Tax bills are among the biggest outgoings for businesses. How can finance help spread the cost?
The only two certainties in life are death and taxes, and one of those things will come to us far more frequently than the other.
For many businesses, tax is THE big bill of the year: either the quarterly VAT return or the annual income tax payment. For SMEs and sole traders alike, the end of January is a time when they feel the squeeze of HMRC.
How much tax is too much tax?
We are looking at two major types of tax: VAT and income tax.
VAT is a 20 percent charge on the value of most goods and services which covers almost everything sold by all but the smallest of SMEs and sole traders. Effectively, businesses become tax collectors for HMRC and each quarter, pass on the tax they have taken from customers to the government.
Income tax is a proportion of your earnings and the proportion will depend on how much you earn.
In both cases, you are effectively receiving money that the government has a claim on. Your VAT and income tax return is a statement that declares how much you have earned and how much you should pay the government.
It is important that you take proper qualified advice on how to calculate your tax liability.
It is perfectly legal (and sensible) to avoid paying tax where possible – for example by claiming back VAT paid on tools for your trade, or using tax-efficient investment schemes such as a pension. It is absolutely not acceptable to engage in tax evasion – misleading HMRC or concealing how much you have earned to reduce the amount of tax for which you are liable.
A qualified advisor will help you avoid paying too much tax in line with current rules.
Even businesses and individuals who have tax-efficient finances can find themselves hit by a large bill. As one sole trader told Swoop:
“It’s very tempting to look at that payment for £1,000 and forget that after tax it’s only £600. I have to be very disciplined about putting the tax to one side for when the bill comes in.”
It’s not just a matter of discipline: there are many reasons why someone may have to dip into the money that should be set aside for tax: buying inventory, replacing broken equipment or covering a seasonal shortfall, for example.
The four tax habits every business should have
Rhys Cunnah, Funding Manager at Swoop says that there are a number of things that all founders should do – even sole traders.
- Have a dedicated bank account for business income
“When personal money gets mixed up with business money, it all turns into messy money,” says Rhys. “Keep both sides separate so you know what belongs to you, what belongs to the business and what belongs to HMRC.”
- Avoid, don’t evade
We said it earlier, but Rhys agrees that it’s important: ”Avoidance will save you money. Evasion will get you in trouble. Get advice on how you can save money – legally.”
- Pay your tax bill on time
“If you can’t afford your tax bill, look at financing,” says Rhys. “There are options out there for businesses to smooth payments out over months rather than cover a big bill in one hit. Many businesses find this an effective way to improve cashflow.”
- Talk to HMRC sooner rather than later
“People shouldn’t be afraid of HMRC,” says Rhys. “The thing I hear most from people who’ve called them when they can feel they are getting into trouble is how helpful they can be.”