Understanding Business Accounting For Dummies, 2nd Edition (23 page)

You can find the latest information on business rates on the official Government Web site at
www.mybusinessrates.gov.uk
.

Before you employ a rating adviser, you should check that they have the necessary knowledge and expertise, as well as appropriate indemnity insurance. You should also be wary of false or misleading claims.

'Cause I'm the Tax Man: Value Added Tax

Most governments, and the UK Government is no exception, levy
sales taxes
on certain products and services sold within their jurisdictions. In the UK this tax is known as the Value Added Tax (VAT). The final consumer of the product or service pays the VAT - in other words the tax is tacked onto the product's price tag at the very end of the economic chain. The business that is selling the product or service collects the VAT and remits it to the appropriate tax agency (HM Revenue and Customs in the UK). Businesses that operate earlier in the economic chain (that is, those that sell products to other businesses that in turn resell the products) generally do not end up paying VAT but simply collect it and pass it on.

For example, when you run to your local chemist for some headache pills after all this tax business, you pay the chemist the cost of the pills plus VAT. But the chemist can reclaim the VAT it paid to the wholesaler (and so on, back along the retail chain). Only you, the final consumer, pays the VAT. (Lucky you!)

VAT is a complicated tax. Currently, you must register if your taxable turnover, i.e. sales (not profit), exceeds £64,000 in any 12-month period, or looks as though it might reasonably be expected to do so. This rate is reviewed each year in the budget and is frequently changed. (The UK is significantly out of line with many other countries in Europe, where VAT entry rates are much lower.) The general rule is that all supplies of goods and services are taxable at the standard rate (17.5 per cent) unless they are specifically stated by the law to be zero-rated or exempt. In deciding whether your turnover exceeds the limit you have to include the zero-rated sales (things like most foods, books, and children's clothing), as they are technically taxable; it's just that the rate of tax is 0 per cent. You leave out exempt items. As a designated tax collector, the business does not pay VAT on goods and services it buys from other VAT registered businesses that are destined to be sold to its customers.

If you are a small business owner/manager, be aware that if you overlook this role imposed on the business by the government, you're still responsible for paying the tax over to the government. Suppose you make a sale for £100 but don't add the £17.50 VAT, which is the rate currently applying in the UK. Big Brother says you did collect the VAT, whether you think you did or not. So you still have to pay the government the VAT element in the £100 (£14.89), which leaves you with only £87.11 in sales revenue.

There are three free booklets issued by HM Revenue and Customs: a simple introductory booklet called
Should you be registered for VAT?
and two more detailed booklets called
General Guide
and
Scope and Coverage
. If in doubt (and the language is not easy to understand) ask your accountant or the local branch of HM Revenue and Customs; after all, they would rather help you to get it right in the first place than have to sort it out later when you have made a mess of it.

Each quarter, you have to complete a return, which shows your purchases and the VAT you paid on them, and your sales and the VAT you collected on them. The VAT paid and collected are offset against each other and the balance sent to HM Revenue and Customs. If you have paid more VAT in any quarter than you have collected, you will get a refund. For this reason it sometimes pays to register if you don't have to - if you're selling mostly zero-rated items for example; also, being registered for VAT may make your business look more workmanlike and less amateurish to your potential customers.

Tracking and recording Value Added Tax is a big responsibility for many businesses, especially if the business operates across several European countries. Having well-trained accounting staff manage this side of the business is well worth the cost. You can check the HM Revenue and Customs Web site for the latest rules (go to
www.hmrc.gov.uk
and click on ‘VAT').

You can find a useful VAT calculator on the small business portal
www.bytestart.co.uk
. Click on ‘Tax and Accounting' and then on ‘VAT Calculator'.

Taxing Your Bottom Line: Company Taxes

This chapter focuses on the tax dimensions of business entities. Chapter 4 presents a basic income tax model for individuals (see the section ‘The Accounting Vice You Can't Escape').

Every business must determine its annual
taxable income
, which is the amount of profit subject to corporate tax or income tax if the business is not a limited company. To determine annual
taxable income
,
you deduct certain allowed expenses from gross income. Corporation tax law rests very roughly on the premise that all income is taxable unless expressly exempted, and nothing can be deducted unless expressly allowed.

When you read a profit-and-loss account that summarises a business's sales revenue and expenses for a period and ends with bottom-line profit, keep in mind that the accrual basis of accounting has been used to record sales revenue and expenses. The accrual basis gives a more trustworthy and meaningful profit number. But accrual-based sales revenue and expense numbers are not cash inflows and outflows during the period. So the bottom-line profit does not tell you the impact on cash from the profit-making activities of the business. You have to convert the revenue and expense amounts reported in the profit-and-loss account to a cash basis in order to determine the net cash increase or decrease. Well, actually, you don't have to do this - the cash flow statement does this for you, which Chapter 7 explains.

Although you determine your business's taxable income as an annual amount, you don't wait until you file your tax return to make that calculation and payment. Instead, corporation tax law requires you to estimate your corporation income tax for the year and, based on your estimate, to make two half-yearly instalment payments on your corporation tax during the year, one at the end of January and one at the end of July. Rather than calculating the tax due yourself, you can rely on HM Revenue and Customs to do the sums for you if you send in a completed tax return before the 30 September for the year in question. When you file the final tax return - with the official, rather than the estimated, taxable income amount - after the close of the year, you pay any remaining amount of tax you owe or claim a refund if you have overpaid your corporation tax during the year. If you grossly underestimate your taxable income for the year and thus end up having to pay a large amount of tax after the end of the year, you probably will owe a late payment penalty. After your first year in business, the tax you have to pay will be based on your profits for the previous tax year. A tax year runs from 6 April to 5 April.