We might love numbers, but we understand that not every business owner or startup founder feels the same. That’s why part of our mission for this blog is to demystify the numbers you need to know. With the new tax year starting in just a few weeks, this is the perfect time for making sense of the main business taxes you will come across.
With a few exceptions, most of the taxes Scottish businesses need to pay are governed by UK law. Which taxes your company needs to pay depends on whether your business is incorporated or not. We’ll highlight the specifics below for each individual tax.
Corporation Tax
Businesses in Scotland are liable for UK corporation tax on any profits they make. Currently, the rate sits at 19% of your profits for the tax year that started on 1 April 2021. HMRC has confirmed that this will stay the same for this coming tax year. This corporation tax rate is the lowest within the G7 group of countries, and the joint lowest within the G20.
It’s important to note that this is a tax on profits rather than revenue. Plus, there are a few exemptions. Any business established as a partnership, limited liability partnership (LLP), or a sole trader is exempt from corporation tax, but will be subject to income tax – see below.
Having a corporation tax liability can be a good thing. It shows that you are making profits. If your business has a corporation tax liability, the payment deadline is 9 months after your company’s financial year end, which is the same as the deadline for filing accounts at Companies House . If you don’t know what that is you can check the company’s record at the Companies House website.
Confusingly, the actual tax return deadline is 12 months after the financial year end date.
Mind Your Payment Dates!
Miss the payment date and you will pay interest on the payment you should have made. Miss the return submission deadline and you will start to rack up flat rate fines, and that’s a Bad Thing.
Particularly as a startup in technology you may be eligible for tax credits based on your development spend which can either reduce your tax liability or, if you are making losses, give you a cash refund when you need it most.
Income Tax
Sole proprietors or partners in a limited liability partnership don’t have to worry about corporation tax, but you are liable to pay income tax.
Income tax is due on profits made after your personal allowance, which is currently £12,500 per year. Once you exceed that number, your income tax rate depends on the amount you make.
The situation is similar for owners of a limited company. If that is your situation, you’re obliged to pay income tax on your salary as well as dividends. How much you pay depends on how much money you take out of the business. Like sole proprietors, limited company owners are entitled to a tax-free allowance of £12,500 for 2021-2022.
Unless your income tax bill is small, you will have 3 income tax payments to make during the year. These are:
- By 31st January in the tax year, so for 2021-22 that’s 31st January 2022, half of your estimated income tax liability. This is usually half of last year’s actual tax liability.
- By 31st July (so for 2021-22 that’s 31st July 2022) the same amount again, unless you have been hot off the mark with submitting your tax return to establish your actual tax liability.
- By the tax return submission deadline of 31st January after the end of the tax year (so for 2021-22 that’s 31st January 2023) you must pay any remaining balance of your actual tax liability. Of course you will also have the first payment on account for the next tax year to make as well.
Value Added Tax (VAT)
VAT is simply a sales tax you need to pay on services or goods you provide, whether or not you are a limited company. Your turnover determines your need to register for VAT, and HMRC’s current VAT threshold is £85,000. You need to register if one of two scenarios is true:
- Your business had a taxable turnover exceeding the threshold over the past 12 months.
- You expect your turnover to be more than £85,000 within the next 30 days.
If you are only just starting out, you can hold off on VAT registration and simply keep an eye on your financial statements. Once you are nearing the 12-month threshold or you have a large order coming in, it’s time to register.
It’s worth noting that the threshold applies to any running 12-month period. There are no specific cut-off dates. If your business is about to cross the threshold, it’s important to ensure you have sufficient funds to cover your new obligations.
The standard rate for VAT has been 20% since 2011. Specific goods like children’s car seats are charged at a lower rate of 5%. Other goods and services are exempt from VAT, including most foods.
The amount of VAT you have to pay is reduced by the amount of VAT you are charged by other VAT registered businesses. Most businesses send in a VAT return and pay VAT every 3 months. VAT can be complex but there are various schemes you can use to ease the admin burden, or claim VAT back faster if you usually pay more than you charge.
Business Rates
Business rates are simply a local property tax your business owes to the local council. Like residential council tax payments, business rates are based on the size and value of the property your business is occupying. They won’t vary depending on your turnover or profits.
Business rates can vary widely depending on your location in Scotland, whether you have a single location or more than one, and the size of the business overall. If you are getting ready to lease or purchase premises, it is worth checking what your obligations will be to avoid nasty surprises later.
How to Deal with Your Business Taxes
As a matter of good housekeeping you should be paying the taxes that you are due to, but you shouldn’t be paying a penny more than you need to. It is worth getting expert advice on business tax early when you are founding a startup or running an early-stage business.
Like with finance-related aspects of your company, we recommend a proactive approach. Talk to a tax adviser as early as possible to gain a solid understanding of your obligations. This is the only way to avoid unexpected tax bills that run into the thousands and jeopardise the future of your business.
We’re happy to tell you more about how your tax relates to your company’s financial situation as a whole. Just get in touch to find out more. For an in-depth tax consultation, we’ll recommend one of our trusted partners.