Working with Accounts and Tax
The humble 3-letter word ‘tax’ has the potential to give even the most balanced business individual the worriment. However, SME’s shouldn’t feel timid from getting educated about tax. Being educated about tax puts you in a healthy position where you can steer clear of mistakes and tackle tax with composition.
The tax pot System
At the risk of sounding like a parent of a compulsive shopper teen, you should save money for tax. Tax bills shouldn’t be unpleasant surprises if you’re on top of your accounting. You should have a pretty good idea of what’s coming, and therefore you can put aside that money from business earnings. By putting aside money from income in to a allocated account to pay Value Added Tax (VAT), Pay As You Earn (PAYE), or your own Self-Assessment return you should never have a tax cash flow issues.
This of course means that you need a discernment into what you’re doing in accounting terms and where tax liabilities lie. The only way you can do this is by using error-free records. Cloud accounting software, such as Xero makes this significantly easier. Use them regularly and your records will be piece of cake.
Many SME’s and owners fall into difficulty when it comes to claim the expenses. They either don’t claim adequate, or claim erroneous, therefore paying tax more than they should. Some people even think expenses are an opportunity to take the advantage. While doing this, you’ll end up heavily fined or paying over the odds in capital gains tax down the line.
Importantly, for expenses to work for your business in terms of tax you need to know how to classify them and have proof of their existence (e.g. receipts).
If you’re working for yourself (Self-employed), use the guidance here.
Understand tax allowances
Tax allowances don’t usually carry over. So, if you don’t avail them, they are gone. For an individual with income tax, savings allowance, dividends allowance and capital gains tax allowance that could altogether sum up to £26,000 each year in neglected allowance. Therefore, consider how you can use this allowance most effectively across you and your business.
Understand tax breaks
Know which status suits you and your business best
It may be a case that you started as a sole-trader and have grown. Or you may have a unique structure from how you started out. Every year you should review your business structure, its performance and decide if it is still the most efficient in terms of tax. Compare the different options and run a quick calculation to see which model would perform you the best.
This is particularly true if you have found yourself increasingly using the ‘gig economy’. Make sure you’re not in fact an employer in the eyes of HMRC or you could face some horrible tax imputations.