unavoidable component of business ownership.
If you aren’t diligent in organising, arranging, and paying your taxes, then you can end up receiving hefty fines. If you continue not paying your taxes after fines have been issued, you could even be imprisoned.
So that that never happens and your taxes are always on time and in order, this article will tell you everything you need to know about business taxes:
Tax Overview
HM Revenue and Customs (HMRC) is the legal body responsible for administering, collecting, and controlling taxes in the United Kingdom. Basic UK taxes they administer include income taxes, property taxes, capital gains, inheritance taxes, and Value Added Tax (VAT). Most of these taxes are progressive taxes, which means that people who earn more, pay more. Even the highest earners can reduce their tax bills significantly by employing the use of chartered accountants and tax services, who can apply for exemptions and discounts. There are many different discounts and exemptions available to British taxpayers.
HMRC is responsible for the collection and management of tax throughout the United Kingdom, including in England, Scotland, Wales, and Northern Ireland. With that said, there are some minor differences in Scotland, due to the nation’s legal system.
In order to pay tax in the United Kingdom, you first need a national insurance number. If you are a self-employed business owner, which we will delve into in great detail later, then you will also need your own unique taxpayer reference number, which you can use to pay your tax on HMRC’s self-assessment portal. Limited companies also have to file tax returns with HMRC.
Tax Types
In the United Kingdom, there are 21 different taxes. These are:
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Income Tax
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National Insurance
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Value Added Tax
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Capital Gains Tax
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Corporation Tax
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Bank Payroll Tax
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Petroleum Revenue Tax
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Fuel Duties
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Inheritance Tax
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Stamp Duty
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Tobacco Duties
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Spirits Duties
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Beer Duties
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Wine Duties
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Cider Duties
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Betting and Gaming Duties
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Air Passenger Duty
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Insurance Premium Tax
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Landfill Tax
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Climate Change Levy
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Aggregates Tax
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Local Taxes
Council Tax
In addition to the taxes that we have previously outlined, there’s also Council Tax. Council Tax is paid directly to one’s local authority. It is not something that HMRC are involved in the administration of. Like other taxes here, Council Tax is non-negotiable. If one fails to pay one’s Council Tax, criminal charges can be brought. At the very least, a person can end up being taken to court.
It is possible to receive an exemption from Council Tax, however. The reasons that one might be exempt from Council Tax include disability, benefit income, or unemployment. It’s usually required for one to apply for Universal Credit or some kind of benefit before exemptions and discounts can be approved.
Goods Taxes
We have already mentioned Value Added Tax but have not yet explained it. Value Added Tax, or VAT, is a form of tax that is paid on almost all goods and services in the United Kingdom. VAT is usually also applied to goods that have been imported into the United Kingdom from abroad. New rules were introduced last year that mean if you import items from outside the United Kingdom and the order does not cost more than £135, then you pay VAT on the seller’s website.
Otherwise, you have to pay it elsewhere after the bill has been calculated. The United Kingdom’s commercial tax rate is 20%. With that said, some goods are subject to lower commercial tax rates. It is also possible to apply for VAT exemptions on items like medical supplies.
VAT Refunds
It is possible to get a VAT refund in the United Kingdom if you are a tourist or visitor to the United Kingdom. Non-residents are able to claim a refund on VAT paid for any goods bought in the United Kingdom, as long as these items are taken back with them when they leave. More often than not, shops in the United Kingdom will charge you for tax-free shipping.
One of the United Kingdom’s biggest tax-free shopping hubs is Bicester Village in Oxfordshire, where hundreds of thousands of tourists shop designer clothes each year. Bicester Village is an outlet centre with cheap designer clothes. Tourists visit the United Kingdom solely to come here, so that they can buy their clothes for next to nothing, then get additional VAT refunds. VAT refunds must be claimed within three months of buying an item. UK nationals living abroad may also claim a VAT refund, as long as they have lived abroad for at least a year.
VAT Shopping
If you do intend on claiming a VAT refund for purchases made in the United Kingdom, then you need to ensure that you find a shop that offers VAT refunds. You will have to sign a VAT check in the presence of one of the shop’s assistants. You then present this form, together with your receipts, passport, ticket, and boarding card at a customs office upon departure, in order for your refund to be processed. Customs will validate the form for you. When it has been validated, you can get your refund in cash, or you can get it refunded to your credit card. Many international travellers elect for the refund to be sent to their card, which is more convenient.
Ineligible Items
With all of the above said, there are some items and purchases that are ineligible for a VAT refund. These include:
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Goods that have been used or partially used in the United Kingdom, such as food or beauty products.
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Boats, planes, and motor vehicles.
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Goods in excess of £600 in value, exported for business purposes.
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Unmounted bullion.
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Goods exported as freight.
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Goods that need an export license.
