Tax can be one of the most daunting parts of starting a business. Many first-time business owners have to self-teach themselves all about taxes – including different types of tax, tax brackets, allowable expenses and deadlines. It’s common for companies to make mistakes. These can sometimes be costly and even dangerous to the reputation of your business. Below are just 10 examples of common tax mistakes that businesses make.

Leaving your tax return too late

It’s important to keep track of tax deadlines. Self-assessment tax returns have to be completed and paid by midnight on 31st January (or 31st October if you’re filing a paper tax return). Failing to pay on time could result in heavy fines and potentially other penalties. 

Don’t wait until the evening of January 31st to start filling in your tax return – it will be a stressful mad rush to get it completed in time and you could end up missing the deadline if there are complications. It’s better to try and complete it at least a week before so that you can deal with any problems you may encounter during the process (such as having to double-check statements or request your UTR if you have forgotten it). You also need to make sure that you’ve arranged the funds necessary to pay your tax return well in advance. 

The tax year ends in April, so you have from April the previous year to get your tax return done (9 months!). In other words, there really is no excuse for missing the deadline. 

Not checking your allowances

All businesses are entitled to make tax deductions. This involves knowing exactly which allowable expenses can be deducted. 

Some first-time entrepreneurs end up paying more tax than is necessary because they are not aware of certain allowances. For example, when running a business from home, many business owners are unaware that costs like rent/mortgage may be deductible (especially if you have a designated home office). Also, equipment such as your laptop and your desk may count as an allowable expense if you use it mainly for business. This could include repairs and any software you use.

Hiding some of your income

It’s important to declare all income in your tax return. Hiding income is illegal and could result in heavy fines or even jail time if you are found out. HMRC carries out tax investigations to make sure that companies are not evading tax. A HMRC COP9 is one of the most common tax investigations, typically issued if your tax returns contain a suspiciously low amount of income. That said, HMRC also occasionally issues tax investigations on random businesses – this is another way in which many businesses get caught out.

Make sure that you’re recording all of your income and including it within your tax return. This includes money paid in cash and returns made off investments.

Claiming personal expenses as business expenses

While there are many tax deductible expenses that you can claim, you should make sure that they are all business-related expenses. Many sole traders who do not have their personal and business finances divided take advantage of this by claiming personal expenses like travel and even meals out to be business expenses. 

Although it’s very hard for a tax investigation to prove that a past train journey or meal wasn’t a business expense, a tax investigator that is dedicated enough will be able to find evidence that puts your claims into doubt (such as demanding that you show receipts or show proof of communication with business-related clients). If you’ve been found to be claiming personal expenses, you could face fines. This is why you should be very careful as to which expenses you claim as business expenses.

Not claiming back overpaid tax  

Paid too much tax? You may be entitled to a tax rebate. This is something that is worth looking into if you feel that you did not account for certain allowable expenses.

You should try not to leave it too long before claiming back overpaid tax – after four years, any previous tax assessments become closed to claims. That said, there may be some exceptions where you can still claim back some money.

Using the wrong VAT flat rate percentage

When it comes to VAT, you can end up paying the wrong flat rate by selecting the wrong trade sector. This could result in your overpaying or underpaying tax.

Try to select a trade sector that best reflects the nature of your business. If the nature of your business changes, bear in mind that you can always change the trade sector. You can read more about trade sectors and  VAT flat rate percentages here. 

Overlooking other important taxes

Some industries have a multitude of taxes to keep track of from business rates to machine games duty. It’s important that you’re also budgeting for these taxes and paying them by the deadline. 

Do your research so that you know exactly which taxes you’re required to pay. Some tax payments may be possible to incorporate into VAT or your income tax return. 

Not using accounting software for bookkeeping

It’s essential that you keep accurate records of all your income and expenses. While you can use a spreadsheet to do this or even do it manually on paper, accounting software is a far more efficient way of handling your bookkeeping. 

Accounting software can be linked up with other technology such as online payment gateways or POS software to automatically record your income and calculate tax. Such software can also make calculating expenses easier. On top of saving you time, such software can reduce errors, helping you to avoid tax assessment mistakes.

It’s worth taking the time to shop around for accounting software – there are many different programs and plans to choose from, and some may be better suited to certain business sizes/industries.

Not knowing when to use an accountant

If bookkeeping has become too complex or you can’t get your head around certain tax laws, it may be time to hire an accountant. Accountants can help to handle all your bookkeeping for you, making sure that your accounts are not only well-presented but accurate.

When hiring an accountant, try to look for an individual or firm that has a great reputation and that has experience within your industry. You also need to consider the rates they charge, and whether this is within your budget.

This guide delves more into whether or not you should hire an accountant.

Leaving it too late to tell HMRC you’re retiring

When it comes to retiring and receiving your pension, don’t wait until the day you retire to start telling HMRC. Arranging a pension can be a lengthy process, so it’s better to get started several months in advance so that you don’t end up overpaying tax. 

This guide explains more about planning for retirement and how/when to notify HMRC.