Small business tax advice
If you run your own business, there are a number of small business tax issues you need to sort out at the start.
Structure
You could choose to be set up as one of the following:
Sole trader (or self employed — they are the same thing)
Partnership
Limited company
Being a sole trader means the business is entirely yours. If anyone else works for you, they’ll be employees. All the profits the business makes are treated as yours and you have to pay Income Tax and National Insurance on them, whether you draw the profits out or leave them in the business.
In a partnership, two or more proprietors of the business own it together. In tax terms you are all treated as self-employed, with your own personal tax bills at self employed tax rates. You can still have employees who don’t own a stake in the business. If you are worried about being bankrupted if the business fails, there are special kinds of partnerships called Limited Liability Partnerships which can limit the amount you’ll have to find if the business makes large losses.
Sometimes people run a business via a limited company. Again, the “limited” aspect means that there is a limit on how much you have to put into the business if it fails. When you use a company, you own shares in the company and the company is legally the business proprietor. As the owner of the company, and probably an employee of it too, you take your share of the profits out by way of salary and dividends. Typically small businesses arrange it so that the salary paid is quite modest, thereby reducing the income tax rate, and most of the profits are taken out as dividends as a way of reducing the National Insurance Contributions necessary. But there is usually a bit more hassle involved in using a company and so it’s not always the best way forward.
Record keeping
Whatever structure you use, you need to make sure you keep sufficient records so that you (or your accountant who can provide tax advice for a small business) can work out your business profits at the end of the year.
You will need to record your turnover, ie your total sales figures. In tax terms you make a sale when you deliver your goods or do the job you will get paid for, and not when you get paid (which is often later) and so you need to remember to include sales you’ve not got paid for yet in your figures. If you don’t keep good enough records of your turnover, then again you can incur financial penalties if the tax authorities take action.
You can deduct your business expenses. Some expenses will be obvious (such as the cost of the goods you sell, or consumable items you use in your work). There are lots of things that you can’t claim as expenses though: normal living expenses won’t count, including food, clothing and costs of your home — although if you run your business from home, some domestic costs may be allowed. There are some (such as business mileage in your own vehicle) where the rules are complicated and you would be best advised to contact an accountant for business tax advice.
If you use a company, you will also have to have accounts filed with Companies House, usually nine months after your business year-end. That is separate from sorting out your own liability.
Gerry Jackson