Starting in Business - Income Tax and NIC

Obligations to Notify Start of Business

A campaign to get people starting their own business to register immediately with HM Revenue & Customs (HMRC) was introduced on 10 January 2001. This means new businesses will get help from the outset and avoid drifting into the hidden economy:

• A new helpline takes registrations over the phone for the first time;
• The registration process is easier by making the existing registration form shorter and more straightforward to complete;
• The registration for Class 2 National Insurance contributions (NICs) will also be treated as notification for tax and Class 4 NICs purposes - so that the newly self employed will only need to notify HMRC once;
• People who register will be issued with a new Starting up in Business guide covering everything about tax, National Insurance and tax credits someone starting to work for themselves needs to know;
• The newly self-employed will have 3 months to register - and if they do not they face a penalty of £100 unless they have a reasonable excuse. The 3 months runs from the last day of the month in which self-employment began.

The Government says that it is committed to helping small business to start up and grow and help them understand and meet their obligations but is not prepared to allow honest businesses to be undercut by those in the hidden economy who are determined not to pay their dues - hence the introduction of a penalty for those who fail to notify HMRC about their new businesses.

The Helpline number is 08459 15 45 15. It is open 7 days a week from 8am to 8pm and calls are charged at local rates.

A leaflet P/SE/1 'Thinking of working for yourself?' explains how to register and tells people thinking of starting up how they can get a free video which shows what may be involved. The leaflet is available from the Helpline for the newly self-employed, HMRC Enquiry Centres, Jobcentres, Business Links, other appropriate locations and on HMRC’s website at: www.hmrc.gov.uk/leaflets. The Starting Up in Business guide is also available from the helpline and on the website at: www.hmrc.gov.uk/startingup.

Tax returns and tax payments

31 October: Paper returns
If you are sent a notice to complete a tax return before or on 31 July and you want to send HMRC a paper return you must send the completed return back by 31 October following the end of the tax year on 5 April. If you are sent a notice to complete a tax return after 31 July you must send the completed paper tax return back by the later of 31 October or three months following the date of issue of the notice. For paper returns that reach HMRC by this date they will:

• calculate your tax for you (though you can calculate it for yourself if you want)
• tell you what to pay by the following 31 January
• collect tax through your tax code (if possible) where you owe less than £2,000 unless you tell them otherwise.

There are a very few cases where online tax returns can't be made. In these cases the deadline by which the paper return must reach HMRC is 31 January.

30 December: Online returns
(for tax to be collected through your tax code)
If you send HMRC your tax return online you must send it back by this date if you want them to collect tax through your tax code (if possible) where you owe less than £2,000.

31 January: Online returns
Where a notice to complete a tax return is issued before 31 October this is the deadline for sending back an online tax return.

Where a notice to file a tax return is issued after 31 October the deadline to send it back is three months after the date of issue of the notice. If it arrives after this deadline you'll be charged an automatic £100 penalty. This is also the deadline for paper returns where there isn't the option to file the return online.

The 2008 tax return (for 2007/08 income and gains) should therefore be submitted before 31 January 2009.

Late filing penalties
There is an automatic penalty of £100 where a return is made late, unless there is a reasonable excuse. Late Partnership returns attract a £100 penalty for each partner. If the return is six months late, another penalty of £100 is due. These penalties are reduced to the amount of the tax liability, where that is less. There are also provisions for daily penalties and a tax geared penalty in some circumstances.

Tax and NIC payments
All income tax and class 4 national insurance contributions for the year ended 5 April must normally be paid by the following 31 January. There will be daily interest to pay on amounts outstanding after that date. In addition, a 5% surcharge is payable on any tax and NIC paid more than 28 days late (that is, normally after 28 February following the tax year). A further 5% surcharge is payable on any tax and NIC not paid six months after the due date (that is, normally 31 July).

