Running your own business, big or small, involves taking care of your tax returns. Knowing your taxes and in particular small business taxes are vital.
In this post, we’re going to look at the most important taxes that as a fashion professional running a successful business, you need to know to help your business’s balance sheet continue to flourish.
Know your taxes
Income tax is a tax which is paid on your business’s profits. Depending on if you have another income, i.e. a salary from another job, as well as how much your business makes, will all depend on how much income tax you must pay to HMRC.
Therefore, managing your cash flow and keeping track of orders coming in as well as receipts for what is going out, is vital.
Fact: You will need to start paying income tax once your business profits go over the personal allowance of £11,850 (currently) and you’re under 75.
Ok, so not exactly a tax but it is monies which must be paid to the government, so is often classified within the same tax criteria. For sole traders, there are two types of NI, 1. A flat weekly rate of £2.95 identified on your accounting records as Class 2 NI (unless your business profits are under the £6,205 small profits threshold) and 2. Class 4 NI which is payable (as a percentage taken from your business profits) once your business profits reach £8,424 and above.
Note: You can voluntarily pay Class 2 NI if you want to protect your entitlement to state pension and other benefits.
Corporation tax applies to Limited companies and is a tax that is paid on profits. As soon as a company starts to make any profit, it is liable to pay corporation tax, which is currently 19%, payable nine months and one day after the company’s accounting year end.
Note: Sole traders do not pay corporation tax.
VAT applies to any business that makes VATable sales of over £85,000 per year (if this is the case you must also register your business for VAT), and it’s imperative to know your VAT as different rates do apply.
For example, it could be 20% (the standard default rate – chargeable on most goods and services), 5% (the reduced rate – normally on goods/services such as domestic fuel), or 0% (depending on industry and type of goods – usually found on most foods and children’s clothing).
Note: VATable sales include goods or services that would have VAT added to them if made by a VAT-registered business.
If you have any office or retail/warehouse space, you may have to pay business rates. In some instances, some premises are exempt from business rates, or certainly, they’re entitled to business rates relief.
Note: If you’re working from home, you usually won’t pay business rates on top of your regular council tax. However, the exceptions to this would be if you employ staff who also come to work at your home, you sell goods and services to visiting customers, or you have adapted your home to be able to work there.
How often do your taxes have to be paid?
Tax returns are usually paid yearly, with HMRC issuing a tax return to you each tax year. The tax year itself runs from April 6th to April 5th the following year.
Working on the tax year starting 6th April 2017 and ending 5th April 2018, deadlines for submitting your tax returns and paying your taxes by the deadlines are:
If you make advance payments on your bill, the payment deadline for this is the 31st of July.
NOTE: Penalties are issued for any late tax payments or no payments received.
If you have a company as a partner
If your partner’s accounting date is between 1 February and 5th April and one of your partners is a limited company, the deadline for online returns is 12 months from the accounting date and for paper returns this is nine months from the accounting date.
If you have any questions concerning self-assessment or tax returns, please visit HMRC.gov.uk.
Knowing your taxes and what you must pay is all part of knowing your finances and working on maintaining a good and structured balance sheet and cash flow forecast. Even the most experienced fashion professional needs to know up front, what they are entitled to as well as the taxes that must be accounted for in balance sheets. Being on top of your taxes helps with future planning and even financial protection of your business.
HMRC provide a range of advice as well as an FAQ section which can offer further guidance and support.
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