Underreporting of £320,000 in taxes results in business licence being revoked for 8 years!
- TBA Marketing
- Jun 14, 2024
- 4 min read
Updated: Mar 13
It’s crucial to remember that no matter what business you run, you need to fully comply with your tax obligations – they are applied very strictly!
Recently, a High Court judge in the UK imposed severe penalties on a restaurant owner in West Sussex. In 2007, Shafique Uddin opened a restaurant in Worthing and became the sole director of the company. However, from April 2010 to January 2017, he submitted inaccurate tax returns, resulting in an underpayment of a total of £320,000 in taxes.
The restaurant eventually went into liquidation on the 11th April 2017, prompting an investigation by the Insolvency Service. It didn’t take long for investigators to uncover years of tax evasion by Shafique. The High Court ordered the revocation of his business license for eight years.
This is one of many cases where business owners have been prosecuted for underreporting taxes. Many businesses may underestimate the importance of accurate tax reporting, whilst others are simply unfamiliar with tax regulations and do not know what taxes are involved in running a business.
When you decide to open a store or start a company in the UK, the types of taxes you pay and how you pay them will depend on the structure of your business. The tax obligations for a sole proprietorship differ slightly from those of a limited company or a partnership.
So, what are the most common tax obligations you should be aware of as a business owner?
1. Corporation Tax
If your business is a limited company, the employer must pay corporation tax on the company’s profits, including profits from trading and from selling investments or assets. The current corporation tax rate is 19%. If you are a sole trader or a partner, this tax does not apply.
You need to register for this tax within three months of starting your business and submit a corporation tax return to HMRC detailing your company’s income, tax allowances, and any other relevant deductions.
Remember, HMRC is not responsible for helping you calculate the correct amount of corporation tax! It is your responsibility to ensure you pay the correct tax, so keeping accurate company accounts and submitting tax returns on time is essential.
If you delay paying taxes or provide inaccurate information, you may be fined by HMRC or, in severe cases, have your business license revoked, as seen with the business owner at the beginning of this article.
2. Value-Added-Tax (VAT)
If your taxable turnover exceeds £90,000 (as of the 2024/25 fiscal year) you must register for VAT. Smaller businesses under the threshold can also voluntarily register to take advantage of certain tax benefits.
After registering for VAT, you must charge VAT on all taxable products and services. You will then need to submit quarterly VAT returns to HMRC, and pay VAT.
However, you can also reclaim any VAT you’ve paid on products/services purchased for your business as input tax. This is one of the reasons why some smaller businesses trading under the threshold may still voluntarily apply for VAT.
3. Business rates
If you rent a shop or other premises for your business, you will need to pay business rates. If you work from home and use only a small part of the property for business (e.g. one room), you might not need to pay business rates, but if most of the property is used for business (e.g. a shop with living space above), you may have to pay them.
The amount you pay is based on the value of your property, so if commercial property prices in your area increase, so might your business rates.
Small businesses can get take advantage of business rate relief, which may reduce or eliminate their bill. This applies to properties used for charitable purposes, properties in enterprise zones, some pubs, and some agricultural buildings.
4. Employee taxes
Income Tax and National Insurance (NI)
Income tax is generally paid by individuals as employees, so business owners don’t pay income tax for the business itself.
However, if you are a director of a limited company, you will have a fixed salary, and if your income exceeds the personal allowance (£12,570 for 2024/25), you will have to pay income tax and NI contributions.
The amount of income tax you pay will depend on your tax band. Remember, other income, such as dividends, savings interest, or capital gains, will also be added to your income and may push you into a higher tax band.
Company directors pay income tax is paid through the company’s PAYE system, along with any NI contributions.
Sole traders pay income tax based on business profits and must submit a self-assessment tax return to HMRC.
Employer’s National Insurance
If you employ staff, you must pay employer’s NI contributions on their wages, known as ‘secondary Class 1 NI contributions’.
You must also pay NI on most employee benefits (e.g. company cars, private health insurance etc.).
5. Dividend Tax
Directors can receive income in two ways: through salary or dividends.
Dividends are subject to dividend tax, with the first £2,000 tax-free. Beyond this, dividends are taxed at different rates: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
Dividends must come from profits, and all dividend payments must be recorded and declared, even if you are the sole shareholder.
Summary
As a business owner, the taxes you pay can vary based on your specific circumstances. The information outlined provides a general framework of the potential tax obligations. It’s important to ensure that you do not engage in underreporting, which could be considered tax evasion and a criminal offence!
If you plan to run a business in the UK, hiring a professional accountant is recommended to work out the best tax strategies for circumstances, and ensure that you’re fully compliant. If you need assistance, contact TB Accountants for more help!
