Chapter 9

How to prepare tax returns

Tax returns can be hard for small business owners. There are deadlines to make, and rules to follow. Let’s take a look.

A bookkeeper at a desk with a coffee cup and a laptop

What is tax filing?

Businesses generally have to file three main types of tax return.

  • VAT: This is a tax that you may have to add to your prices. The government expects you to collect that cash on their behalf and send it their way at set times.
  • Income tax: This is calculated as a proportion of your profits.
  • Employee-related taxes: You’re expected to withhold income tax from your employees’ wages and hand it over to HMRC.

Why does it matter?

Paying too much tax is like giving money away. Paying too little can get you in trouble. Getting it right greatly increases your chance of running a profitable and relatively trouble-free business.

How to file taxes

Filing taxes is the easy part. It can generally be done online, which is a huge step up from the days of paper returns. Preparing those returns is the trickier part.

VAT tax returns

These are often handled by a bookkeeper throughout the year. They’ll keep tabs on what you’ve collected and make adjustments for the VAT you’ve paid on purchases, then put together a report for HMRC. Any taxes due are generally paid soon after the report is filed.

Business income tax

This is calculated on profits. The higher they are, the more tax you pay. But there are ways to legitimately lower your profits in the eyes of the HMRC. This is where things get technical, and the stakes are high because your returns will be checked by government tax experts. That’s why most businesses get an accountant to prepare their income tax return.

Employee income taxes

These are calculated and collected from employee pay at every pay run. You’re required to file reports with the tax office saying how much you paid your employees and how much tax you withheld. They will tell you when to turn over the money to them.

Modern tax filing

Tax time isn’t the ordeal it used to be. Accounting software can do a lot of the grunt work so filing time is easier for your accountant or bookkeeper. For example, accounting software can estimate taxes owed and quickly produce the reports needed to finalise a tax return. These efficiencies make tax season less stressful and less expensive.

Because accounting software has a record of all the money coming and going from your business, it can quickly run the maths to estimate your taxes.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

How to do bookkeeping

Bookkeeping includes everything from basic data entry to tax prep. Let’s look at the core jobs and see how they’re done.

Download the guide on how to do bookkeeping

Learn about the eight core bookkeeping jobs, from data entry to reporting and tax prep. Fill out the form to receive the guide as a PDF.

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