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A Brief Overview of Business Taxes

By: Matthew Strawbridge - Updated: 7 Oct 2012 | comments*Discuss
 
A Brief Overview Of Business Taxes

When you come to start your own business, you need to understand the various revenue duties that it will be subject to, so you can budget for them. Otherwise, you will get a nasty surprise when the tax inspector asks you for a payment – perhaps even a fine or imprisonment!

This article provides a brief overview of the different types of taxes relating to corporate finance. It does not cover levies that employees and shareholders might have to pay in relation to the company – those are a separate concern. Your accountant will be able to advise you which of these duties apply to you.

Corporation Tax

Corporations have to pay corporation tax on their profits. This has traditionally been charged at a lower rate than the top rate of income tax, and this is likely to remain the case. Because of this, some self-employed individuals find that they are able to save money by forming a limited company and working for that instead.

Several bands are used, so that companies with a low turnover pay a lower rate than those with a higher turnover.

VAT

If a company has a turnover above a certain threshold, and it does not produce solely goods that are exempt, then it will have to register for Value Added Tax (VAT). A company may choose to register for VAT even if it is below this threshold if it is advantageous to do so.

VAT is levied on consumers rather than on suppliers. A VAT-registered company must charge VAT to its customers at a fixed percentage of its sale price, passing this on to HMRC in its quarterly returns. However, such a business is able to reclaim the VAT on the products and services it buys, so transactions between two VAT-registered companies do not generally raise any tax revenue, since the recipient can reclaim the VAT component charged by the supplier.

National Insurance Contributions

National Insurance contributions are paid by employers and employees, and entitle the employees to receive certain benefits from the state. There are several classes of NIC:

  • Class 1: paid by employers and deducted from employees gross wages
  • Class 1A: paid by employers on the value of “benefits in kind” bestowed upon their employees
  • Class 1B: paid by employers when they enter into a PAYE Settlement Agreement
  • Class 2: paid by self-employed workers and not linked to earnings (except that self-employed people on very low earnings may apply for exemption)
  • Class 3: voluntary contributions paid by employees, to make up for previous periods when they did not make contributions, in order to ensure that they are entitled to receive benefits such as a state pension
  • Class 4: paid by self-employed people as a portion of their profits above an earnings threshold

Capital Gains Tax

When an asset it bought for one price, kept for a period of time as it increases in value and then sold, the difference between the two prices is called a capital gain.

Both individuals and corporations are subject to capital gains tax, but its application is slightly different between them. Companies can claim an indexation allowance, which offsets the effect of inflation on the asset over the period for which it was held.

Business Rates

Companies occupying commercial property must pay business rates. These are collected by local authorities and used to help finance them (although they are first pooled by central government and then redistributed).

Other Duties and Fees

This article has covered the main corporate taxes that entrepreneurs have to concern themselves with. However, there may be additional duties or fees that are applicable in your situation. It is always worth consulting an accountant or other financial adviser, who will be able to make sure that you have everything covered, and who may be able to help you to structure your company in such a way as to minimise or delay the amount you have to pay.

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