In our new series on reducing your tax bill and avoiding a tax investigation, each month we’ll be exploring a different aspect of business tax, the importance of understanding your tax responsibilities and how to both minimise your tax bill and avoid falling under investigation by HMRC.
Today, for our first post in the series, we’ll be starting with the basics. Grab a notepad and pen and prepare to make some small changes in your business that could make a huge difference to your tax affairs.
Part One: The tax system, simplified
The British tax system is one of the most complicated in the world, and the onus for getting your tax return right is put on the taxpayer, with penalties and even potential prison time for any mistakes.
But it doesn’t have to be this way, as proven by countries like Estonia and Singapore where the tax system is much more digitised and automated. And the introduction of Making Tax Digital is the first step towards a streamlined, simple-to-use tax system.
Why is tax important?
Tax is a necessary evil. It is the most significant source of government income in almost every country, according to the International Centre for Tax and Development. It not only allows our government to fund benefits such as Universal Credit, Child Benefit and Disability Living Allowance, as well as the State Pension, but our taxes are also spent on the NHS, education, transport, defence, housing, business, the environment, and more.
In 2021, the UK government spent £792 billion of taxpayer money, the highest percentage of which went on Healthcare (22%), followed closely by Welfare (20%). See the UK Gov website for the full details.
You may not agree with everything the government spends our tax pennies on, but we will all benefit from one or more of the services funded by taxes at some point in our lives, and therefore it is essential that those of us who are able to contribute financially, do.
Types of tax
In our guide, Happiness is Paying the Correct Tax, we cover all UK taxes, including:
- Income Tax
- Value Added Tax (VAT)
- Capital Gains Tax (CGT)
- Inheritance Tax (IHT)
- Corporation Tax
- Pay as you Earn (PAYE), etc.
All of the above are dealt with on a self-assessment basis, meaning it’s up to you, the individual, to submit your records and make sure you get it right. Any errors or deliberate omissions are the taxpayers responsibility, and any penalties that may arise from an investigation by HMRC will also fall to you.
Calculating your tax bill
You are responsible for calculating your own tax, even if you have someone else doing it for you, such as an accountant or tax advisor. Using a suitably qualified professional to calculate your tax may provide some defence against potential penalties, but ultimately the buck stops with you, so it’s critical that you keep on top of your financial responsibilities.
The worry and stress caused by an enquiry is a serious distraction from your business, and the cost of that distraction, as well as the potential lost opportunities, could be significant—even if there is ultimately nothing to pay.
In our next article on avoiding a tax investigation, we’ll discuss the difference between tax avoidance, tax evasion and tax planning, and we’ll look at the potential triggers for a tax investigation. Don’t want to wait? Click here to get our guide, Happiness is Paying the Correct Tax now,
Get in touch to discuss your individual circumstances and get some independent, impartial advice on your business’s tax affairs.