One of the key issues that must be addressed when starting up a new business is taxation. As far as the administrative burden of any small business is concerned, taxation is one area that requires accurate records to be kept.
Good paperwork makes the entire process smoother and in some cases, can even help to ease the tax burden. Adequate paperwork also reduces the risk of penalty payments being levied by HMRC.
Registration and self-assessment
It is essential for a new business owner to ensure they are fully conversant with the current tax regulations for their particular industry. Legislation changes over time and can vary according to the type of business involved, so constant monitoring is necessary in order to keep up-to-date. However, there are some general responsibilities that it is important to be aware of.
First of all, it is important for a business owner to be registered with HM Revenue and Customs. Registration of self-employment is quite straightforward and simply requires basic personal information. After this, one of the basic regular tax responsibilities is the preparation and submission of an annual self-assessment form. This form has to be returned to HMRC by the end of January, along with payment of any taxes due.
For a business with an annual turnover of more than the current threshold, registration for VAT (value added tax) is also necessary. Voluntary registration for VAT is possible, whatever the company’s turnover, but it becomes a legal requirement once the threshold has been reached.
Apart from VAT, they might also need to be FUTA (Federal Unemployment Tax Act) compliant, especially if they are setting up their business in the US. For entrepreneurs who are unaware of what FUTA is –it is a tax collected by the Internal Revenue Service to help fund state workforce agencies. Any business owner in the States is subject to this tax on the wages they pay to their employees.
Limited company or sole trader
If the business owner decides to form a limited company, it becomes liable to pay corporation tax. The necessary forms and information on corporation tax are sent to the business owner after the relevant registration forms have been filed with HMRC. Sole traders do not have this tax liability.
The decision on whether to operate as a limited company or as a sole trader should be taken when forming the business, based on issues such as the type of business being carried out and the potential commercial risk involved. The greater the potential risk, the more reason there is to set the business up as a limited company.
Many businesses trade internationally, which brings with it the possibility of becoming involved in double taxation, depending on the regulations in the countries involved. It is necessary to ascertain what the local regulations and treaties are so that exemptions can be applied; for example, in the case of VAT.
A new small business that intends recruiting employees has a further set of taxation requirements to deal with. Essentially this involves registering as an employer and implementing a PAYE (pay as you earn) system, including completion of the employer’s annual return form.
Another issue to be aware of is the importance of the IR35 system of taxation, which is intended to prevent so-called disguised employment. This affects payments that are made from clients through an intermediary, such as a small company. This is a complex area, which has been subject to significant change in recent years, widening the scope of the relevant tax regulations.