Getting tax right and making sure you pay the right taxes is one of the most important financial aspects of any business, especially when starting up, below is a guide to UK taxation for new entrepreneurs.
Corporation tax
Once you carry on business in the UK as a company, you will be subject to corporation tax on profits. Taxable profits include profit derived from income and also from capital transactions. Current corporation tax rates can be found here.
Value Added Tax (VAT)
Another tax which may be of relevance to a new business is VAT. VAT is a sales tax designed in compliance with European Union requirements. It is charged, very broadly, on all supplies of goods and services made by a business in the UK. Where the customer is registered for VAT and uses the supplies for business purposes they will receive credit for this VAT so that, for most businesses through a supply chain, the impact of VAT is usually largely neutral as the business can recover the VAT that it pays on supplies.
VAT is also chargeable on the importation of goods into the UK from outside the EU; special rules apply for supplies within the EU. There are three main categories of supply for UK VAT purposes: standard-rated, zero-rated, and exempt – outside the scope of VAT. Most supplies are standard rated. Where a person makes taxable supplies in the UK and the value of those supplies (which is the taxable turnover (i.e. standard or zero-rated)) exceeds at the end of any month:
- A specified limit in the year then ended; or
- There are reasonable grounds for believing that the value of the taxable supplies in the next 30 days will exceed the specified limit, that person should notify HMRC and register for VAT. There are financial penalties for failing to do so. Where turnover is below the specified limit a person may voluntarily register for VAT.
PAYE and National Insurance
If your company is going to employ individuals, one of the tax payment regimes of which you should be aware is PAYE. PAYE requires a company which employs individuals to deduct income tax under the ‘pay as you earn’ system from all payments of salary made to those individuals.
National Insurance Contributions (“NICs”) are also payable both by the employee and the employer. The employee’s contribution is deducted, by the employer, from their salary. The employer’s contribution is an additional cost to the business. Currently an employee’s NIC is charged at a rate depending on level of earnings, and employers’ NICs are charged at the rate of the gross salary paid to the employee. As soon as your company employs any individuals it should inform HMRC and establish a payroll system (this can be outsourced to a payroll services provider).
