How to declare tax for small business? Here is the answer!

By Nguyen Oanh

Published: 24 January 2022

Tax declaration is something that you are afraid of? You don’t know how to declare tax for small business? Here is the answer!

Small businesses represent a unique case for the tax system. They form the bulk of taxpayers but are at the same time the main contributors to the informal economy, which escapes taxation. The burden of the tax system is considered in most countries as one of the main reasons for choosing the informal economy.

What taxes do small businesses have to pay? How to declare tax for small business? How to file income tax? What are the best practices for declaring tax? Don’t worry, Appvizer will help you find out in this article!

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What taxes do small businesses have to pay?

In the UK, not every business has the same tax. The tax declaration process is different between a local company and a foreign company. A company is a local taxpayer if it is incorporated in the UK or has its central place of management and control in the UK.

A foreign company will be deemed to have a permanent establishment in the UK if:

it has a fixed place of business in the United Kingdom through which the business of the limited business is wholly or partly carried on, or,
an agent acting on behalf of the company has and usually exercises authority to do business on behalf of the business in the UK.

The common taxes of all small businesses are income tax, self-employment tax, payroll taxes, capital gains tax, property tax, and dividend tax.

Pay attention to the NIC (National Insurance Contributions) which is a tax paid by employers and employees to contribute to the UK government benefits. The NIC class changes by status and profit, even when you don’t employ anyone.

Special taxes	The standards rate
Main corporate tax rate, not applicable to profits from petroleum rights and extraction	19% (where taxable profits can be attributed to the use of patents, a reduced rate of 10% applies)
Misappropriated profit tax	25%, applies if multinational companies use artificial arrangements to divert profits overseas to avoid UK tax (55% in the case of ring-fencing operations in the UK, mainly for oil extraction)

How to declare tax for small business: Step by step

Know your tax declaration year

The tax payment year is usually the same as the calendar year. You have to know what is your tax payment year by choosing the year that you want when you file your taxes. If the tax year doesn’t suit you anymore, you can change the tax year later.

In the United Kingdom, the fiscal period starts, for companies, on April 6th of year n and ends on April 5th of the following year. The fiscal year also applies to employees that work in companies. Most of the companies will pay for their income tax through PAYE (Pay As You Earn)

Accumulate your business records

Before declaring your tax or filing your tax sheet, it is important to gather all the records of the income and expenses of your business. To do that, you have to first verify your accounting statement.

English companies must keep their books of accounts, in which all the operations of the business are recorded, and draw up annual accounts which include an annual report, a profit and loss account, a balance sheet, a statement of economic flows, an appendix, an auditors' opinion, a statement of recorded gains and losses, comparison of shareholder interest movements and a note on results on a historical cost basis.

💡 Tip: Using accounting software helps you import easily the tax return!

Determine the tax form of your business

The second step is determining the right tax type for your business. It depends on the operations’ nature of your business activities. Both domestic and foreign public accounting statements must be prepared in accordance with IFRS.

There are five financial reporting frameworks for SMEs, the most common being the FRS 102 Financial Reporting Standard applicable in the UK and the Republic of Ireland. This framework is based on the IFRS standard for SMEs with some modifications. You also have to complete the CT600 form to HMRC (the company tax return).

Don’t worry if you don’t know how to file the income tax! We have prepared the guide for you down below, just keep reading!

Don’t forget the tax deadline!

Save all these dates to not forget. The tax deadline is different for each business type.

Sole traders: you have to pay your income taxes and national insurance liabilities in 2 phases. The first payment is on January 31st and the second is on July 31st.
Self-assessment: The tax deadline for self-assessment remains January 31st. All the late filing and payment penalties will be rejected for a month.
Self-employment: You need to notify HMRC and NIC (National Insurance Contributions) by October 5th.
New partner: the tax deadline for the new partner is October 5th.

How to file income tax for small business

UK local companies have to file taxes on their activities’ income. Otherwise, from April 6th, 2020, a non-resident business, investing or not in UK property, make corporation tax payment only from a permanent establishment. The tax rate for these non-resident companies is 20% of their income source, with no allowance.

A business's capital gains are treated as taxable profits but are exempt if they arise from the disposal of substantial holdings in UK and overseas companies. Non-resident companies are generally not subject to capital gains tax unless the gains are obtained by their permanent establishment in the UK.

📌 Some special taxes regimes small businesses have to pay attention to are oil and gas, life insurance, tonnage tax, and banking sector.

Best practices

For SME owners or sole traders, completing a tax return is often complex. Not to mention that this year, Covid-19 has undoubtedly caused its share of upheavals. Here are some tips to facilitate your tax declaration process, especially for small businesses.

Be realistic about business expenses

If you want to reduce your tax, before deducting your expenses, make sure your business is earning enough. Your business must have a “reasonable expectation of profit”. Make sure that you register all the operations of your accounts (income and expenses sources, bills) and do the self-assessment tax return. Furthermore, it is important to separate personal expenses from business expenses if you don’t want your personal accounts to be verified.

Get the right distribution of your salary and dividends

A small business director can be compensated by receiving a salary, receiving a dividend, or a combination of the two. All three options have their own pros and cons. The key is to determine which combination will maximize each individual shareholder's income. Figuring out the right mix can be complicated and confusing, so it's always best to get an experienced accountant to help you strike the right balance between salaries and dividends.

Maximize the deduction of financial charges

This is one of the most used tax optimization levers. Thus, many companies reduce their taxable income by deducting the interest on loans taken out with related companies (intra-group loans) or making certain investments, such as the acquisition of shares in a target company.

Using accounting software to optimize the process

Accounting software is a computer program used for accounting operations related to suppliers, customers, partners, employees... of your business. This tool can be designed and adapted in-house or purchased from a specialized firm. Accounting software can perform multiple functions such as bookkeeping, payroll accounting, invoicing, bank reconciliations, etc. In addition to its practicality, accounting software saves you valuable time.

It is difficult for you not to have recourse to the human side of an accountant. Its support role is fundamental during the creation of a business, as well as for the tax and legal operations of a business. You can also call for the help of HMRC, a national non-ministerial department, to get your tax right.