Tax Guide for Service Businesses

By Adam Austin - 9th May 2016

Tax is a small but frightening word. It can seem like a minefield understanding and negotiating what you owe. After all, unless you’re an accountant, this is probably not the reason you started your business.

However, understanding what taxes services businesses are liable to pay, and how you go about doing it, doesn’t have to be hard. As the slogan goes: tax doesn’t have to be taxing.

Here’s a look at exactly what taxes service businesses need to pay and everything else you need to know about taxation.

Tax Guide for Service Businesses

Which taxes do I need to pay?

It all depends on what kind of business you run and how big it is. The below taxes may or may not apply depending on your status.

Income Tax

If you’re registered as a sole trader (which means you work for yourself and not anybody else) then you need to pay your taxes personally each year on your income. There are two ways to submit your returns:

  • Via a paper return, which must be returned complete by midnight 31st October
  • Register online and complete by midnight 31st January

The tax year runs from 6th April until 5th April the following year, and you pay tax depending on how much you earn in this period. There is a lower threshold for tax payments above which the standard rate is 20%. This increases at various other thresholds of income.

Don’t forget your expenses

If you are self-employed, your business will have running costs. Some or all of these can be deducted from your taxable profit – providing they are allowable. For example, if you turn over £50,000 and claim £8,000 in allowable expenses, you will only be eligible to pay tax on the remaining £42,000.

Expenses do not include money taken from the business to pay for private purchases. But do include things like:

  • Office costs
  • Travel costs
  • Clothing costs (for example, uniforms)
  • Staff costs
  • Stock
  • Financial costs
  • Advertising

Cash basis

This is a way to work out your income and expenses for self-employed and sole traders that may suit you better than the traditional accounting outlined above. Using cash basis payments, you only declare money when it comes in and out of the business. This means you won’t need to pay income tax on money you didn’t receive in your accounting period.

PAYE

If you have employees, you need to register with HMRC for the Pay As You Earn scheme (PAYE) which takes tax from their income as they earn. As a sole trader you are not affected by PAYE but if you register as limited company and take a salary from the business, then you will be eligible to pay.

All taxable information is relayed to the HMRC in real time rather than at the end of the tax year.

National Insurance (NI)

These are the contributions you make to state pensions, statutory sick pay and healthcare. There are two main types of NI, Class 2 and Class 4. What you pay will depend on what you earn. NI can be paid monthly via direct debit or at the end of each tax year when you complete your return.

Corporation Tax

This is a tax levied on limited companies’ taxable income or profits. Companies are responsible to calculate their own liabilities and pay HMRC without prior assessment.

In most cases this tax only applies to larger limited companies and is not applicable to sole traders. The threshold for corporation tax is on profits of more than £1.5 million and is taxed at 20%, although this will drop to 17% from 2020.

You may be required to submit a company tax return, even if you have made a loss. When you file this return, you need to work out your profit and loss and your corporation tax bill. This is usually done by an accountant. You may be able to file accounts with Companies House at the same time (if you’re a registered company). Deadlines do apply.

Value added tax (VAT)

Technically the tax on final consumption of certain goods and services but collected at every stage of production. The standard rate of VAT is 20% but only applies to companies with taxable supplies of more than £83,000 a year.

Should I be VAT registered?

If your company has exceeded the VAT threshold for the tax year, then you need to register for VAT with HMRC. The £83,000 value relates to turnover and not just the profit at the end of the year. Once you are VAT registered, you should submit your VAT return online and settle any outstanding tax. Once registered, you can then request customers to pay the VAT when you supply goods or services.

Within the wider VAT rules, some small businesses may be better off operating within the flat rate VAT scheme, which involves paying a fixed percentage on your gross turnover each year.

Capital Gains Tax

If you sell or in any other way dispose of all or part of a business asset, then you may have to pay capital gains tax. These assets can include:

  • Land and buildings
  • Fixtures and fittings
  • Plants and machinery
  • Shares
  • Trademarks
  • Business reputation

Capital gains tax is paid by sole traders and self-employed people. Organisations like limited companies pay corporation tax on sales or the above assets. Remember that you don’t have to pay tax on gifts to your husband or wife, civil partner or to charity.

Capital allowances

You can claim these in the form of tax incentives or breaks when you buy an item that will be used by the business. This can include:

  • Equipment
  • Machinery
  • Business vehicles

Deduct the value of these items from your profits before you pay tax.

Remember that you may have to pay tax on capital allowances claimed if you sell or otherwise dispose of the item in the future. You will do this in the tax period when you sell said item.

Other business taxes

Depending on the nature of your business, you may be eligible to pay a range of other taxes. These can include but are not limited to:

  • Alcohol duties – if you are moving alcohol into the UK or storing it here
  • Air passenger duty – for aviation businesses
  • Climate change levy – for businesses that can be harmful to the environment or have been found to be polluting
  • Landfill tax – companies that need to dispose of large amounts of waste products may be required to pay an additional tax
  • Tobacco products duty – if your business imports tobacco products then you have to pay an import duty

Charity status

If you are a charity recognised by HMRC, then you are eligible for certain tax reliefs. You won’t pay tax on most kinds of income (as long as it’s used for charitable purposes) and can claim back tax that has been paid on any income.

Appealing your tax and non-payment

If you wish to challenge decisions made about your income tax, PAYE, capital gains or other, you can appeal to the First Tier Tribunal. This is a body independent of the government and will listen to both sides of the argument before reaching its decision.

If you simply can’t pay your tax then you need to make a hardship application which will be reviewed.

Tips for making taxes easier

The thought of tax is almost always more scary than the reality. Once you actually get on and do it, it’s not so bad. Especially if you complete your return online. However, there are some things you can do to make paying your taxes each year that little bit easier. These include:

Tax Guide for Service Business

Start early

Leave it to the last minute and you’re asking for trouble. You should start to complete your return at least eight weeks before the deadline. This gives you plenty of time to locate all the information you need.

If you miss the deadline, you could face a fine. This will be £100 initially, followed by £300 for failure to complete after 90 days. From then you’ll be required to pay £10 a day interest up to £900. The fines continue to rack up and you could even be charged the full tax amount as a fine in exceptional circumstances.

Keep regular records

Update your income and outgoings every month, with a separate bank account for your company. Doing things little and often will really speed up the tax return process.

Tax Guide for Service Businesses

File it away

Keeping all your receipts neatly stored and filed in the correct place is definitely the way to go. This will really speed up the process when it’s time to complete your return.

Ask for help

HMRC are always available to ask for advice. You can find out more at https://www.gov.uk/ or you can also contact them via Telephone: 0300 200 3300, Textphone: 0300 200 3319, Outside UK: +44 135 535 9022.

There are also plenty of tax accountants who can help you with tax and returns. Ask around for recommendations.

Tax Guide for Service Businesses

Paying your tax bill

There are a number of ways you can pay your tax bill. As mentioned above, if you’re PAYE you will be paying your tax in real time as part of your salary. However, sole traders and self-employed people will need to pay once they have calculated their income. This can be done either by bank transfer, direct payment or you can spread the cost using a direct debit.

You may also have to make payments on account, which means you pay a portion of the following tax year up front.

About the author

Adam Austin is the CEO & Co-founder of YourTradeBase.com (The easy way for tradespeople to save hours on their paperwork). Read more of his posts or Follow YourTradeBase on Twitter

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