Connecting you to the facts

Although everybody’s accounting needs are different, there are common themes and questions that we get asked. Below are some of those, complete with answers, but if you cannot find your answer here, please contact us.

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accounting advice


Starting Up

Is it better for tax to be a sole trader or a limited company?

In the majority of cases where a person is making profits in excess of the personal allowance (2015/16 = £10,600) then it is usually better to be a limited company.  This is because you can earn up to the higher earner threshold (2015/16 = £42,466) without paying any income tax, and by paying minimal national insurance contributions (by using a combination of minimal salary through a company payroll, and topping up your income with dividend payments).

You will however be subjected to 20% corporation tax on the company profits (adjusted for taxation purposes).  This charge will generally be significantly lower than the income tax liability you would have had to pay on the same amount of sole trader profits.

For a more detailed explanation and working examples please download our helpsheet: A Guide for Start-Up Businesses – “What are my first steps?…..Connecting you to the facts about starting up”.

 

What do I have to do to set up a limited company?

You can set up your own company online through the Companies House website, or you can ask us to do it for you (company formation service – £100).

When you set up your company you will need to provide a number of pieces of information such as the company address, the company director’s details, and the company shareholdings (including classes of shares).

 

How long does it take to set up a limited company?

Once all of the necessary information has been submitted to Companies House the company will be created within 48 hours.

 

What records do I have to keep?

In the same way you would do with any form of sole trade business, you must keep a record of all company income and expenses.  There are a number of different ways you can do this, but we recommend using a computerised bookkeeping system such as Xero.


SELF ASSESSMENT TAX RETURN

Who is HMRC?

HMRC is an acronym for “Her Majesty’s Revenue & Customs”.  This is the UK Government tax authorities.  They are responsible for ensuring that the current UK tax laws and regulations are being upheld by the UK taxpayers.

 

What is a UTR?

UTR is an acronym for “Unique Taxpayer Reference”.  It is a 10 digit number that is issued by HMRC to all UK residents who are required to file a tax return.

 

How do I get a UTR?

If you don’t already have a UTR then you can request one online using form SA1 on the HMRC website.

 

What is the “tax year”?

The UK tax year runs from 6 April to the 5 April.  We are currently in the 2015/16 tax year which began on 6 April 2015 and ends on 5 April 2016.

 

When do I have to submit my tax return?

Each UK taxpayer is required to report on their earnings for each tax year, and pay all liabilities by 31 January of the year following the end of the tax period.

i.e. The deadline for submitting your tax return to HMRC and paying your liability for the 2015/16 tax year is 31 January 2017.

This may seem like a long time, but it creeps up on a lot of people, so make sure you have adequate savings in place to cover your tax bill when it is due.

 

What are the consequences of missing the filing deadline?

HM Revenue & Customs impose late filing penalties for anyone that files their tax return later than the 31 January deadline.  This penalty increases the longer the tax return is outstanding, as explained in the table below.

Length of time from 31 January deadlinePenalty additions
Less than 3 months£100 fixed fee penalty
3 – 6 months£10 daily penalty for 90 days
6 – 12 months5% of tax due or £300 whichever is greater
More than 12 months5% of tax due or £300 whichever is greater

 

What are the consequences of not paying my income tax and national insurance liability by the 31 January deadline?

HM Revenue & Customs will also impose penalties if they believe that a person is deliberately withholding information or trying to evade tax, as shown below.

Length of time from 31 January deadlinePenalty additions
30 days5% of tax due
6 months5% of tax due at that date
12 months5% of tax due at that date

 

If I am employed and self employed do I need to do a tax return?

Yes.  Your tax return should detail all of your income for the tax year, and state how much tax has been paid on it so far.  Hence you need to add your sole trade income to your employment income, and deduct the PAYE and national insurance already deducted at source from your liability for the year.

 

If I have two trades do I have to complete two tax returns?

No. Regardless of how many sources of income you have in any one tax year, you will only need to submit one tax return.  You must list all of your income on your tax return, and state which business activities you were involved in.


ACCOUNTS

Do I need to prepare accounts if I am a sole trader?

As a sole trader you have no legal requirement to prepare accounts, or to submit them to anyone.  However, it is best practice to have accounts prepared, and could help you in the future (for example to gain funding).

 

Who do I have to submit my limited company accounts to?

As a company you are required by law to submit a set of abbreviated accounts to Companies House each year.  You are also required to submit a set of full accounts to HM Revenue & Customs (alongside your corporation tax return).