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Services like hotels, haircuts, and taxi journeys.
It is important to bear all of this in mind if you will be attempting to get refunds on items that have been purchased in the United Kingdom for your business.
Tax Liability
Anybody that works in the United Kingdom is liable to pay tax. With that said, different incomes fall into different brackets, so not everybody pays the same amount of taxes. Business owners handle their taxes directly – or rather their accountants do – while workers have their taxes automatically deducted from their wages for them. If a business owner or self-employed person fails to pay their taxes, they can get into a lot of trouble.
Tax Exemption
Some citizens of the United Kingdom are totally exempt from paying taxes. A person that was a tax resident for at least one of the last three tax years and spent fewer than 16 days in the current tax year, is exempt. Some people who own businesses or are self-employed are also exempt. In the United Kingdom, a person must earn over a certain amount. Anybody that earns £12,750 or less for the 21/22 tax year, for example, is not required to pay tax. This is called the “personal allowance.” You only pay tax over this amount.
Legal Structures
Moving away from general tax information, let’s address this article’s main subject: business taxes. There are different styles and forms of business in the United Kingdom. These are referred to as “legal structures.” The way that these structures are taxed differs. For example, a person that is self-employed does not pay tax in the same way that the director of a limited company does.
Each of these structures has its own tax advantages. Many find that, out of all of them, self-employment is the best way of saving money on tax, due to the exemptions available. The legal structures in the United Kingdom are as follows:
Sole Traders
Sole traders are self-employed individuals that run their own businesses. Without a doubt, this is the easiest, most straightforward, and simplest type of legal structure to register in the United Kingdom. In order to register as a sole trader, you must be solely in charge of your business and have no partners. You must register your business with HMRC. You also have to submit an annual self-assessment return to them, which you do through their online portal.
As a sole trader, you are able to keep all of the profits from your business, but as for your business’s income, tax and national insurance contributions must be paid on them, which is all explained on HMRC’s self-assessment portal. As a sole trader, there is no limit to the amount of money that you can earn. With that said, as you earn more money, being a sole trader becomes less tax-efficient, which is why it’s better to register as a limited company once you earn over a certain amount.
Partnership
Partnerships are very similar to sole traders except they involve two or more people. The people involved in a partnership are all equally responsible for their business’s profits or losses. A partnership is an agreement between these people, where all risks, benefits, and costs are shared. Partnerships, like sole traders, are unincorporated entities.
If one person in a partnership makes a mistake, incurs debts, or takes a profit, this is shared by the other member(s) of the partnership. Profits are equally split unless a prior agreement has been drawn up stipulating otherwise. Each partner will pay tax on their own share of the profits.
Limited Liability Partnership
A limited liability partnership is another type of partnership, except that in an LLP a partner’s liability is limited to that which they have invested financially. A limited liability partnership must be registered with HMRC and at Companies House. Annual accounts must be drawn up and filed. LLPs can involve two or more members. Members can also be individuals or they can be companies. This is up to the partner’s discretion.
A member’s responsibility and share are detailed in an agreement all members have signed prior to the LLP’s formation. All members of an LLP are required to submit their own self-assessment return with HMRC each year, where they will pay tax on their share of the business’s profits.
Limited Company
Finally, we arrive at a limited company, which is a business managed privately, owned by its shareholders. Limited companies are run by their directors. Like LLPs, limited companies are separate legal entities. They have their own rights and obligations. The company’s directors are not responsible for everything it does. Its finances are separate from the director’s personal finances. Profits taken from the business after Corporation Tax has been paid are then divvied among shareholders, in the form of dividends. Limited companies are sometimes limited by shares or by guarantees. They are required to report their income annually. If they do not report their income or file taxes with HMRC and Companies house, they can get into a lot of trouble.
Tax Penalties
In the United Kingdom if you do not report taxable trading income, import goods VAT-free and sell them to customers with added VAT and don’t report added VAT to HMRC, commit any form of tax evasion, submit false invoices and personal expenditure claims, fail to declare goods, avoid paying tax on cryptocurrency transactions, operate with a false identity in order to carry out taxable transactions in their name, or participate in any tax avoidance schemes, you can get into a lot of trouble.
The penalties for any form of tax evasion or tax-related crime in the United Kingdom are very high. The fines can cost you an absolute fortune. It’s also entirely possible to end up in prison for tax evasion. Evasion of VAT, for example, can result in six months in prison, or a fine of up to £20,000. Some tax-related crimes have a maximum sentence of life in prison. It’s very important that you keep your business’s taxes in order so that you do not fall afoul of HMRC and end up in trouble.
Taxes are unavoidable. Unfortunately, they are a necessary part of the government’s operation. Without them, they would be unable to sustain the country. The best way to bring down the amount of taxes that you pay is to hire a professional accountant or tax advisor.
