Digital Tax Returns


Small Company - An Accounting & Tax Guide

An introductory guide to accounting and tax for the small company. The legal responsibilities, claiming expenses and working out your tax.

The Annual Returns

As a Director of a limited company you are required to prepare and submit a number of annual returns for your company:
  • Corporation Tax Payment - you are required to calculate and pay the corporation tax liability for your company within 9 months of the end of your company's accounting period end.
  • Financial Statements - will need to be filed with Companies House within 9 months of the end of your accounting period.
  • Corporation Tax Return - then needs to be submitted electronically (together with supporting financial statements) to HMRC within 12 months of the end of your accounting period.
  • Income Tax - as a Director you will probably need to file your annual income tax return as part of the self-assessment process that ends in January after the end of the relevant tax year.

As a business engaging in trading activities you will need to review your obligations with regard to registering for VAT – whether you are required to be registered and, if not, whether it is advisable. See our VAT Guide guide for further information.

Contractors & IR35

Depending on the nature of your business you may need to determine whether your company is deemed a personal service (IR35) or managed service company because that will have a big impact on the way you account for taxes. See our Contractor Guide for further information.

Employing People

If you have any employees (including yourself) you will need to account for PAYE taxes on any employment payments you make. HMRC’s current Real Time Information system requires you to submit certain payroll information to HMRC ‘on or before’ payments are made to employees. See our Employment Guide for further information.

Tax Planning

One of the main perceived advantages to operating through a company structure is the flexibility you have as a director and shareholder to optimise the payments you receive from the company between salary vs dividends to reduce the amount of tax you pay. The PSC and MSC provisions, if they apply, substantially reduce the flexibility you will have here.

In terms of your responsibilities as a taxable individual (income tax) you may also have to account directly to HMRC for all of the income you receive from your business (employment, dividend, interest etc) and elsewhere (dividends, interest, rental income, capital gains etc).

What expenses can I claim?

The general rule that applies across all incorporated and unincorporated businesses is that expenses must be incurredwholly and exclusively for the purposes of the trade.

Part of mixed expenses can be deducted, for example the business element of line rental and call charges and mixed living expenses where the business and private expenses can be accurately split. Reasonable expenses can be claimed for business travel.

Where an employee of a business (incorporated or unincorporated) gains a personal benefit from business expenditure the normal treatment is for the expense to be tax deductible in the businesses profits but it is taxed as a taxable earnings on the employee.

Accountancy expenses in relation to calculating profits and calculating the tax on those profits are generally held to be deductible although costs incurred preparing a traders tax return ( and capital gains) are not allowed and a distinction needs to be recognised when preparing the directors own personal tax return as opposed to the company's tax returns.

Capital or Revenue expenditure: capital expenditure cannot be deducted in arriving at taxable profits. Relief is given on capital expenditure through capital allowances. Items are capital in nature if they acquired ‘for the enduring benefit of the trade’. The nature of capital items versus revenue items will thus depend on the nature of a trade. For example, cars used by traders will be capital items but cars held for sale by a motor dealer are trading stock. Similar issues arise in determining trading income from capital profit.

Provision for future liabilities: allowable deductions provided they follow accepted accounting practice.

Business entertaining and business gifts are generally not allowable , although expenditure on entertaining staff is allowable but the VAT treatment of entertaining expenses differs.

Bad and doubtful debts specific provisions for bad or doubtful debts is deductible but not general provisions. The recovery of previously written off debts must be included in calculating taxable profits.

Interest paid wholly and exclusively for the purpose of the business is deductible.

Leasing of cars have a number of restrictions in terms of the tax deduction allowable including the level of CO2 omissions.

Private use of good and services goods taken for private use are valued at saleable value. Services are valued at cost and therefore do not introduce a profit element. Directors of a limited company taking goods or services are charged under the benefits rules and the cost of the goods or services is an allowable deduction for the company.

VAT - generally businesses registered for VAT will pay over the VAT they have raised on their customers and reclaim the VAT they have incurred on their supplies and thus VAT will not feature in the calculation of their profits. There are general restrictions in place regarding the input VAT claimed and output VAT charged on private use goods, services, and assets. Businesses not registered for VAT are entitled to include the input VAT as a business cost along with expenses that are deductible and also include the non recoverable VAT on the purchase cost of assets for calculating capital allowances. Adjustments to reported turnover and costs need to be made where the VAT flat rate scheme is used.

National insurance contributions – employers Class 1, Class 1A and Class 1B are all deductible.

Worked Example - Calculating Business Tax
The table below shows a simple business tax calculation to highlight the process of completing a business tax return. The first step is to calculate the profits the business has generated using the appropriate accounting standards. The table shows that the business has generated £10,000 of business profits in the period after charging £2,000 for the depreciation of fixed assets and £3,000 for client entertaining.

The second step is to calculate the businesses taxable profits by making certain specific adjustments to the business profits as required by tax law. In this example, the entertaining expense is not allowed as a deduction in arriving at taxable profits and must be added back. Depreciation is also not allowed as a charge against taxable profits. It is added back and replaced by a calculation of the capital allowances that are claimed for the fixed assets purchased by the business. This process generates a taxable profit figure of £12,500 for the business.

The final step is to calculate the tax due on the profits by reference to the tax rate applicable for the business in question. In this example we have applied a tax rate of 20% to generate a tax payable figure of £2,500

1. Calculate Business Profits
Sales 50,000
Cost of Sales 25,000
Gross Profit 25,000
Operating Costs:
Administration 10,000
Depreciation 2,000
Client Entertaining 3,000
Total Operating Costs 15,000
2. Calculate Taxable Profits
Business Profits 10,000
Add: Depreciation 2,000
Add: Entertaining 3,000
Less: Capital Allowances (2,500)
3. Calculate Tax Payable
Taxable Profits 12,500
Tax on profits at 20% 2,500

Tax Points
  • The mixing of private and business expenses should be avoided and the private use of a businesses goods should be avoided to prevent the creation of a taxable profit on the private use.
  • Wages paid after the end of the accounting period, for the accruals basis, must be paid within 9 months of the end of the accounting period to qualify for tax relief. Bonus payments after the end of the accounting period in relation to the accounting period will only be allowable where sufficient evidence exists before the end of the accounting period of the obligation to pay the bonus.
  • All business records relating to tax affairs must be kept for 5 years 10 months after the end of the tax year.
Next Steps
Why not get in touch to discuss how we can help you deal with the accounting, tax and finance for your small business. Request a call back to arrange a free consultation: Request A Callback

Written by Accquant Chartered Accountants
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