Tax and national insurance

An overview of the taxes your company might need to pay

What tax and business records must a business keep?

A business keeps financial records for its own purposes and can get general advice from banks and accountants on bookkeeping and what records to keep. Additionally, a business must legally keep certain financial records for accounting and tax purposes and official advice on this aspect of record-keeping and bookkeeping is available from the government department responsible, namely HM Revenue and Customs (HMRC). Also, Business Link (supported by the Department of Trade and Industry) employ business advisors who can help answer queries about business record-keeping and bookkeeping. Call 0845 600 9006 for you local office.

HMRC produces leaflets on record-keeping for income, capital gains, corporation and value added tax. In general, they stress the need for businesses to record all transactions and keep all documents relating to them, such as receipts, invoices and bank statements; there are statutory bookkeeping requirements for businesses to keep financial records and to keep them for particular lengths of time.

Business records for tax returns must be kept for at least five years from the latest date for sending a tax return; there is a fine for failing to keep proper records. If a business puts paper records onto a computer, it will still need to keep originals, but it does not have to keep a paper record of tax deducted under PAYE. HMRC runs an internet service for PAYE that allows businesses to send and receive a number of payroll forms over the internet.

VAT-registered businesses need to keep business records for six years. If this creates problems, for example with storage, a business should contact HMRC's National Advice Service (0845 010 9000). Small businesses can also make use of simplified VAT accounting arrangements to cut down on paperwork. These include making annual rather than quarterly VAT returns (if turnover is less than �660,000); a ‘flat rate scheme’, where VAT is calculated as a set percentage of total turnover (if turnover is less then �150,000), meaning less accounting of every single VAT transaction; and ‘retail schemes’ if it’s impractical for a retailer to issue invoices for large numbers of supplies to their customers.

Relevant Online Forms

Forms are available from:

What accounting exemptions are there for small and medium sized companies?

Under the Companies Act 1985, all limited and public limited companies and some unlimited companies, must deliver their accounts from a specific accounting reference period, or financial year, to the the Registrar of Companies House.

All companies must include specific information in their accounts documents. However, some companies may be exempt from including certain details in their accounts, or may be exempt from audit.

Small and medium-sized companies can either deliver to Companies House the accounts that were prepared for its members, under the special provisions of part VII of the Companies Act 1985, or an abbreviated version of these accounts. Abbreviated accounts of a small company must include an abbreviated balance sheet and notes; and a special auditor's report. Abbreviated accounts of a medium-sized company must include: the abbreviated profit and loss account; the full balance sheet; a special auditor's report; the directors' report; and notes to the accounts.

Very small and dormant companies can claim exemption from audit, but must submit an abbreviated balance sheet. To qualify for total audit exemption, a company must have a turnover of not more than �1 million; and have a balance sheet total of not more than �1.4 million.

Classification as a small, very small or medium-sized company depends on the company's turnover, balance sheet total and the average number of employees. Public companies and certain companies in the regulated sector do not qualify for these classifications. Dormant companies are those which have had no significant accounting transactions during the accounting reference period. To be a small company, at least two of the following conditions must be met: annual turnover must be �5.6 million or less; the balance sheet total must be �2.8 million net; the average number of employees must be 50 or fewer. To be a medium-sized company, at least 2 of the following conditions must be met: annual turnover must be �22.8 million or less; the balance sheet total must be �11.4 million or less; the average number of employees must be 250 or fewer (2004-5).

Further Information

For further information see the Companies House web site; online forms are available.

Can a business send tax returns via the internet?

HM Revenue and Customs (HMRC) manages various internet services that allow businesses to send tax returns over the internet. The internet service for Self-Assessment (SA) allows individuals, trusts, partnerships and agents to file SA tax returns over the internet, view statements and make payments (businesses need to have tax return software or an online forms product to complete returns - HMRC provides a list of commercial products on its website).

There is also an internet service for companies paying Corporation Tax, which allows returns to be sent, and current payments and liabilities to be viewed.

HMRC also operates a helpdesk specifically for its online services - 0845 6055999.

What are the tax arrangements for sole traders and partnerships?

Sole traders are taxed as self-employed individuals, paying income tax on the profits of the business. Sole traders pay flat rate Class 2 national insurance contributions (NICs) (�2.05) and Class 4 NICs at 8% on profits between �4,745 and �31,720 per year and at 1% on profits above �31,720 (2004/5). The Class 2 rate rises to �2.10 and the Class 4 thresholds rise to �4,895 and �32,760 for 2005/6. There is also tax relief to individuals for losses incurred by their business.

Individual partners in partnerships are taxed in the same way as sole traders, that is, on their share of profits they take as part of their partnership agreement.

The HM Revenue and Customs lists current tax rates.

How can small businesses give effectively to charities?

All businesses can get tax relief when they give money under the Gift Aid scheme. There is no limit to the amount that a business can give; the way tax relief is given depends on whether the business is a company, a sole trader or a partnership.

Companies can make payments through Gift Aid and deduct the amount as a 'charge' when working out profits for corporation tax purposes. When a payment is made to a charity there is no need to deduct any tax from the payment and the charity does not claim back any tax on the gift. There is also no need to give a Gift Aid certificate to the charity or provide a new form of declaration as all of the tax relief is given to the company.

Sole traders can treat Gift Aid payments made between the end of the tax year and the date of a Self Assessment return as if they were made in the tax year the return is for, and so get tax relief for that year on their charitable payments. A business may need to give HMRC evidence of charitable payments in the same way as for other items on a Self Assessment tax return.

HM Revenue and Customs (HMRC) treats gifts by a partnership as made by individual partners, with any gift split between the partners unless specifically stated otherwise. HMRC treats gifts as paid out of taxed income and the charity reclaims the basic rate tax on it from them. Higher rate taxpayers get relief on the difference between the basic rate and the higher rate of tax on the gross amount of their share of the gift. To make a Gift Aid declaration on behalf of the partnership, each partner needs to make a Gift Aid declaration in favour of the charity.

The HMRC has further information on Gift Aid and on non-cash gifts.

How are National Insurance Contributions (NICs) deducted, calculated and paid?

NICs are deducted from an employee’s gross earnings if they are 16 or over and under State Pension age, and their earnings are above the ‘Earnings Threshold’ (for 2005/6, �94 a week and �408 a month).

NICS are calculated by using the National Insurance tables supplied in HM Revenue and Customs’ (HMRC) ‘Employer’s Pack’ – it can be ordered on 0845 7646 646 or via the HMRC website.

NICs are paid with income tax to the HMRC Accounting and Payment Services. Medium sized employers (between 50 and 249 employees), or a small employer (fewer than 50 employees) paying electronically, must pay by the 22nd of the month. If payment is made by post, the cleared payment must reach HMRC by no later than 19th of the month.

What rules and incentives are there for businesses filing tax returns online?

Small business employing fewer than 50 people must start online filing for the 2009/10 tax year, with returns due by the 19 May 2010. However, small businesses filing electronically before then can get tax free payments of up to �825 from HM Revenue and Customs (HMRC), if returns are filed online for the tax years 2004/5 onwards. To qualify, a small business must send its P14 and P35 data online and the return must meet the HMRC Quality Standard. HMRC has accredited a number of software payroll products. Forms P14 and P35 relate to PAYE (subject to tax and/or National Insurance); payments subject to National Insurance contributions only; occupational pensions; sick pay only; tips only; and PAYE part only, where there is a combination of regular employees and subcontractors in Construction Industry Schemes.