The UK tax code is 17,000 pages long, offering countless opportunities for entrepreneurs launching their businesses to make mistakes.
“Unless you are a tax expert, anything you think you know about tax is probably wrong. Hence it is important to seek advice early on,” according to Pete Miller, partner at The Miller Partnership.
The first step to getting your tax right is to make your business known to HMRC, Miller says. This might sound trivial, but it’s a common mistake to assume that HMRC would know about a new business, especially if launched as a sole trader.
“So, the starting point, assuming you want to be compliant, is to tell HMRC that you have started a business, and registering it for tax purposes,” Miller says. “In that context, what I would say to every business, and I don't care how small, is take advice from an accountant’.
“I would argue that there are no words more crucial in the English language – more important than ‘I love you’ or ‘dinner is on the table’ – than ‘speak to an accountant’,” he says.
And startups shouldn’t be put off by the cost that might be associated with this advice, Miller says. Business owners at the micro level wouldn’t go to the Big Four firms but can easily find smaller local practices that will set them up, prepare their accounts and take care of their tax affairs, often for a few hundred pounds a year.
Miller says that the best advice he himself received when he set up his own business is “not to spend time doing things you are not an expert in: you should find an expert to do it for you,” he explains. “I’m a corporate tax guy: when I set up my business and I first looked at a VAT return, I immediately asked my accountant to do it for me.”
The second piece of advice Miller has for micro businesses is to be diligent in their record keeping. The most important thing that micro businesses get wrong is keeping records, he says. “Everyone thinks, ‘Oh, I've just gone down to the corner shop and bought a pint of milk so I can have tea in my office, I'll remember that I spent £0.49’ - but you won't!” he says. “And it’s obviously more important if you're trying to do it for something that's £49 instead of £0.49. So you must get a receipt for everything, write everything down.”
This is particularly important for businesses that deal a lot with cash, Miller highlights. They will often receive a cash payment and net off a part of that with expenses, and without any trace of what went in and out, would take the net amount at the end of the day as the total earnings.
“If an HMRC officer decides to look at your accounts and sees your records are incomplete, how are you going to persuade HMRC that you didn't make this money,” he asks. Taking the example of a taxi driver, HMRC has years of research on business economic models to prove what taxi drivers ought to be earning. “If HMRC expects you to be earning £250 pounds a week and you're only showing £150, unless your records can disprove its expectations, you're going to be at a disadvantage, so keeping records to demonstrate your position is the most important thing.”
Tax is a cost with a stigma, and often people naturally want to pay as little of it as possible. Miller says there are legal and legitimate ways to reduce a tax bill that can and should be explored. But overall, he says it comes down to the questions: “Do you want to sleep at night knowing that you've got a decent accountant making sure that your records are square, and you're paying the right amount of tax, or do you want to try and dodge a few £100 of tax each year and worry that the taxman will come knocking at the door one day”.
Miller’s third and final piece of advice with tax is to understand what might change as a result of the business growing. It might mean that instead of using a few freelancers the business might need to hire full-time staff, and that would have tax implications. But it could also reach a point where the business outgrows the accounting firm that takes care of its tax.
One of the first signs of this would be your existing accountant taking more time to complete the work involved in managing your tax and accounting affairs, Miller says. And he admits that stepping up the advisory capacity is “much harder to do because in most cases it's human nature for your current accountant to want to hold on to you as a client and tell you they can achieve anything for you”.
He concludes: “It's a difficult judgment to make. A really good accountant will tell you when you would be better advised to move to a larger firm, but that doesn’t happen often. The practical reality is that business owners have to make that decision themselves, which is quite hard. Discussing with other local business owners might help inform these sorts of strategic decisions.”
Insights Special: Access to finance
ICAEW Insights examines the finance options and support available to businesses, as well as the challenges they face in obtaining it.
Finding finance options
Trusted business advice
ICAEW Business Advice Service
The Business Advice Service connects owners of SMEs with ICAEW regulated firms who will provide a free initial consultation, without obligation.Find out more
The Small Practitioners Community provides sole practitioners and small firms with bespoke content, webinars, exclusive benefits and networking opportunities.Join for free