The culmination of your hard work, sacrifices and ambitions are right there – with your name on it.
One lesson that all entrepreneurs must learn, earlier in their journey than later hopefully, is that it takes a lot of work to get things right – from marketing, to customer service, to accounting, to human resources and more.
A lot of start-ups and other younger businesses looking to scale place the majority of their focus on sales and customer acquisitions which can lead to rapid early success but means that taxes can take a backseat.
Unfortunately, if you fail to start taking tax needs into account until the business earns revenue then you might be storing up trouble ahead of tax season.
In this blog we look at some of the most common mistakes that businesses can make when it comes to filing and paying their taxes.
By recognising in advance areas where you’re most likely to struggle, you may be able to avoid tax trouble in the future and even save money through the use of appropriate deductions.
1. Failure to File Correct Forms or Send Proper Payments
Depending on how your business is legally incorporated, how you use employees and the type of industry you’re working in – you’re required to send a number of different forms to HMRC.
Some of these such as estimated income tax, payroll taxes and sales tax have to be filed on a quarterly basis.
Others have to be submitted annually while some should be sent directly to workers and employers throughout the year to ensure that they can pay their own taxes.
There are lots of accounting and payroll software packages that will remind you which payments and forms are required for your business and if you also use the services of an accountant then they could also give you reminders of what is due and when.
2. Poor Record Keeping Practices
No matter how big a company is or what industry they operate in – record keeping is one of the most crucial aspects of running a business.
If you keep good records then you should be able to deduct business-related expenses easily, manage and track inventory usage, maintain accurate employee payroll information and vastly reduce the potential for any significant or expensive legal errors.
Keeping good records for tax purposes is all about being as organised as possible. In other words, you can’t simply rely on your memory no matter how good it is.
You need to keep all receipts you obtain for every expense and ensure they are all stored, in order, in a secure place.
Receipts should include everything from office supplies to business rent, employee payrolls, business trips and advertising.
Companies can manage their records physically, through the use of physical filing cabinets and paper and file systems through to online software designed to automate record keeping.
3. Failure to Access the Right Tax Help
Once your business is established or even before you begin taking on clients and profits, it’s useful to seek out a tax advisor that can offer you guidance and advice as to whether you’re following the correct regulations.
Many people prefer using the services of an accountant rather than managing their taxes themselves. Running a business requires a great deal of energy that can be used creating products, forming business relationships or developing marketing strategies while your accountant looks after the books.
That said, you shouldn’t use any accountant who suggests that you should take write-offs that you’re sure you aren’t entitled to or if they recommend hiding parts of your income.
This is a red flag that you’re dealing with a shady person who could lead to you ending up under audit at best or even worse consequences if you go along with these schemes.
4. Inability to Properly Classify Workers
Every business evolves and grows and sometimes it can be difficult to determine whether an employee is working part-time, freelance or full-time – particularly if they’re working on a remote basis.
Every time you hire an employee, it’s important to classify their status and designation within the company. Failure to do this can lead to significant fines from tax officials and could be the first step towards further legal trouble.
Contractors are a different consideration. There can be significant tax implications for you and them depending on their employment designation.
A simple way to ascertain if an employee is a contractor is to assess the amount of control you have over their work. If you set specific hours for them to work, supply them with necessary equipment and pay for their office space then in all likelihood they are an employee rather than a contractor.
Alternatively, if the individual controls their own work schedule and uses their own equipment then they may be a contractor.
If you need further guidance then speak to your accountant or a payroll expert when you’re thinking of taking on new staff.
5. Taking Incorrect Business Deductions
A great way to reduce your overall tax burden is to take advantage of a number of legal business deductions.
According to the government, companies have the right to deduct any necessary expenses incurred while operating the business.
For instance if you work from home, then you may be able to deduct a number of expenses including rent, insurance, utilities, office supplies and taxes.
On the other hand, if you use your car frequently for work, you may be able to deduct petrol expenses, parking fees, congestion or toll fees and insurance premiums.
You need to be aware that taking excessive deductions or claiming ineligible or fraudulent deductions or expenses is not allowed and could lead to audits or further sanctions. For this reason it’s important to take care when deciding which expenses to deduct.
Again, you can ask an accountant for guidance if you’re unsure what you should include.
6. Mixing Personal and Business Expenses
If you’re relatively new to running your own business then it can be hard to keep track of everything that needs to be tracked.
One important thing to be aware of is that you can’t mix up personal and business expenses. HMRC calls this commingling and is very strict when it comes to enforcing rules around it.
Only expenses directly related to your business and work can be deducted from income tax for the purpose of tax payments. One solid strategy that can be used is to have a dedicated business bank account for company expenses and a separate one for personal expenses.
This way, you can use the business’s card for making purchases associated with the company and your personal card for your own purchases without any chance of co-mingling.
7. Waiting Until Last Minute to Organise Information
Too many companies and businesses wait until tax deadlines are upon them before they start sifting through their collection of receipts, bank and credit card statements to try to make sense and order of how much they’ve earned and spent during the year.
It can be time-consuming, stressful and a general hassle to dedicate time to arranging your finances correctly but it will save you time and effort in the long run and ensures that you’ll be able to claim all the deductions you’re eligible for.
Make sure you collect and store every receipt properly and promptly so you can refer to them at a later date. If you spend an extra ten minutes at the end of the day to note your incomings and outgoings over the past 24 hours.
It can pay off – some accountants will charge you less for their services if your system is as organised and robust as this. It saves them time and effort too!
8. Missing Out Crucial Information
Always double check your tax returns or make sure someone does.
You’d be surprised at the number of people who fail to do something as simple as sign and date them correctly.
You should also ensure that your unique taxpayer reference number (UTR) and National Insurance number are also correct.
Depending on any additional income you may receive that’s not covered by primary tax returns, it might be necessary to include supplementary pages within your documents.
This could include:-
- Insurance payouts
- Post cessation receipts
- Employee deductions
- Income from property, shares and other sources
- Non-qualifying distributions or stock dividends
- Loss relief claims
The Bottom Line on Business Tax Mistakes
At the end of the day, the best thing you can do to avoid tax problems with your business is to stay organised and honest.
If you keep track of what’s going on in your business and inform the relevant authorities when necessary information arises then you’ll be ahead of the game.
New business owners especially can find the concept of tax confusing so it’s always best to access professional help to make sure that you include all information so they can discern what’s essential and what isn’t.
Keep in mind that even if you are using a tax professional or accountant, you are still responsible for managing and keeping your own records – but this is a useful and important skill for any business owner to have.