 

What are the deadlines for submitting my limited company accounts?

You have 9 months after your company financial year end date to submit your accounts to Companies House.

For example, if your financial year end date is 31 March 2015, you have until 31 December 2015 to submit the company accounts to Companies House.

 

What are the consequences of missing the filing deadline?

Companies House impose late filing penalties for all companies that file their accounts later than the 9 month deadline.  This penalty increases the longer the accounts are late as explained in the table below.

Length of time from accounts due datePrivate company penaltyPublic company penalty
Not more than 1 month£150£750
1 – 3 months£375£1,500
3 – 6 months£750£3,000
More than 6 months£1,500£7,500

These penalties double if the accounts are late in two successive years.

 

How is my company financial year end date determined and can I change it?

Your financial year end date (also known as your accounting reference date) is the last day of the month in which your company was incorporated.

For example, if you incorporated on 11 May 2015, your financial year end date would be 31 May each year.

You can change your year end by submitting form AA01 “change of accounting reference date” to Companies House.  This can only be done once in any 5 year period.


CORPORATION TAX

What is corporation tax?

Corporation tax is a tax on limited company profits.  You are only liable to this tax if you operate as a limited company.

 

How is corporation tax calculated?

Corporation tax is calculated on the limited company profits (i.e. income less all tax deductable expenses) at a rate of 20%.

 

When do I have to pay corporation tax?

Corporation tax is payable 9 months and 1 day after the financial year end date for your company.

For example, if a company has a financial year end date of 31 March 2015, the corporation tax liability would be due for payment on 1 January 2016.

 

When do I have to submit the corporation tax return?

Corporation tax returns (CT600) are due to be filed with HM Revenue & Customs 12 months after the financial year end date for your company.

For example, if a company has a financial year end date of 31 March 2015, the corporation tax liability would be due for payment on 31 March 2016.

 

What are the consequences of missing the filing deadline?

HM Revenue & Customs impose late filing penalties for anyone that files their corporation tax return later than the 12 month deadline.  This penalty increases the longer the return is outstanding, as explained in the table below.

Length of time from 12 month deadlinePenalty additions
Less than 3 months£100 fixed fee penalty
3 – 6 months£100 fixed fee penalty
6 – 12 months10% penalty added to estimated tax bill
More than 12 months10% penalty added to estimated tax bill

 

What are the consequences of late payment?

Late payment of corporation tax is subjected to a 3% penalty.


VAT

What is VAT?

VAT is an acronym for “Value Added Tax”.  It is a tax imposed by the UK Government on most goods and services traded within the UK economy.

 

How does VAT work?

The current rate of VAT in the UK is 20%.  A company charge 20% on their sales, and can then re-claim any VAT on their business purchases.  The difference between the VAT collected and the VAT paid is the company’s liability to VAT.

 

Who can charge and reclaim VAT?

Only VAT registered businesses can charge and re-claim VAT.

 

Do I need to be VAT registered?

If your VAT taxable turnover is more than £82,000 in any rolling 12 month period then you are required by law to register for VAT.  This is called compulsory registration.

You can also register for VAT voluntarily, and there are many pros and cons of doing this.  Please see our helpsheet “An overview of VAT…..Connecting you to VAT rules and regulations”

 

How often do VAT returns need to be filed?

All VAT registered businesses (unless on a special VAT scheme) are required to file a VAT return each quarter (i.e. every 3 months).

VAT returns must be filed electronically online, and are due to be filed by the end of the month following the quarter end plus 7 days.

For example a VAT registered business preparing a VAT return for the quarter 1 March 2015 to 31 March 2015 must file the return by 7 May 2015.

 

How often does VAT need to be paid?

All VAT registered businesses (unless on a special VAT scheme) are required to pay their VAT liability each quarter (i.e. every 3 months).

VAT payments are due to be made by the end of the month following the quarter end plus 12 days.

For example a VAT registered business preparing a VAT return for the quarter 1 March 2015 to 31 March 2015 must pay their liability by 12 May 2015.


PAYROLL

Do I need a payroll scheme?

If your business employs anyone, or intends to employ anyone, then yes you will need to open and administer a payroll scheme.

 

What is RTI?

RTI is an acronym for “Real Time Information”.  This refers to the “real time” exchange of information between employers and HM Revenue & Customs.  Employers are required to electronically inform HMRC on a regular basis when an employee has been paid, and how much tax has been deducted.

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