Common Tax mistakes: As a business owner, you handle several positions, and spending a lot of time with your accountants might not be your top priority when you have urgent business tasks to complete.
Every business, at some stage, makes a mistake. Some pay too little, others spend too much, and even others refuse to take advantage of the tax breaks they are entitled to.
Although your customers and clients may not be bothered by the occasional blunder, the tax authorities may not be so forgiving.
Small mistakes can result in a tax investigation by the tax authorities, prompting an aggressive legal action involving fines, surcharges, and penalties.
Continue reading on to learn about common tax mistakes made by UK businesses and how to ensure that your business isn’t doing something that will cause the HMRC to take action.
Common Tax mistakes
This blog post is divided into the following sections
- No bookkeeping software and no help from an Accountant or a Tax Advisors
- Inadequate record-keeping
- Making incorrect expense claims and ignoring Allowances
- Refusing to claim back overpaid taxes
- Choosing the incorrect legal structure
- Not putting money aside for taxes
- Acting as individuals rather than as a group
- Not double-checking the tax code
- Refusing to claim the blind person’s allowance
- Failure to notify HMRC when your working hours change
- Missing deadlines
Many business owners believe they understand how tax laws operate, but the truth is quite the contrary.
Many tax laws, rates, and reliefs change every year, if not more often. Cases going through tribunals and trials, HMRC policy changes, and government announcements may all affect them.
As a result, if in doubt, it is always best to consult with your tax advisor/accountant to get a good picture before making any business decisions.
Commonly held misconceptions include: You must establish a company if you start a business, and you must trade through a company if you have found one.
In reality, you might keep the company dormant (while protecting the business name) before you need to conduct business through a company.
Meanwhile, any initial losses can be compensated against other sources of income to generate tax refunds.
If a start-up business loses money, there is no chance of a tax refund; instead, the company pays less tax when it finally turns to profit. Clients prefer tax refunds and are perplexed about why their corporate tax bills unexpectedly rise once taken forward; the reason is that cumulated losses are depleted.
Other common assumptions are:
- Assuming that tax is payable on benefit figures shown on a spreadsheet or in an online bookkeeping system, with no adjustments
- And some of them believe they do not need to file personal tax returns irrespective of how they derive money from their business – not to mention all of the other incorrect assumptions about cash extraction!
2. No bookkeeping software and no help from an Accountant or a Tax Advisors
While it may seem that you are saving money by not hiring tax advisors/accountants and not using appropriate accounting software, on the opposite, you could end up losing even more money in the long run.
Tax advisors/accountants have the expertise to ensure that your self-assessment is completed correctly and business taxes are optimised.
They can also assist you in claiming all deductions you are entitled.
Accounting software can help you track invoices, receipts, and expenses; software is beneficial for calculating VAT amounts, which can be difficult for business owners.
3. Inadequate record-keeping
You must maintain complete and accurate records.
When claiming or incurring business expenses, make sure that the main reason is for the business and that you have all supporting documentation.
When it comes to supporting documents, collating and preserving all receipts/invoices is crucial.
It’s a common mistake not to keep them. If you don’t get the VAT invoice, think about whether you’re willing to pay for it out of your pocket the next time.
Again, the accountant will guide you about which documents to keep and how to keep them.
4. Making incorrect expense claims and ignoring Allowances
There are complicated laws that determine what expenses you can deduct, and there are expensive fines for filing inaccurate claims.
If you have any doubts, consult with your accountant. It’s much safer to double-check these items – some things can seem to be claimable but aren’t. For example, mortgage interest on your buy to let properties is not 100% reclaimable.
However, there are a few items you might not have considered claiming or using, such as Allowances.
You lose them if you don’t use them.
When you add up the income tax allowance, capital gains tax allowance, and dividends allowance for the year, you get a whopping £26,000 as allowance.
It is not unusual to see a large number of these go to waste.
5. Refusing to claim back overpaid taxes
If you pay too much tax because you neglected to claim an exemption or tax relief, or just because you deducted too much tax from your salary, you can generally claim it back within four years of the end of the tax year.
6. Choosing the incorrect legal structure
How you disclose and pay your taxes is often determined by your legal form, such as a sole proprietorship, partnership, or limited company.
Speaking with an accountant or tax advisor in the UK before filing the business is the safest way to prevent any mistakes.
Self-employment is another significant and complicated subject.
Although you might be able to legally establish your status as an entrepreneur, how certain are you that your freelance employees and associates are genuinely self-employed?
Keep in mind that it is the responsibility of business owners to get this right.
7. Not putting money aside for taxes
Another common mistake is forgetting to save for their tax bill. It can be challenging to have to pay at the last minute to pay PAYE, VAT, Corporation Tax, Self-Assessment, etc.
Setting aside a percentage of your earnings is an excellent way to prepare for your tax bill.
Please put it in a different bank account and keep it there!
That way, when the tax deadline arrives, you won’t be like anyone else who is struggling to find a way to pay their bill.
8. Acting as individuals rather than as a group
Married people can save tax by making investments available to the spouse who pays the lower tax rate – but it must be a genuine donation, not a gift in name only.
If you are married or in a civil partnership and one of you was born before 6 April, 1935, you might also be eligible for Married Couple’s Allowance, which may reduce your tax bill.
If you were both born after 6 April, 1935, you could be qualified for Marriage Allowance instead, but this is conditional on your income.
9. Not double-checking the tax code
Your tax code informs your employer how much of your pay is tax-free – the rest is taxed.
Your tax office will write to you regularly to clarify how the code was created.
Verify that they have given you the suitable allowances, that the amount of pension or other income shown is correct, and that everything you don’t understand is questioned.
10. Refusing to claim the blind person’s allowance
If you are born blind or seriously sight-impaired, or if you live in Scotland or Northern Ireland and your vision is too poor to do any job that requires eyesight, you are entitled to an additional £2,390 grant.
After you’ve registered as a blind person with the local authority, call HMRC and request Blind Person’s Allowance. It is not automatically applied.
11. Failure to notify HMRC when your working hours change
Notify HMRC if your working hours vary. They will need to make changes to the tax code. Be very cautious if you have a second job and a pension – you get a code for each source of income, but it is normal for the incorrect sum to be deducted.
12. Missing deadlines
If you are sent a tax return for the fiscal year, if completed by paper, you must complete it by 31 October or 31 January if you do it electronically.
Each tax year, which runs from 06 April of the current year to 05 April of the following year, the tax must be paid by 31 January. For example, for the tax year ended 05 April 2021, the tax payment deadline is 31 January 2022.
If you miss the deadline, you will be charged an additional £100 penalty, with increased fines after three months.
Double-check that you are not making any of these mistakes.
If you are unsure, seek the advice of a reputable accountant.
A competent accountant will assist you in avoiding these tax mistakes.
Rather than battling conflicts and attempting to do cumulative tax planning, make sure you have a tax plan in place throughout your business plan.