It is vital to properly account for tax. Failure to do so can lead to significant claims from HMRC. Our brilliant team can help advise
The effective collection of tax is essential for our society to operate, in terms of ensuring public services are provided and the wealth, health and safety of our society is protected and preserved. There are lots of different types of taxation, all of which provide funds to central or local government to deal with a lot of these needs, but the largest group of taxation liabilities are usually directly payable to HMRC on behalf of Central Government.
Value Added Tax (“VAT”)
VAT is a tax liability charged to all purchasers of goods and services in the UK from VAT registered businesses. VAT registration is not compulsory until income received by the company or business reaches a certain threshold which is revised annually, such threshold being continuous (and therefore capable of being triggered at any time as a result of a large one off transaction).
Failure to register for VAT can result in serious consequences for a business owner or director.
- the advantage of voluntarily registering for VAT (which can be applied for below this threshold) is that all VAT paid out to suppliers can be reclaimed from HMRC;
- some companies opt for VAT registration with lower earnings purely on this basis, because they find themselves in a net reclaim position on submission of each return.
VAT makes your goods and services more expensive, which for many small businesses can be an incredible burden. Hence the existence of the threshold, which means that low income businesses are not required to register.
However, once registered, it is important to keep both your returns (stating the value of goods supplied and the amount of net VAT due to be repaid or paid) and payments fully up to date – VAT returns may be filed monthly or quarterly and thus (in addition to the VAT cost) there is an administrative burden. If you fail to file returns, it will not be long before HMRC takes enforcement measures.
The VAT process has been subject to a number of high value frauds perpetrated on HMRC in recent years, the most common of which is referred to as “Carousal Fraud”. Where any such fraud, or indeed any non-payment of VAT, exists, then for Directors they may find increased burdens by way of VAT security notices imposed on any successor companies they become involved in.
PAYE and NIC
Pay as You Earn (“PAYE”) and National Insurance Contributions (“NICS”) are perhaps the most commonly understood taxes as they are imposed on employees by their employers, acting on behalf of HMRC. For the employer, additional contributions (outside of what appears on the pay packet) exist in respect of employer NICs and pension contributions.
- employment costs, for most small businesses, are perhaps the highest business cost after the cost of the trading/office premises. For employee heavy businesses this can be a considerable burden.
- PAYE/NICs should be accounted for monthly on a HMRC Real Time Information system (“RTI”) which accounts for deductions from employee pay, which must be immediately paid across to HMRC.
Sometimes employees are employed as outside consultants through Service Companies, with the benefit that the employer does not have to deal with tax, payroll etc. However, for both employees and employers this comes with its own problems in terms of the bargaining position, loss of employee rights and IR35.
PAYE and NICs are a very expensive tax for high earners, and in recent years many individuals have turned to tax schemes to avoid or reduce such income tax liabilities. This has become known as disguised remuneration which has led to a number of legal changes and penalties being imposed on such schemes.
Corporation tax is a company income tax which is charged as a percentage of profits.
Corporation Tax in the UK currently has two bands which are chargeable against companies dependent upon the company’s level of earnings, but for most small companies the charge is 20% of net income. Corporation Tax is also perhaps the most delayed tax liability as payment of such Corporation Tax liabilities is not required until the end of 9 months after the financial year end of the company.
At Francis Wilks & Jones we are able to assist with any legal advice or assistance sought in respect of the above and particularly with regard to claims by HMRC against you personally or claims arising out of your company against you personally.