5 Common Tax Mistakes Small and medium-sized Enterprises Make and How to Avoid Them
Tax is something that can trip up even the most well-organised small business. Fail to get it right, and you could be risking the financial health of your business – and exposing yourself to legal risk. Let’s take a look at five common mistakes made by small businesses, and how they might be avoided.
Overlooking VAT Obligations
Businesses that generate more than £85,000 per year are required to register for VAT with HMRC. Fail to register on time, and you could be liable, and made to pay extra penalty charges, as well as interest. Errors in paying your VAT may also result in extra costs, and stress.
Staying on top of this problem means holding regular reviews, and staying abreast of any changes in the law. Again, this is an area where outside experts, especially the vat consultants can be invaluable and help you to navigate the complex VAT side of your business.
Incorrectly Claiming Expenses
As a small business, you’re allowed to write certain purchases off as a business expense, for which you’re not liable for VAT. If you’re working as a freelancer, or operating a home office, it can be difficult to determine what qualifies as a business expense and what doesn’t. Claiming for your gas or electricity might be tempting – but you’ll need to determine the portion of your gas and electricity you’re using during business hours.
Your expenses claims are worth making, since they can yield significant savings. However, it’s worth taking the time to get them right!
Missing Tax Deadlines
Punctuality matters when it comes to taxation. In some cases, the penalties for late payment might be significant. There are deadlines for VAT, self-assessment income tax, and corporation tax. You can set up reminders in your favourite calendar or accounting software. Missing deadlines will not only incur extra costs directly – it might cause you to rush through your tax, and miss out on efficiency savings. You might also find yourself more vulnerable to an audit if you’re missing the deadline regularly.
Misclassifying Employees as Contractors
Employees are different from contractors, according to HMRC. For each employee working for your business, you’ll need to make National Insurance Contributions, and deduct these from the salary paid (alongside any income tax). Making the distinction often means bringing in outside experts in tax to help you.
Failing to Keep Accurate Records
The more transparent and accurate your records are, the easier it will be to file your tax returns, and the less likely errors will be. Record-keeping is an ongoing task, and you’ll want to develop the right habits along the way. If you prefer, you can keep records using traditional pen-and-paper means. Or, you could follow the government’s ‘making tax digital’ initiative, and use specialised digital tools to simplify the process.