Income tax, VAT & legal form of business
Disclaimer: Whilst every effort has been made to ensure the accuracy of the information contained in the Pink Book of Legislation, we regret that we cannot be responsible for any errors. This guide is not intended to be a definitive statement of the law in England. If you require precise or detailed information on the legislation mentioned in this guide, or on the legal implications for you in particular, you should consult a professional legal adviser.
- You must establish your income tax position and whether you are claiming all the expenses and capital allowances you are entitled to.
- There are different tax and legal implications, depending on whether you operate your business as a sole trader, a limited company or a partnership.
- Tax and VAT are very large and complex areas of legislation that are constantly being revised and amended. For this reason we suggest that you contact your accountant or financial advisor to discuss all related issues.
It is important that you establish your income tax position and whether you are claiming all the expenses and capital allowances you are entitled to claim.
You must keep records of your business income and expenses for your tax return if you are self-employed as a:
- sole trader
- partner in a business partnership (if you're the nominated partner in a partnership, you must also keep records for the partnership).
There are different rules on keeping records for limited companies and you are advised to consult an accountant for advice if your business is structured as a limited company.
Regardless of whether you are a sole trader, partner in a business partnership or run your business as a limited company, you will also need to keep records of your personal income.
Many businesses use traditional accounting where you record income and expenses by the date you were invoiced or billed. However, there is an option of using Cash Accounting if you are a small business.
Cash basis accounting
The Government has introduced a "cash basis" tax scheme for self-employed individuals or partnerships carrying on the smallest trading businesses. Under this scheme, you can choose to be taxed on the basis of the receipts you gain minue the payments you make. You can join the scheme provided that your receipts for the year do not exceed the amount of the VAT registration threshold (currently £83,000) or twice that (currently £166,000) for receipts of Universal Credit. However, you must leave the scheme if your receipts exceed twice VAT registration threshold (currently £166,000). Further information is available on the Gov.uk website.
You can speak to an accountant or a financial advisor, or visit the HM Revenue & Customs website, which has a range of helpful information and contact numbers.
You do not have to register for VAT if your turnover for the previous 12 months is less than £83,000 (2016/17). This figure is known as the VAT registration threshold. The Government adjusts this figure each year so it is important to check on the HMRC website to find the current level.
You must also register for VAT if:
- you think your VAT taxable turnover may go over the threshold in the next 30 days alone
- you take over a VAT-registered business as a going concern.
VAT deregistration threshold
The deregistration threshold is £81,000 (2016/17). If your VAT taxable turnover for the year falls below £81,000, or you expect it to fall below £81,000 in the next 12 months, you can ask be deregistered for VAT.
Flat Rate VAT Scheme
If your VAT taxable turnover is less than £150,000, you can simplify your VAT accounting by calculating your VAT payments as a percentage of your total VAT-inclusive turnover. The current flat-rate VAT percentage for accommodation businesses is 10.5% of your VAT-inclusive turnover. Once you join the scheme you can stay in it until your total business income is more than £230,000.
It is recommended that you talk to your accountant as to whether joining the Flat rate Scheme would be beneficial for your business.
For information go to The VAT Guide or contact the HMRC’s National Advice Service on 0845 010 9000.