Payments on account
Payments on account for income tax may be required on 31 January in the year of assessment and the following 31 July. Each interim payment is normally half the amount of the tax and NIC payable for the preceding year, but may be reduced to half the current year's liability if less. Interest is charged on late payments on account, but a surcharge only arises if the payment on account is not made by the date that a surcharge would arise on the balancing payment (that is, normally 28 February following the end of the tax year).

It is important to make provision for tax liabilities as soon as possible from the start of the business. Normally, new businesses have to pay the equivalent of 150% of the first year’s tax liability in one lump sum on 31 January following the first tax year.

Self-Assessment - Paying tax over the Internet

From 10 January 2001, self-assessment (SA) taxpayers have been able to pay their tax by Debit Card over the Internet as part of a facility for tax payment developed jointly by HMRC and Giro Bank. This is a Modernising Government initiative, which provides taxpayers with the facility to pay their Self-Assessment tax from any place with a connection to the Internet, at any time day or night, 7 days per week. Although HMRC already offered taxpayers a range of electronic payment methods, until this initiative they had not offered a direct Internet payment option. This facility complements the existing service for sending Self Assessment tax returns over the Internet at: www.hmrc.gov.uk/sa/using-online.htm Following on from the introduction of Internet based tax payment, the subsequent Government Gateway project provides a general facility for people to make payment to Government over the Internet. The Gateway is an important part of the government's strategy of delivering 'joined up' government, enabling people to communicate and make transactions with government from a single point of entry. In addition to Self Assessment, the Gateway can be used to enrol for other government services including PAYE Internet Services for Employers and Electronic VAT Returns. For more information visit: www.gateway.gov.uk

National Insurance

A self-employed individual or partner is liable to both class 2 and class 4 contributions:

Class 2 contributions are a flat rate - check with us for the latest figures. If profits are expected to be below a certain figure, then the liability can be exempted for the year - again, check with us for the latest figures.

Class 4 contributions are based on assessable profits and are payable at a fixed percentage on a band of profits with a lower and upper limit - check with us for the latest figures. The Class 4 liability is payable with the income tax liability for the year.

Someone who is self-employed is unable to obtain jobseeker’s allowance and can claim only a flat rate incapacity benefit. Therefore separate insurance cover should be considered.

National Insurance

Losses in early years Special tax relief is available where a business incurs a loss in any of its first four tax years:

The loss relief is given against income of the previous three years of assessment. Thus, losses incurred in the trade may be carried back and set against income of previous years.

This carry-back relief is an alternative to the general relief available where a loss can be offset against other income of the tax year in which the loss occurred.

The best way of relieving any loss will depend on the individual’s or partners personal circumstances. The claim must be made within 12 months after 31 January following the year of the loss.

Partnerships

Individual partners are treated in effect as if they are sole traders. They must declare their share of the partnership profits on their tax returns. They are responsible for calculating and paying their own tax. However, partnership returns, together with details of profit allocations, need to be completed and submitted to HMRC.

• Here at Geoffrey Cole & Co., Chartered Accountants, Reading, Berks we have an extensive list of online resources available for FREE DOWNLOAD in our unique Info Vault.

• It is extremely important for all businesses to note that new and amended legislation may become applicable at any time.

Geoffrey Cole & Co Chartered Accountants & Registered Auditors offer a service that both encompasses and extends beyond the provision of traditional tax, auditing and assurance services. We believe in the value of an integrated approach to your financial needs and view a substantial part of our role as being that of business adviser. In this capacity, we work alongside you, helping you identify your immediate and long-term business objectives and plan for them accordingly. Communication is key and we maintain regular contact with clients in relation to their own affairs. Our IT capabilities are extensive: wherever possible your documentation will be prepared and processed electronically. Furthermore, as SAGE software suppliers and trainers our expertise with their business packages is second to none.

Our years of experience are reflected in the range of services we provide and our extensive client list.

Managing Director Geoff Cole says:
"Our aim, as Chartered Accountants, is to help you to achieve your personal goals and aspirations. Yes, we can deal with the compliance work such as audits, tax returns and the preparation of accounts but these are not the area of our principle focus"

“It’s about you.”