Business Taxes

There are several structures to choose from depending on your situation. The model you decide on will determine whether you are regarded as self-employed or as an employee of the business.

Further information on the taxes outlined below can be found on the HMRC website at http://www.hmrc.gov.uk/.

Corporation Tax

Corporation tax is paid by limited companies on their profits. Eligible businesses must inform HM Revenue & Customs (HMRC) that they exist and file a self-assessment Company Tax Return by the statutory filing date, which will be issued by HMRC. If this assessment shows that you are due to pay corporation tax then any payment must also be made by the due date. Penalties and interest charges are issued if these dates are missed. To ensure the accuracy of any tax computation it is a legal requirement to keep comprehensive records of company income and expenditure.

There are two rates of corporation tax:

• small companies rate of 19% on profits of £0 to £300,000
• main rate of 30% of profits over £11.5 million

For companies whose profits fall between these two rates a marginal relief rate is calculated which eases the transition from one rate to the next.

When companies sell assets they are liable for chargeable gains, as opposed to capital gains tax. Capital allowances for certain equipment purchased by the business can be offset against any tax due.

Income Tax

In a partnership the burden of ownership is shared between two or more people and is a relatively simple and flexible way to run a business. The business does not have a separate legal entity meaning that should a partner leave, die or go bankrupt the business will not cease but the partnership will have to be dissolved and re-built. Each partner is considered to be self-employed and will be entitled to a share of the profits. However, as with the sole trader, personal assets must be used to raise finance and any debts are the responsibility of the partners.

In England, Wales and Northern Ireland there is joint liability meaning that any burdens are shared equally between the partners In Scotland the liability is joint and several meaning that the debts are either shared or one partner can be held responsible for the entire sum.

Self-Employed

Business owners that operate as sole traders or partnerships are treated by HM Revenue & Customs as self-employed and are liable to pay income tax on business profits. Self-assessment forms are issued every April and cover the period from the previous April 6th to the current April 5th. If you miss the deadline to send in your form and pay any tax due you will be issued with a penalty. It is a legal requirement to keep records of your business income, capital gains and business expenditure for 5 years and 10 months after the tax year. Allowable expenses include;

• Supplies
• Travel costs
• Administrative costs
• Rent
• Staff costs
• Equipment and vehicles (the cost of these is spread over a certain period).

Company Directors

A director of a limited company is usually regarded as an employee and will be required to pay income tax under the Pay As You Earn scheme (PAYE) as well as National Insurance. A director must also complete a self-assessment form to include any dividends, interest, fees, salary and taxable benefits such as a company car. Personal allowances and reliefs can be claimed for at this point.

It is a legal requirement to keep records of your personal income and your employer will also have issued you with certain forms, including a P60 and P11D.

Partners

As well as partners completing individual self-assessments due to their self-employed status the partnership must also submit a partnership tax return. This will show any profits made and how they have been distributed amongst the partners. Business expenses can be offset against the partnership income. Each partners share plus any other income is then subject to income tax according to the standard rates.

Pay As You Earn

Pay As You Earn (PAYE) is the way HM Revenue & Customs (HMRC) collects income tax from employees as they earn. Employers have a legal duty to collect the tax from their employees and transfer it to HMRC. Directors of limited companies are also subject to PAYE.

By the 22nd of each month (or the 19th for electronic payments) employers must send employee deductions to HMRC. If your payments total less the £1500 then you may have the option of quarterly returns. There is substantial administration involved in the PAYE system and most employers find it useful to appoint an accountant or book keeper to manage this aspect of their business. HMRC do operate an online service for filing returns and making payments.

National Insurance

National Insurance contributions are collected by HM Revenue & Customs from most employed people and are linked to contributory benefits such as the state pension. There are various classes of contributions payable over a certain earnings threshold, which then affect the entitlement to benefits at a later stage. 

Related documents

• Company Formation Package - the documents necessary set up a limited company
• LLP Agreement - the documents necessary to set up a LLP between 2-10 partners
• LLP Conversion - the documents necessary to convert a traditional partnership to an LLP
• Partnership Agreement - a formal agreement to set up a partnership between 2-4 partners
• Salaried Partner Agreement - terms of employment for partner who does not share in the profits of the partnership