7 Business Tax Basics

7 Business Tax Basics

Seven frequently asked tax questions for new businesses

By Carl Stanford

What is the best way for a startup to handle taxes?

The tax preparation service provided by a reputable CPA or enrolled agent offers the most comprehensive method for filing your taxes. The cost depends on the complexity of your business and the experience of the agent. It’s advisable to conduct a thorough background check to access the credibility of the agent.

There’s also the option to use online accounting software, which is becoming ever more popular. TurboTax and TaxAct are examples of such online accounting options.

You could always complete a tax return yourself; however, you need to be confident in your accounting competence as you may face penalties for improperly completed returns.

Is it easy to separate personal taxes and business taxes?

If you receive income from an employer, or as a salary or dividend as the owner of an incorporated business, your personal tax bill and that of the business will be entirely separate. It will therefore be easy to differentiate between the two, and your only challenge will be to correctly identify and claim for business-related expenses such as mileage.

However, if you’re self-employed or you’re a partner in an unincorporated partnership, although you must still keep separate business accounts, you won’t pay business taxes. Instead, any profit or loss from trading will be included on your own personal tax return. In the case of a partnership, the profit or loss will be divided between the partners.

What are the tax benefits of buying a car through my business?

The tax benefits to buying a car through your business will depend on how it’s financed and its carbon emissions.

If you borrow money or enter into a hire purchase agreement, only the interest payments will be tax deductible. However, you can also claim a taxable allowance on the actual cost of the vehicle. The annual allowance for vehicles with emissions up to 130g/km is 18%, otherwise it’s 8%. Additionally, a 100% first year allowance can be claimed for some vehicles with emissions up to 95g/km.

For limited companies, running costs including insurance and road fund licence are also deductible, as are the lease costs in cases where a vehicle is leased rather than bought.

Is goodwill tax-deductible?

Yes it is. If you purchase an existing company, your business will benefit from the brand, reputation and established customer base of that company – collectively known as goodwill. The sum you pay to buy the company will include payment for this goodwill.

To claim this goodwill as a deductible expense, you must amortise the sum over its expected useful life, up to a maximum of 20 years. The amortisation for each year will then be tax deductible against any income made in that year.

However, if you purchased the business from a related party that started trading before April 2002, corporate tax relief can’t be claimed, even if some of the goodwill was generated after that date.

Is redundancy pay taxable?

The first £30,000 of redundancy pay is tax free. If you receive any non-cash benefits on redundancy, such as being permitted to keep your company laptop or car, this will be assigned a cash value and will be counted towards your £30,000 limit. If the total value exceeds £30,000 then you will be charged tax at your marginal rate on the excess amount.

However, if your redundancy package includes benefits that you would have received anyway, such as a bonus, holiday pay or pay in lieu of notice, these will be subject to tax and National Insurance as normal. These amounts will therefore not be counted towards your £30,000 tax free allowance.

Does HMRC only require original receipts for tax purposes?

You don’t normally have to provide HMRC with receipts when you send them your tax return, but you’re required by law to keep records of your tax, income, expenditure and any other documents you relied on to complete your return. HMRC may ask to inspect these documents at a later date.

HMRC recommends that you keep all your original documents, including receipts. However, this doesn’t necessarily mean that you need to keep them on paper. It’s perfectly acceptable to use scanned images instead, as long as the scans are complete, clear, legible and easy to access. You must keep your records until the end of January five years after the tax year they relate to.

How do I claim tax relief?

There are several different kinds of tax relief.

Personal tax relief can be claimed by registering for tax self-assessment and completing an annual tax return. If you’re an employee, you can claim tax relief via this method on essential working expenses such as uniforms and business mileage via your self-assessment tax return. This is the same form to use if you’re self-employed and want to claim your business expenses, or if you need to claim relief on private pension contributions and your pension scheme isn’t set up for automatic tax relief.

For businesses, there is a range of tax relief and incentive schemes including those for start-ups, research and development, creative industries and social investment. Each have their own criteria and application processes.