Tax and Expenses: The Company Tax Year Countdown
The stress of tax
Tax return stress is a real problem.
In 2017, recruitment consultancy Robert Half found that 78% of UK Chief Financial Officers (CFOs) said that the stress levels in their departments would rise over the ensuing three years (which takes us roughly to where we are today).
The main reason for this is the sheer volume of data that the business world is already churning out. IDC predicts that the world will be generating 163 trillion gigabytes of data every year by 2025, with finance, transactions and taxation taking up a huge chunk of that.
It’s true that there are more factors at play here outside of tax and expense reporting. However, it’s difficult to argue that smoother processes wouldn’t have a tangible impact on the stress levels among accountants and finance pros.
But it isn’t just those with finance-specific roles who find tax time stressful.
A 2019 survey by YouGov of 1,500 UK taxpayers found that nearly four in ten (38 percent) worry about the consequences of making a mistake in their tax return.
When asked to quantify these stress and pain levels, the top comparisons cited by respondents were:
- Subjection to a medical or dental procedure (16%)
- Filling out mortgage or loan applications (15%)
- Sitting a school exam (12%)
The uncomfortable truth, however, is that we really don’t make it any easier on ourselves in the preceding 12 months.
According to the private investment platform Hargreaves Lansdown, in 2019 more than 700,000 people in the UK filed their tax return on the last possible day, while nearly 5 million left it until the last few weeks.
If you are one of those who finds yourself in the latter category for 2020, don’t worry, we‘ll take you through everything you need to do in the next few weeks leading up to the company tax return deadline.
However, the sooner you put clearly defined tax and expense reporting processes in place, the easier your next tax return will be.
The tax return process is far more painful if you don’t take the time to manage your financial reporting in the year leading up to tax time.
Often the best means of managing a crisis is by preventing it from happening in the first place.
What do I need to do right now?
At the time of publication, there are only a few months to go before the end of the tax year, which this year, lands on Monday 6th April 2020.
So, with the clock ticking, what exactly do we need to do to minimise the impact of the 2019/2020 tax return?
Step 1: Don’t get flustered, there’s a job to do
If you’ve fallen behind on your receipt logging or tracking your own VAT on expenses amid the day-to-day stresses and strains of running a business, don’t worry.
However, making a little time at regular points throughout the year (weekly, biweekly or monthly) to take stock of your allowable business expenses and VAT receipts can save you a huge amount of time and money when March rolls around.
It may seem like a chore at the time, but you will thank yourself later if you stay disciplined.
The prospect of going back through a pile of receipts and logging each individual transaction can be daunting, particularly when you haven’t been as diligent this year as you maybe could have been.
Step 2: Get your circumstances straight
With just a few months left, it pays to be smart with the time you have, so make sure you know exactly what kind of tax return you need to file before you start ticking boxes.
Depending on your company’s size, industry and previous tax history, there are different forms to file and documentation you need to provide.
Certain types of business, such as charities and not-for-profits, don’t need to file a company tax return unless they have any income that doesn’t qualify for tax relief.
If they do have these types of financial incomes and are a limited company, a trust or an unincorporated association, they need to complete a company tax return. They must include supplementary pages for charities and community amateur sports clubs (which come as part of the stand downloadable tax return form).
A charity counts as a limited company if set-up by:
- Memorandum and articles of association
- Royal charter or Act of Parliament
- Limited companies must also send annual accounts to Companies House
A charity counts as a trust if it was established by a trust deed or will and requires the completion of a Trust and Estate Self Assessment tax return form.
Step 3: Clear your schedule and dive in
Once again, there isn’t a huge amount of time to waste before the tax deadline, so here is how you can make the process as methodical and efficient as possible.
Get your affairs in order
You need to submit three pieces of documentation to Her Majesty’s Revenue and Customs (HMRC), so make sure you have as much of the corresponding data to hand as humanly possible. The three elements are as follows:
This is basically the full rundown of all your company’s incomings and outgoings over the period in question. This is the basis for which transactions you need to be taxed on for the previous year.
You need to provide relevant documentation (receipts, invoices etc.) for each individual transaction to prove their taxation status.
This full report consists of:
- Company-wide profit and loss account, also known as an income statement
- Balance sheet, basically a comprehensive statement of your current financial position
- Notes – basically any further information or context around your account filing
- Directors’ report – but only if you are both a public limited company (PLC) and a larger enterprise company
Corporation tax calculation
This number is based on the amount of profit your company made this year, minus business overheads such as staff salaries, office rent or expenses.
