Small business tax & finance advice Tax and VAT for small businesses

Tax and VAT for small businesses

Are you running a small business and are unsure about finances, such as tax relief? This post provides tax and VAT advice for small business owners.

By Jazz Gakhal, Director of Direct Line for Business in For Small Businesses.

Tax and VAT for small businesses

Many of the 2.17 million micro-businesses (like yours!) are probably run from a house or a small office. These businesses don’t always have access to people in the know when it comes to managing the financial admin of their enterprise.

We recently asked UK based micro-businesses about their knowledge of taxation and found that over a third1 (36 per cent) don’t know about the VAT registration limit.

At the moment, if you’ve turned over more than £82,000 of VAT taxable goods and services in the last 12 months you must register for VAT. Our research showed that around 780,000 small firms could be unintentionally not paying what is due to HM Revenue & Customs (HMRC).

If you’re one of these businesses and find all of this tax and finance stuff complicated, don’t worry as there’s a lot of small business help available from places such as HMRC.

Small Business Tax

Here are a few tips to get you started:

1. Do your research

Business owners need to learn about their VAT obligations and how to register by visiting the HMRC website or getting in touch with a professional. For example, if you sell digital goods, such as music downloads, you must register for and charge VAT at the rate of an individual consumer’s country.

2. Understand what you sell

Get back to basics and run an audit on the products/services you offer to find out what’s liable for VAT. Businesses that make food and drink need to check laws carefully as they may sell items that are zero rated, or standard rated for VAT.

3. Know your VAT categories

Enterprises should be aware of the three rate VAT categories, standard (20 per cent), reduced (five per cent) and zero, and then identify what they may need to charge the customer.

4. Keep records

Don’t throw away receipts made for business purchases and goods/services sold. VAT records must be kept for at least 6 years. They can be kept in any format, be it paper or electronically. Not doing this could land you in hot water if the tax man comes knocking.

5. Paying too much?

Small and micro enterprises should also look at ways to get back VAT on purchases made for their company. This may be able to help reduce business expenses. Businesses should look to reclaim what they can as no matter how small the expense, these can eventually ramp up and mean you’re overpaying tax.

Often entrepreneurs are focussed on growing sales and managing day-to-day business operations. This may mean overlooking financial obligations such as tax and insurance protections.

In turn this could mean financial penalties and increased risk of damage to your business. So it’s important to learn what you do or don’t have to pay as a business, while you could also look at legal expenses cover for VAT disputes.

Related posts: Read our ‘tax tips for landlords’.

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Jazz Gakhal

Jazz Gakhal
Last Updated: 06 Aug 2015