There are many reasons why a business may struggle, but one of the biggest is poor cash flow, and perhaps the most painful bills which businesses pay are tax bills.
We need to get over the hurdle that tax bills are necessary and not optional. We should also remember that whilst paying other suppliers may take a priority, as they are fundamental to your business and may put you on stop for not paying, HMRC now charge penalties/surcharges/interest for the late payment of just about every kind of tax.
There are four main tax categories which affect businesses:
If you are registered for VAT, you are an unpaid tax collector. It should (in theory) be a neutral tax, as your customers bear the VAT on your sales. In addition, you can reclaim input VAT to cushion the impact. VAT is generally due a month after the end of your 3 month VAT return period. Based on your usual liability level, it may be a good idea to put money aside every week/month.
Again to a certain degree, this is again taking money from one of your stakeholders (VAT is customers, whereas PAYE is employees) and paying it to the Government, although you also may have to pay employers national insurance. PAYE is due after wages have been paid, sometimes several months later if it is paid quarterly, so again this should be put aside. The exact figures should be known with more certainty.
This is based on company profits and is due 9 months and 1 day after the company year end. For example, a company with 31 December year end will have to pay corporation tax by the following 1 October. The current rate of corporation tax for small companies is 20% of taxable profits, so this can be estimated in advance. With such a large window, it makes sense to put this money aside. A poor year after a good year can mean that the tax money is spent before the tax can be paid.
Generally this is tax paid by sole traders and partnerships and is due by the end of January following the tax year: tax on profits in tax year 5 April 2012 will be due by 31 January 2013. However, payments in account will increase this demand. As with corporation tax, this money should be put aside.
Ideally, the tax money for a period should be saved from that year, although in reality it tends to be paid from the following year.
We have also seen more examples recently of taxpayers not liking the debt hanging over them, and actually paying their tax liabilities earlier than legally required. It gives them more control over their cashflow.
Now that’s a novel thought, and perhaps not something you often hear from an accountant – “pay your tax early!”
In addition, HMRC have ‘time to pay‘ provisions which allow taxpayers longer to pay their liabilities, although as we identified, this is getting harder to secure. We’ve even heard HMRC turn down requests with the statement “you’ve spent our money”.
When viewed by employees who suffer tax under PAYE, the ability to pay your tax bills months after they were incurred may seem like a good perk of being self employed. However, this should be approached responsibly.
How do you save for your tax bills?