Which type of tax return should a small business submit?
Any small business will need to file tax returns and pay taxes. The type of tax return a small business will need to submit depends upon how the business has been set up. Most small businesses will be either a sole trader, a partnership or private limited company.
In general terms, small businesses may or may not be liable to pay VAT depending upon turnover; limited companies will need to pay Corporation Tax and sole traders and partners in a business partnership will need to pay Income Tax. Company directors will also need to pay tax on income they receive from the company.
Limited Companies pay Corporation Tax on their profits and must submit a company tax return (form CT600) to HMRC. The CT600 form needs to be submitted whether or not the company has a Corporation Tax liability to pay. The form must be submitted online except in minimal circumstances. The company tax return needs to be submitted within 12 months after the end of the accounting period covered by the return. The company tax return must show:
- Profit or loss for Corporation Tax purposes
- The company’s Corporation Tax bill
Most companies will submit their company tax return early because Corporation Tax is payable nine months and one day after the end of the company’s accounting period. It is up to the company to calculate its Corporation Tax liability. With Income Tax HMRC calculate the tax liability based upon the information given to them by the taxpayer, but this does not happen with Corporation Tax.
The directors are personally responsible for making sure that Corporation Tax is paid, whether or not they employ an accountant or tax consultant to prepare the return for them. The current Corporation Tax rate is a flat rate of 19% of profits, regardless as to the size of the company.
There are penalties if a company does not pay its Corporation Tax on time, starting at £100 for being even a day late. The information in the company tax return must be complete and accurate, as HMRC can also fine a company if its tax return is incorrect. If you notice a mistake in your tax return, you must notify both HMRC and Companies House and provide a corrected set of accounts and tax return.
Dividend tax liabilities for directors of Limited Companies
If a company director is paid both a salary and through dividends, they will need to pay tax on any dividends over and above the current dividend allowance of £2000. Smaller amounts of dividends can be taxed through the director’s tax code, but if the dividend is over £10,000, the director will need to file a self-assessment Income Tax return.
Sole Traders and Partnerships
Sole traders and partnerships do not pay Corporation Tax. Instead, the business owner, if a sole trader, or partners in a partnership, will pay Income Tax on their share of the profits. They will need to submit self-assessment tax returns to HMRC if they are either self-employed and earning more than £1000 per year, or they are a partner in a business partnership. If you are not already registered as self-employed with HMRC then you must notify them.
Value Added Tax
Value Added Tax, or VAT, is a tax payable on the supply of goods and services. If the turnover of the business exceeds the VAT threshold, currently £85,000 per annum, then it must register for VAT. Businesses can register for VAT voluntarily, which can be advantageous. Once a company is registered for VAT, it must then complete and file VAT returns every three months. The returns must be filed even if there is no VAT to pay.
If your small business ceases to trade, you must notify HMRC. If your business is a limited company, it can be marked as dormant if HMRC agrees.
Whichever way your business is structured, you must keep accurate records so that completing your tax return is as straightforward as possible. This is the case whether you complete your tax return yourself or employ an accountant or tax consultant to do it for you – remember that as the business owner or director, you are responsible for payment of taxes.
Ensuring that receipts and expenses are accurately captured will aid the completion of your tax return. No-one wants to be in the position of struggling to file their tax return correctly or on time, and the substantial penalties that might result are best avoided.