Almost all company profits, (except ring fence profits) come with a flat 19% taxation rate. The main exception to this being profits for unit trusts and open-ended investment companies, for whom the rate jumps to 20%.
Company tax return
It is a comprehensive profile of your business and what it owes the government in taxation, covering all elements of VAT, corporation tax and any other charges incurred over the last 12 months.
The main component parts of this are:
- Details about your company
- Calculation of corporation tax due
- Details of capital allowances claimed
- Details of losses claimed
The good news is that thanks to the government and HMRC’s ‘Making Tax Digital’ campaign, you needn’t subject yourself to a mountain of paper receipts and manual forms.
The majority of tax return processes now take place online, so the first thing you need to do is log in to your Government Gateway or set-up an account if you haven’t already.
To complete your tax return in one go, you’ll need each of the following to hand:
- A balanced record of your company’s annual accounts, if you’ve already filed them (i.e. your total assets should match what you owe in taxes)
- Your Companies House login details (if you’re filing your accounts at the same time)
In limited circumstances you can still fill out a tax return form manually if you need to, but only if you can provide what HMRC terms a ‘reasonable excuse’ (or, you’re based in Wales).
Examples of reasonable excuses can include:
- The death of a partner or close relative shortly before the tax deadline
- An unexpected hospital stay prevented you from dealing with your taxes online
- A serious or life-threatening illness stopped you being able to complete your online return
- Technical issues such as computer or software failure while preparing your tax return
- Technical issues with HMRC’s own IT system
- Logistical issues relating to a personal disability
Examples of excuses that wouldn’t be deemed ‘reasonable’ include:
- Someone failed to send your return on your behalf
- HMRC’s online system was too difficult to use
- You need to fill your taxes out quickly as you weren’t reminded by HMRC
If you are completing your return digitally, you can start it and pick it up again at any point (just make sure you’ve saved your progress) if you need more than one session to finish it.
There are also software tools like Sage that can take care of this for you. If the financial tax and expenses data you have available covers the full tax year, and can be imported into these tools, they can make your life a lot easier.
For the full list of tools you can use, you can consult the HMRC approved software directory.
What you need to work out ahead of filing
When you’re outlining your company tax affairs, based on your account declaration for the year, you need to have the following elements of your company finances for the period ordered and accounted for.
Your business’s day-to-day ad hoc spending is the bread and butter of any yearly tax return, but the sheer number of transactions, coupled with the number of staff members making those purchases often make it the most time-consuming part.
The easiest way of ensuring you avoid unnecessary VAT fees or an inaccurate final tax bill is to identify all of your purchases from the last 12 months that fall into:
Allowable expenses for employees, which can be loosely defined as:
- Expenses that were necessary for the staff member to do their job
- Expenses that were paid for while operating on behalf of the company directly
- Expenses that were of a lower value than the staff’s earnings at that job
- Expenses that were incurred on behalf of your business and your business alone, not partly for another role or job or for personal reasons
Allowable business expenses, ie. essential costs which keep the business in proper working order, including:
- Everyday costs like stationery and professional services
- Insurance costs on property, tech etc.
- Vehicle running costs
- Proportional costs
If you categorise your day-to-day expenses properly, you can account for a big chunk of your tax return workload relatively quickly and with minimum angst. One of the easiest ways of doing this is to manage your expenses with software like Soldo.
Soldo account feeds allow you to track allowable expenses in real-time, so when the taxman comes calling, you have all the information you need ready to go in a few clicks.
Which VAT bracket you fall into (if any)
Once you’ve worked out which purchases you need to pay VAT on, the next logical step is to work out how much VAT you actually owe.
Value Added Tax comes in many forms and the flat rate of tax varies wildly depending on the industry your business falls into.
This can range from just 4% for retailers selling food, confectionery, tobacco, newspapers or children’s clothing to 14.5% for a number of industries including architecture and legal practices. It is therefore extremely important to understand how much VAT you can expect to owe when your tax return is all said and done.
The earlier you work this out, the less surprising your final bill should be.
Be honest and take advice
Failure to divulge the right information can lead to unexpected financial penalties.
If you ever find yourself wondering “is this too detailed?” don’t let it worry you too much. You’ll never be charged more for providing too much information, but you can face fees or further questioning for providing too little.
It also pays to be honest with yourself about what you can and can’t do on your own. Sometimes the best option might be to hire an accountant or bookkeeper.
If you’re in any doubt about which transactions/costs fall into what category, speak to an accountant or bookkeeper. The last thing you need is to run into unexpected fees as a result of ticking the wrong box or miscalculations.
