Businesses and taxation
A HMRC case study

Page 2: Growth of business and taxation

From the day that a business starts up it will engage with the tax system.

  • As soon as a business employs its first member of staff it will be involved in deducting Pay As You Earn (income tax) and National Insurance payments from their wages. If it employs other people, it needs to keep full records of what it's paid them, including wages, payments and benefits. Business owners are responsible for deducting tax and Class 1 National Insurance contributions from their employees' pay and declaring it to the Inland Revenue. In addition the employer is responsible for payment of Class 1 employers' National Insurance contributions.
  • Self employed people must pay Class 2 National Insurance contributions. These contribute towards providing cover for eventualities such as injury leading to incapacity, and help to pay for a state pension.
  • If business owners move from working in an office at home to hiring business premises they will have to pay business rates (collected by the local authority, not by Inland Revenue/Customs and Excise).
  • Businesses that import parts, materials, goods or services from abroad will pay an import duty on certain items. A firm buying goods from outside the European Union will pay VAT and import duties at the goods' point of entry. All firms importing and exporting goods must declare these transactions to Customs and Excise.
  • When a businesses taxable turnover reaches the Value Added Tax (VAT) registration threshold (currently £58,000) the business must register for VAT. Businesses trading below the registration threshold can register voluntarily. This is normally done where a business incurs more VAT on its purchases than its sales (meaning that there is VAT to be reclaimed), where a customer will deal only with VAT registered suppliers or to provide business credibility. Businesses registered for VAT will charge this tax on many goods and services they supply to customers in the UK and the Isle of Man. These are known as taxable supplies. There are different VAT rates (17.5standard rate, 5reduced rate, 0zero rate) depending on the goods or services being supplied. Some items are classed as exempt from VAT.

Sole traders and partners must pay income tax on profits. Companies pay Corporation Tax on profits. To run a business as a company, shares need to be issued and directors appointed. There are a number of legal requirements. For example, all business must keep records so that they can complete tax returns.

HMRC | Businesses and taxation

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