Q&A - What taxes will a start-up pay?

The main taxes that a start-up needs to consider are summarised below:

Value Added Tax (VAT)

VAT is a tax that is charged on most goods and services that VAT-registered businesses provide in the UK. VAT is charged when a VAT-registered business sells to either another business or to a non-business customer such as a customer in a shop. When a VAT-registered business buys goods or services they can generally reclaim the VAT they have paid. Not all businesses charge VAT. However, once annual turnover exceeds a threshold (in 2010 it is £68,000) then VAT needs to be charged. The current rate of VAT in the UK is 15% (due to rise to 17.5% in 2010).

Income tax and National Insurance

Most people who work have to pay income tax (a deduction from gross pay) and national insurance contributions (also based on weekly pay). A business needs to account for these taxes, ensuring that it calculates the correct amount of tax due (from employees) and also making sure that it pays the taxes collected to the Inland Revenue by the due date. A business effectively acts as a tax collector for the government for income-based taxes!

Corporation tax

Corporation tax is a tax based on the profits earned by a company. A sole trader will pay income tax on the profits earned by the business, whereas a company’s profits are taxed using corporation tax. Companies benefit from a range of “tax reliefs” which reduce the profits on which tax is charged. For example, a company is allowed to offset money spent on capital items like computer systems, plant and machinery. Small companies also pay a lower rate of corporation tax, at around 19-20% compared with the normal rate of 30%. Corporation tax is paid around 7 months after a financial year has been completed, so there is plenty of time for a business to calculate what the tax is going to be and ensure that it has enough cash to settle the bill!

Business rates

Rates are another form of business taxation. The difference is that rates are paid to local authorities rather than central government, since they are meant to contribute towards the cost of local services. The amount of business rates payable depends on the kind of business location occupied by the business and also the rates charged by different local authorities.