There are plenty of useful online resources such as The Accountancy Partnership and The Accountancy Solutions which offer direct advice on granular tax return questions about VAT on expenses, tax-deductible expenses and countless other areas of financial reporting.
Quickbooks and Xero customers can consult their financial support teams directly as they complete their annual accounts. Which means Soldo prepaid card users whose company finance software is fully integrated have it easier.
Step 4: Don’t be afraid to ask for help
Some people find these things difficult, however responsible they’ve been with their financial records throughout the year. Others may be too busy for the full tax and expenses process amid the day-to-day responsibilities of running a business.
The good news if you fall into either of these categories and want to get your taxes and VAT returns in order is that there are companies and professional service providers who can take a lot of the weight off your shoulders.
The most obvious examples are accountants and accountancy firms.
The main issue with hiring an accountant this late before the end of the tax year is that if you don’t have properly collated and categorised expenses, payroll and spending records already, there isn’t a huge amount that they can do retroactively.
If you have been responsible with collecting your receipts and tracking PAYE however, a good accountant can take all of the responsibility for tax and expense filing off your hands.
While they may ask you for a few extra pieces of information like specific receipt records and staff employment details, your accountant should handle the lion’s share of form filling, along with any back-and-forth with HMRC.
There are also non-accountancy businesses popping up around the world who deal specifically with tax returns. London-based startup Taxscouts was set up by former Transferwise employees to make quick, easy tax assessment affordable and accessible.
All you need to do is register online, answer a few questions about your circumstances and they pair you up with a trusted tax return accountant who will take things from there.
They promise a £119 flat fee (VAT included, reassuringly) for any tax return, however large or complicated. While they do require a certain level of documentation, with just a few weeks until the deadline, their services can provide welcome support to anyone who is feeling the pressure.
Make next tax year easier
As mentioned above, if you can afford the monthly cost, hiring an accountant at the beginning of the tax year to track all of your financial incomings and outgoings can save you and your business countless hours and headaches.
Indeed, if your business is in the process of scaling up and you’re looking at the possibility of bringing your financial recording and reporting in-house, it’s important to understand exactly what your business needs.
But even if you can’t justify the cost of retaining an accountancy service or an in-house finance team, there are a number of tactics you can employ today that will make 2020/21 the easiest tax year you’ve ever had.
Track your company expenses
One of the worst parts of filing a tax return is going back through team expense spending throughout the last 12 months and identifying tax-deductible expenses and allowable business expenses.
The easiest way to ensure that this process is as straightforward as possible is to implement an integrated staff expense structure which takes care of all the admin for you as you spend.
Soldo prepaid expense accounts allow you to control and track staff spending, while also capturing receipts and transaction information at the point of sale. You can then filter all of these transactions into specific reports, depending on whether the goods/services purchased are for staff (and therefore VAT exempt) or clients/customers (and therefore not VAT exempt).
By setting your own reporting and spending rules in a central online web console, and following them from Day One of the new tax year, you can ensure that calculating tax on your company expenses requires little more than a single data export.
Find the right software
As mentioned, there are only a few weeks to go ahead of the 6th April company tax return deadline. The fact that many people would call this ‘leaving it to the last minute’ gives you a real insight into how much work can go into getting it right.
This is where using the right accounting software to track your company taxation throughout the year can be a lifesaver.
While there are a number of financial tracking tools available, there are two clear leaders in the field:
Xero offers a holistic view of your company finances, allowing you to track invoices, transactions and payroll in one place. By connecting your business spending accounts to Xero, you can see exactly what you are owed and track what you will owe at the end of the financial year as you go. With a clear idea of how much you need to set aside for HMRC, you can avoid any unpleasant surprises come April 6th.
Xero monthly pricing starts at £5, £12 and £15 (all of which double after three months and remain at that rate thereafter), depending on scope and account features, making it an affordable service for companies of all sizes.
You can also integrate a Soldo expenses account with Xero directly, to further streamline the day-to-day process of financial reporting and filing.
Quickbooks operates in a similar way to Xero, but with a clearer focus on SME clients. Their all-in-one tool allows users to track all of their financial spending and accounting in a single place, whether that’s company insurance charges or team payroll.
You can also import data from spending and expenses accounts like Soldo directly into Quickbooks via CSV upload, meaning you needn’t stress about creating a thousand reports in the leadup to the tax deadline in 2021.
Filing your taxes is an inevitable and necessary part of running a business.
If you follow the simple tips outlined above and get everything sorted for this particular spin of the taxation roundabout, you can wave goodbye to your return for another year.