Knowledge of and compliance with taxation is fundamental to the smooth running of a business. If you run a business or are considering starting one soon, having some basic knowledge about the key elements of the corporate tax system will never go amiss. In this article you will find a brief introduction to the tax system that businesses are subject to in the UK.
Self-employment
If you run a business on a self-employment basis, you are liable to pay income tax and national insurance of your profits. To find out how much you should pay, you must complete a self-assessment, which can be done online at the HM Revenue & Customs website. During the 2013-2014 tax year, the personal allowance on income tax is set at £9,440.
Business partnerships are also taxed on the self-employment principle, where each partner is responsible for paying their own income tax and national insurance contributions.
Limited companies
The tax regime applicable to limited companies is comprised of direct and indirect taxes. These are as follows:
Direct taxation
Capital gains tax
If you sell, exchange, transfer, or give away a business asset, you may be liable to pay capital gains tax. The capital gains tax allowance for 2013-2014 is set at £10,900. Any amount above that threshold is taxed according to a tier system, with highest tier being set at 28 per cent and the lowest at 10 per cent.
Corporation tax
Corporation tax is payable on a company’s taxable profits and is currently set at 23 per cent. The corporation tax rate will experience further cuts in 2014 (21 per cent) and in 2015 (20 per cent). Corporation tax can be paid electronically.
Other direct taxes
Stamp duty land tax must be paid on properties purchased or leased for business and / or commercial purposes. The rates vary according to the sale o rental price paid for the property and range between 0 and 4 per cent.
Business are also responsible for paying any taxes collected through the PAYE and national insurance contribution schemes.
Indirect taxation
VAT
Some businesses may need to register for VAT payments depending on their annual turnover. The current threshold is set at £79,000 and the applicable rate for VAT-registered companies is 20 per cent. To find out how and when to pay VAT, visit this page.
Other indirect taxes
If you business imports goods from non-EU countries, you are liable to pay customs duties. Each product is taxed at a different rate, which can range between 0 and 85 per cent of the value of the goods. More information can be found here. Excise tax must be paid when importing tobacco, alcohol, fuel, and gaming or amusement machines.
Other indirect taxes include environmental taxes, aggregates levy, and landfill tax. On the other hand, businesses who invest in energy efficient equipment qualify for a one-year 100 per cent tax allowance on the cost of the machinery.
Business rates
Business rates are payable to local authorities and vary according to the value of the business premises occupied and to its geographical location. These are paid annually and bills are sent out to business owner every February / March. To estimate your business rates, you can use the Government’s tax calculator.