Common Tax Mistakes Small Businesses Make (and How to Avoid Them)

Running a small business can be demanding. Liaising with customers and managing the day-to-day operations can be tricky while overseeing staff and striving for business growth. It is easy for tax and other financial obligations to move down the list of priorities. However, getting these areas wrong can lead to stressful situations and penalties.

Here are some common tax mistakes small businesses make and how to avoid them.

Improper Record Keeping: What records do I need?

Good record keeping makes preparing financial accounts much easier and can save a significant amount of time. It also allows you to understand how the business is performing.

It is advisable to maintain all sales and purchase invoices, bank and credit card statements, showing all transactions. It’s also advisable to keep any agreements or legal documents and any other records you have for the financial year.

Limited companies need to keep all records for at least 6 years from the end of the financial year.

Keeping 6 years’ worth of paperwork does not mean you have to keep copious amounts of paper around your office. Digital record keeping can simplify this task and make finding and organising information much easier. Many accounting software packages allow you to upload documents and attach them to individual transactions. This means you can quickly find an invoice or receipt when required.

Deadlines: What are they and what do I need to do?

The typical key deadlines are as follows:

• Company accounts: 9 months after the end of the accounting period.
• Company Tax Return: 12 months after the end of the accounting period.
• Self-Assessment Return: 31^st October following the end of the tax year if submitted by paper. 31^st January following the end of the tax year if submitted online.
• VAT Returns: 1 month and 7 days after the quarter end of the VAT period.
• Payroll Submissions: FPS submissions are generally due on or before payday. PAYE payments are generally due by the 22nd of the following month when made online.

Although these deadlines may seem a long way away, when managing a business, time can pass quickly. Therefore, it is important to be aware of when your accounting period ends and know when your deadlines fall.

Late filing or payment can lead to penalties and interest. A good approach to mitigating this risk is to diarise key dates well in advance. Planning ahead ensures you have adequate time for the preparation and submission prior to the deadline.

Tax Payments: What do I need to pay & when?

Corporation tax is generally payable 9 months and 1 day after the end of the accounting period. Depending on your company’s taxable profits, corporation tax can be charged at the 19% small profits rate or the 25% main rate. Marginal relief may apply to companies whose profits fall between the relevant thresholds.

Under Self-Assessment your first personal tax payment will be due for payment by 31^st January following the end of the tax year in which the business began trading. In addition to this, you may be required to make payments on account in respect of your second year of trading. These payments being two payments on 31^st January and July of the same year – depending on your total income and tax liability.

It’s important to regularly review your business’ estimated profits and work with your accountant to plan for forthcoming tax liabilities. It can be good practice to put money aside throughout the year, perhaps in a separate bank account. This can minimise the risk of cash-flow issues and reduce stress when payments are due.

VAT Registration: When do I need to register?

The VAT registration threshold is currently £90,000. This means that, should your business make taxable supplies, and its taxable turnover exceeds £90,000, you will generally be required to register for VAT.

One common mistake is assuming that the £90,000 threshold applies to the financial year. However, this is not the case. The £90,000 threshold is based on taxable turnover over a rolling 12-month period, with the requirement to register if you expect your taxable turnover to exceed £90,000 in the next 30 days. Therefore, it is important to continuously monitor your turnover, particularly if your business is approaching the threshold, to ensure you register on time.

Once registered, your business will generally need to charge VAT on taxable sales, reclaim VAT on eligible business expenses, maintain appropriate VAT records, and submit VAT returns to HMRC. Most businesses submit VAT returns every three months, although this can vary depending on the accounting scheme used.

Complete the registration online via the HMRC website. Alternatively, your accountant should be able to assist with the registration process.

How to treat: Personal & Business Expenses

Distinguishing between personal and business expenses is not always straightforward. You may find yourself looking through your bank statements months later and wondering whether a particular purchase was for the business or for personal use. This can make preparing your accounts more difficult and increases the risk of transactions being incorrectly recorded or deductible expenses missed from the accounts.

If possible, it is typically best practice to keep your business and personal finances separate. Dedicate a business bank account only for business to help mitigate this risk.

Sometimes, you may use your personal card to pay for a business expense. This is not necessarily a problem, but you should keep a record of the transaction and retain the relevant receipt or invoice so you can account for the expense correctly.

You may pay some business expenses personally and then recharge them to your business. These can include business mileage, parking costs, use of home as office, professional subscriptions and mobile phone costs.

It is also a good idea to review your business bank account regularly. Doing this throughout the year can prevent confusion later and means that, if your accountant needs further information about a particular transaction, you are more likely to understand the transaction and its purpose.

Final Thoughts

Keeping on top of your business’s accounting and tax responsibilities can take some planning, but it doesn’t need to be complicated.

You do not need to wait until your deadlines to start preparing the financial statements. Preparing early gives you more time to identify and resolve issues, understand your tax liabilities and ensure you have sufficient funds available when payments are due.

If you require any assistance with the preparation and submission of your financial statements, please contact Perrys Chartered Accountants for further advice and support.