UK Business Tax: 10 Most Popular Questions about UK Business Tax
As an entrepreneur, a start-up, or a business, you are faced with different tax-related problems every day. From business filings to VAT flat rates, you might be missing out on some tax opportunities or be at risk of paying fines.
To prevent this from happening, this article looks at the five most frequently asked questions for businesses in the UK. You’re probably wondering what the VAT flat rate is when to pay income tax and what to do if you’re a business selling in the European Community.
This article answers the ten most frequently asked questions related to the VAT flat rate, late payments, negotiations with HMRC as well as national insurance contributions.
1. UK Business Tax: What is the VAT Flat Rate Scheme?
This eliminates the requirement for small enterprises to register VAT for individual purchases and transactions, simplifying VAT reporting. If your company’s annual revenue is less than £150,000, you can sign up for HMRC’s VAT Flat Rate scheme.
2. How does the Flat Rate VAT Scheme Work?
This VAT scheme aims to make the VAT process as simple as possible. You still charge 20% VAT on your invoice, but depending on the sector you trade in, you pay HMRC a lower percentage of the gross invoice in VAT.
IT contractors often save roughly £2,000 per year – based on a turnover of around £77,000 net – by paying 14.5% of the gross invoice in VAT to HMRC.
3. What’s the Penalty for Submitting VAT Returns Late?
It can be fairly tricky, and depends on whether this is your first “offense.” If you don’t pay on time or knowingly pay the wrong amount, you may be subject to penalties and fees.
HMRC will charge you a penalty if you don’t file your return when it’s due. You must file a VAT return every quarter.
4. Can I negotiate a lower settlement with HMRC for a late VAT declaration?
In most cases, HMRC will levy a penalty for late registration. There are, however, some instances in which it can be minimized.
Failure to notify can result in a penalty of up to 30% of the VAT not disclosed although companies could negotiate a lower settlement.
5. Can I Reclaim VAT on my Business Expenses?
This is a difficult situation. When traveling for business, you can claim VAT on meals and lodging, but not on things like entertaining clients.
It is also possible to claim VAT on gasoline and vehicle expenses, although certain conditions must be met in the case of fuel, so this would need to be reviewed before departure. Other expenses such as import VAT, inventories purchases,
6. For Businesses Selling to the European Community, how do we Verify our VAT number?
The check can be done on the EU website using a program called VIES. It not only tells you if the VAT number is valid, but it also tells you the name of the company.
If this verification is not performed and HMRC is not notified, the customer will be unable to be established as a legitimate entity.
Furthermore, because the sale cannot be zero-rated, this could result in a high VAT bill.
7. How do I pay National Insurance Contributions as a director?
If you work as a director of a limited business and earn more than the yearly personal allowance, Income Tax will be deducted at the source through your firm’s PAYE scheme. In order to pay yourself, you are required to have an approved payroll scheme.
Any dividends you get from the company are taxed as part of your annual Self Assessment, which all company directors must submit.
8. Do sole traders have to pay income tax if they do not make a profit?
Income Tax is paid by sole traders on the profit they produce from their firm, which they report on their yearly Self Assessment tax return.
The deadline for reporting Self Assessment and paying any tax owed to HMRC is 31st January each year for company directors or a sole trader.
9. How do I pay National Insurance (NIC) as a director?
Directors are in an enviable position since they can control how and when they are paid.
This means that if their NIC was calculated using the “standard technique,” they could pay their entire annual wage in one week and pay a lot less NI than a regular employee who was paid the same amount for the tax year.
The Director’s NIC is calculated using a new procedure known as the “directors” method” to combat this.
In general, this works in the same way as PAYE in that past earnings from the same tax year’s employment are taken into account for computing the NI owed, i.e. on a cumulative basis.
10. Do I have to pay NI contributions on my income?
Employees are required to pay NI contributions on their earned incomes. Directors do not have to pay NI on their salaries until their total earnings reach £7,956.
The payment is computed in the same way as that of employees, although it is only payable once the total salary exceeds £7,956.
Frequently Asked Questions
Why does the net amount on the profit calculations differ from that on my invoices?
This is because you generate a Flat Rate ‘bonus’ on each invoice. You charge 20% VAT on the net amount but only pay a set proportion (depending on trade sector) of the gross invoice to HMRC, thus you are paying over less VAT than has been charged, which is reflected in the net on profit calculation.
What is PAYE?
When doing your self-assessment each year, PAYE is explicitly paid on salary on a per pay run basis, as opposed to income tax, which is payable on all income.
Each year, the tax year runs from April 6 to April 5, and it is on this premise that the tax year is calculated.
How can I save on income from dividends?
This will be determined by the amount of wages and dividends you received during the current tax year (and any other income you may have). The dividend allowance for 6 April 2021 to 5 April 2022 is estimated at £2,000 according to HMRC.
In order to make informed decisions that will benefit your business, it is important to be aware of VAT flat rates, penalties for submitting your VAT late, and how to pay yourself as a director, consultant, or sole trader.