Tax can be tricky for small business owners. There are lots of deadlines to make, and even more rules to follow. Let’s take a look at what it involves.
What is tax filing?
Businesses generally have to file three main types of tax return:
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.
This is calculated as a proportion of your profits.
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.
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.
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 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.
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.
Figure 8, Data flows into your accounting system which then produces reports showing what tax you owe.
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.
9. How to prepare tax returns