HMRC and tax obligations: the London business starter's guide
)
Posted: Tue 17th Dec 2024
Whether you're self-employed, setting up a limited company or forming a partnership, understanding the rules around taxes and the law is crucial.
This guide explains what His Majesty’s Revenue & Customs (HMRC) does and what its requirements mean to you as a small business owner in London.
By understanding these essentials, you're better equipped to focus on growing your business in one of the world's most dynamic cities.
1. Before you start
Understanding HMRC's role
HMRC is the tax authority in the UK. It's responsible for:
Collecting taxes.
Making sure people and businesses are keeping to the rules.
Supporting businesses with tax-related matters.
For small business owners, staying in line with the law is really important, as it helps you avoid fines and maintain a solid reputation. Think of HMRC as a key partner in your business journey.
Deciding on your business structure
The way you structure your business determines what taxes you pay and how:
Sole trader: simple to set up, but you're personally liable for business debts. You pay income tax and National Insurance contributions (NICs) on your profits.
Limited company: a separate legal entity that offers limited liability. You'll pay corporation tax on profits and need to manage directors' salaries and dividends.
Partnership: shared responsibility and profits, with each partner paying tax on their share.
Choose a structure based on your goals, how much risk you want to be exposed to and your expected income.
Registering with HMRC
You must register with HMRC before you start trading. For sole traders, this involves signing up for Self Assessment. Limited companies register with Companies House and HMRC at the same time. Remember, registration deadlines are strict – usually within three months of starting your business.
2. Small business taxes you must know about
Income tax
If you're a sole trader or in a partnership, you'll need to file a Self Assessment tax return every year. You pay tax on your profits, not revenue and can deduct allowable expenses like rent and marketing costs.
Key deadlines:
Register for Self Assessment: within three months of starting the business.
File your return: by 31 January (online) for the previous tax year.
National Insurance contributions (NICs)
NICs help fund state benefits and pensions. Sole traders pay:
Class 2 NICs: if profits are more than £12,570 a year.
Class 4 NICs: based on a percentage of profits.
Employers must deduct NICs for employees through PAYE (Pay As You Earn).
Corporation tax
Limited companies pay corporation tax on their profits. The current rates are:
19% for businesses with profits under £50,000.
25% for businesses with profits over £250,000.
You need to file a tax return within 12 months of your accounting year-end.
Value added tax (VAT)
You must register for VAT if your business turnover exceeds £90,000 in any 12 month period. As a business, you charge VAT on most goods and services you provide and can claim it back on eligible business purchases.
Common VAT schemes include:
VAT Flat Rate Scheme: simplifies VAT calculations for small businesses.
VAT Annual Accounting Scheme: make advance VAT payments towards your VAT bill and submit one VAT return a year.
VAT Cash Accounting Scheme: pay VAT on your sales when your customers pay you, and reclaim VAT on your purchases when you've paid your supplier.
Employment taxes
If you employ staff, you're responsible for:
Deducting income tax and NICs through PAYE.
Filing payroll information in real time through RTI (Real Time Information).
Providing employees with yearly P60 forms.
Other relevant taxes
Capital gains tax: paid on profits from selling business assets like property or equipment.
Business rates: tax on non-domestic properties. As a London business, you should explore small business rate relief, as commercial rents are typically higher in the capital.
3. Record-keeping and reporting
Why keeping records is crucial
A large part of complying with tax rules is keeping accurate records. You should be able to document all your income, expenses and business transactions.
By doing so, you ensure your tax returns are accurate. It also protects you if your business is audited at any point.
Tools and software you can use
Using digital tools is a great way to make your record-keeping really straightforward:
Accounting software: tools like Sage, QuickBooks, Xero and FreeAgent make it easy to track income and expenses.
Making Tax Digital (MTD): the government system that says businesses must file their taxes digitally. Most current accounting software packages allow you to make these filings.
Reporting obligations
Make sure you meet all reporting deadlines:
VAT returns (if you're VAT-registered): usually every quarter.
Payroll submissions (if you employ staff): every month.
Self Assessment or company tax returns: every year.
4. Deductions, allowances and reliefs
Business expenses
You can deduct allowable expenses from your taxable profits, such as:
Office supplies, software and internet.
Marketing and advertising costs.
Travel expenses (not including commuting).
Tax reliefs
Take advantage of the tax reliefs available to businesses:
Annual investment allowance (AIA): claim 100% on qualifying business equipment.
Research and development (R&D) tax relief: significant savings for businesses that work on innovative projects in science and tech.
Capital allowances: for things like vehicles, machinery and property improvements.
5. Staying within the law
Common pitfalls to avoid
Avoid these common mistakes:
Not registering your business within three months of starting.
Filing tax returns late.
Underestimating your tax bill or missing payments.
Mixing personal and business finances.
Keeping up with tax changes
Tax rules change quite often. To stay up to date, sign up for HMRC's newsletter, find webinars on its website or use its mobile app. Accountants can also help you understand the most current rules and regulations.
What to do if you make a mistake
Mistakes happen. If you submit incorrect information, inform HMRC immediately and file an amended return. Proactive communication can prevent penalties.
6. When to seek professional help
Benefits of hiring an accountant
An accountant can:
Save you time by handling tax returns and payroll.
Help you claim back as much as you're entitled to and identify ways for you to save on taxes.
Make sure you're always complying with regulations.
Look for professionals accredited by bodies like the Institute of Chartered Accountants in England and Wales (ICAEW) or the Association of Chartered Certified Accountants (ACCA).
Alternatives to full-time help
If you're operating on a smaller budget and can't afford to hire an accountant full time:
Use part-time bookkeeping services.
Access free HMRC resources, including helplines and business support schemes.
Key takeaways
Understanding HMRC obligations may seem daunting, but breaking them into manageable steps can make keeping to them straightforward.
From choosing the right business structure to staying on top of deadlines, the key is preparation and consistency. Use this short guide as a starting point, and don't hesitate to seek professional help or tap into London's wealth of resources.
Support to help you meet HMRC obligations
Services
Read more:
Find the right support for your business
At Grow London Local, we understand that you’re passionate about your small London business. That’s why our website is packed with resources tailored to you. Find more support