5th November 2019
One of the first things you'll do as a founder is to register your new business for corporation tax. Compliance, after all, begins from day dot, not just with a deadline approaching.
Still, it can be tricky to focus on compliance in the early, intoxicating days of building a business. When you’re putting in the extra hours and trying to balance your personal and professional commitments, corporation tax might not be number one on your mental laundry list.
To a certain extent, that mindset is okay. It’s understandable that if you’ve started your own business, you will be focused on your trade and growing your livelihood. That said, a poorly managed compliance process will hamper your ability to do these things.
Complying with Taxation and compiling financial statements can be a time sink for business owners. The Federation of Small Businesses estimates British SMEs spend the equivalent of almost three working weeks every year on navigating the complex maze of taxation.
It would be easy – and perhaps understandable – for business owners to adopt an outright negative view of compliance. But while compliance is not the sexiest part of being in business but done well it’s a vital cog in a functioning machine.
For founders, a solid first step is to get a handle on whatever compliance needs you might have (including corporation tax among other things).
Work out the deadlines for each of those items. Your first prompt shouldn’t be a reminder from HMRC. Curate a list of your filings – whether it be accounts, VAT or corporation tax – with a list of dates beside it.
From a corporation tax filing perspective, the main thing to remember is its unique dual deadline structure. The filing deadline is 12 months after your financial year-end. The payment deadline, however, is nine months and one day after your financial year-end. Three months before your filing deadline.
In other words, your computation of the company’s tax liability needs to be ready by the payment deadline. The three months after are largely administrative if you’ve already prepared your tax return, requiring sign-off by the director.
If you miss the payment deadline, there are no penalties attached to that but you do have to pay interest of 3.25% on your liability. But there are penalties associated with filing your return late, ranging from a £100 penalty through to more severe action if you’re over six months late.
More than compliance
Once you’re properly organised, you can unlock a deeper appreciation of how compliance activity meshes with your wider business goals. For startups, in particular, there are generous reliefs in place that not only take the sting out of a tax bill but can help set your business up for the future.
Capital allowances – that is, tax relief on buying assets for your business – are a powerful way to reduce your tax bill and write off the costs of capital expenditure.
In the UK, we have what’s known as the annual investment allowance (AIA). Under AIA, you can deduct the full value of an item that qualifies from your profits before tax. Since tax is paid on profits, this is a substantial relief, and the AIA limit has temporarily increased to £1m (from £200,00) until 31 December 2020 to spur investment.
Of course, many startups are loss-making. AIA would increase any losses, and that’s a good thing because these losses in the early years will be carried forward. When the business reaches profitability, they can be used to reduce your tax bill in that financial year.
Alongside your tax compliance, you'll also be required to file statutory financial statements. Statutory accounts are a set of financial reports prepared at the end of each financial year. Your accounts report the financial activity and performance of the business.
You're obliged to send these reports to all shareholders, people who can go to the company’s general meetings, Companies House and HMRC as part of your corporation tax return.
There are different ways to report your statutory accounts. FRS105 is the financial reporting standard for micro-entities, designed specifically for smaller, simpler businesses. For ambitious startups, however, FRS102 might be more appropriate, as accounts prepared under FRS 105 may not provide the level of detail an outside interested observer requires.
Beyond corporation tax, there are plenty of compliance boxes to check. Among these there lurk potential threats – like HMRC’s notional section 455 tax charge on director’s loans – but also opportunities, such as the government’s generous research and development (R&D) tax relief . The R&D tax credit is designed to encourage innovation and increase spending on R&D Activities for companies operating in the UK. It’s a popular incentive, with around £3bn a year currently being claimed. Although, many businesses still don’t realise they are entitled to claim – or, they aren’t claiming as much as they could.
The journey to sustainability and profit isn't always straightforward, and each development can alter interactions with HMRC. As you grow, your first concern, correctly, is your business. That said, don’t neglect your compliance. Not only because it’s mandatory, but it's also an opportunity.
To make your compliance responsibilities clear, seek out the expertise of Propel's compliance team via: email@example.com or the contact us form.