As Barry Franklin, a business adviser at Business Link for London, points out, the Inland Revenue and HMC&E are usually extremely helpful but as taxation can be a complex subject, you would do well to appoint a chartered accountant with whom to discuss things.
Depending on the structure of your business (for example, whether you are a sole trader or limited liability company), different rules apply.
“A point not always understood by sole traders or partnerships is that you are taxed against the total profit of the business; that is, the total income less allowable cost and expenses incurred in running the business, not just on what you decide to withdraw as wages/salary. Even if you plough your profit back into the business, you will still have to pay tax on that profit”, advises Franklin.
He adds that if you set the enterprise up as a limited company, you become an employee of the company. Your earnings are then taxed through the PAYE system, although the Inland Revenue may still require you to complete a self-assessment form. The company pays corporation tax on its profits. This is calculated from income, capital gains and certain types of investment income.
If you take anything from stock for your own use, you must record this in your sales figures at your normal selling price. In the case of expenses, for tax purposes, allowable expenses must have been incurred wholly and exclusively for the business (not forgetting items like bank charges and VAT paid out if you are not VAT registered).
If you’re not sure, claim it anyway, says Franklin as he adds that the IR will be happy to correct you if you are wrong.
VAT is based on your turnover and costs. Regardless of whether you have a sole proprietor business, a partnership or a limited liability company, it is advisable to (and indeed you should) register for VAT if you believe your taxable sales or services will reach or exceed the threshold by the end of your trading year. The threshold is currently £56,000.
If the threshold creeps up on you unexpectedly, you may still be able to claim back VAT on purchases already made for goods or services used in the business.
Small businesses can also claim 100% first-year allowances on their spending on information and technology equipment (including computers, internet capable mobile phones, digital TV, related software and the costs of creating websites) until 31 March this year.
To qualify, you must meet two of the following three conditions: your turnover does not exceed £2.8 million a year; your assets do not exceed £1.4 million; you have no more than 50 employees.