PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Accounts, tax and finance

Starting a new business

‘Cash flow’ is vitally important. Cash flow is the movement of spendable funds (e.g. petty cash and money in the bank) in and out of the business. You may be making a profit in the business, but if you can’t turn the profit into cash quickly, you may not be able to pay your suppliers on time. Managing the ins and outs, and the credit you give and take is key to business success.

It is wise to prepare a ‘business plan’, however simple this may be, and discuss it with someone else. This could be a friend or professional adviser. The plan will consider cash flow, profitability and capital funding, as well as your overall marketing and business strategy.

Don’t forget to put tax into this equation from the very start. Providing for tax on the money you withdraw from the business should mean that you have something set aside for tax when the bill comes. A big issue for new businesses is that there may be no tax bill for a considerable length of time, then when it arrives it is large!

Example: Jane sets up in business on 1 June 2015 and registers with HMRC at once. Her first tax return will arrive in April 2016, and the first tax bill will be payable by 31 January 2017. But this bill will cover 16 months of profits – 10 months in arrears (1 June 2015 to 5 April 2016, and 6 months worth of taxes in advance (called a ‘payment on account’) for the year to 5 April 2017).

If you can’t pay this bill as soon as it is due, then you will face penalties and interest, plus recovery action from HMRC.

You can set up a budget account to pay your tax as you go along – https://www.gov.uk/pay-self-assessment-tax-bill/budget-payment-plan.

You need to decide if you are going to use an accountant. It makes much more sense to find a suitable accountant as soon as you start rather than waiting until the tax returns are due. Your accountant can show you how to keep good records, which will make it easier to prepare the accounts and tax return at the year end.

Companies

At TaxAid our remit is to help those on low income who cannot afford to pay for professional help. TaxAid does not advice on company tax.

Self employed (including partners)

Paying tax

Self-employed people pay tax on the 31st January following the end of the tax year  (5 April). If your annual tax bill is over £1,000 you will also be required to make ‘payments on account’ for the following tax year.

Payments on account are due on 31 January and 31 July each year. The first payment on account, which, according to the rules is simply 50% of last year’s tax liability, is due on 31st January and a further 50% is due on 31st July. Once the tax bill for the year is known (and the Self Assessment  Tax Return submitted), any outstanding tax for the year will be due, along with next years 1st payment on account.

You can ask for your payments on account to be reduced if you think your actual tax bill will be lower, for example if your profits are falling.

Failure to pay your tax on time will mean you incur interest. The rate reflects the Bank of England rate and has varied in recent years from 2.5% to 8.5%. (Current rates can be found at http://www.hmrc.gov.uk/rates/interest-late.htm#itnic). If remains unpaid, there are late payment penalties – see http://taxaid.org.uk/guides/taxpayers/tax-returns/late-tax-returns.

Filing Tax Returns

Once you have registered with HMRC you will be given a Unique Tax Reference number (UTR) and enrolled in the self assessment system.

As part of the self assessment system you should be sent a Tax Return soon after the end of the tax year (5th April). This should be completed to reflect your taxable profits for the last tax year.

There is more information on this in the section on being self-employed.

For more information on completing your Tax Returns see our guide:  Help with your Tax Return.

Glossary

payments on account
provisional amounts of tax payable until your final bill for the year is worked out
payment on account
provisional amount of tax payable until your final bill for the year is worked out