How can I prepare for my VAT and corporation tax bills?

Table of Contents
    Add a header to begin generating the table of contents

    Managing VAT and Corporation Tax can be challenging for businesses of all sizes, especially for small companies with limited resources.

    However, with the right approach, you can streamline your tax processes, reduce last-minute stress, avoid penalties and ensure compliance with HMRC.

    To fully prepare for VAT and corporation tax bills, it’s vital to:

    • keep accurate records using accounting software
    • identify and claim allowable expenses
    • set aside funds regularly in dedicated savings accounts
    • understand tax deadlines

    It is also beneficial to seek advice from a professional accountant.

    From understanding tax deadlines to maximising allowable expenses and setting aside funds, this blog has you covered.

    Contact Jameco Group today for tax advice and support.

    When are limited company taxes due?

    Understanding tax deadlines is crucial for maintaining compliance and financial health within a limited company.

    Here’s a breakdown of when key tax payments are due in the UK:

    VAT return

    Businesses are required to pay VAT and submit VAT returns within one month and seven days following the end of the VAT quarter. For example, for the quarter from January 1st to March 31st, the VAT return and associated payment are due by May 7th.

    Proactively managing VAT each quarter with the assistance of a VAT specialist can help ensure timely compliance and avoid any last-minute complications for your business.

    Corporation Tax return

    Unlike a sole trader who pays income tax, limited companies are a separate legal entity and, as a result, are subject to business taxes on the company’s profits. Limited companies must settle their corporation tax liability within nine months and one day after the end of their accounting period.

    By providing your company’s financial details to your accountant promptly at the end of the accounting period, you will receive finalised company accounts and an accurate bill in ample time to meet your corporation tax payments without any last-minute stress.

    Factors to consider when preparing for your tax bill

    Company cash flow

    It’s crucial to understand the timing of your tax payments. Filing your company accounts and Corporation Tax return early doesn’t mean you’ll be paying taxes sooner, but it does give you advance notice of the amount due well ahead of the 9-month deadline. This can be helpful for financial planning.

    Submitting your VAT return soon after the quarter ends is also advisable, as it provides early clarity on your financial obligations without restricting the use of funds until the payment deadline.

    Allowable expenses

    A business owner should make every effort to legally maximise their allowable expenses to reduce their business tax burden. While taxes are a part of life, it’s essential your company doesn’t pay more than it needs to!

    For a business expense to qualify, it must meet HMRC’s criteria of being “wholly, exclusively, and necessary for the purpose of trade.” Businesses pay Corporation Tax on taxable profits, which means business expenses and allowable tax relief are deducted from revenue before your tax bill is calculated.

    Deductible costs include rent, salaries, motor expenses, and business insurance. For more detailed guidance, see our article on limited company expenses.

    If your business is VAT registered, you can offset the VAT paid on purchases against the VAT collected on sales. During periods of significant investment, when purchases exceed sales, this could result in a VAT repayment.

    To learn about reclaiming VAT, read our blog.

    Tax reliefs

    You can leverage various tax reliefs to further reduce your company’s Corporation Tax bill, including:

    • Capital Allowances: Use your annual investment allowance for business assets purchased.
    • Losses Carried Forward: From previous accounting periods, if not already used.
    • Research and Development Allowances: For qualifying activities.
    • Losses from Group Companies: Applicable if your business is part of a group.

    If you’re unsure about which type of tax relief you qualify for, it’s best to speak to a tax expert.

    How much money should I set aside to pay for limited company taxes?

    Managing your business taxes efficiently can significantly ease financial stress when it’s time to pay tax. Here’s a process we recommend to our clients to ensure VAT and Corporation Tax bills don’t leave them out of pocket:

    1) Set Up Dedicated Savings Accounts: Open separate savings accounts specifically for VAT and Corporation Tax. This facilitates better financial management and helps avoid complications. We recommend setting up separate savings accounts rather than using “pots”, as these can cause issues on Xero bank feeds.

    2) Make Regular Deposits: Consistently deposit a calculated portion of your revenue into these accounts.

    • VAT: The main VAT rate is 20%. We encourage our clients to put this amount aside as, technically, the money isn’t theirs; they are merely collecting it on behalf of HMRC. In our experience, it’s very rare that your VAT bill will amount to the full 20% you collect on sales, providing you correctly offset VAT claimed on expenditure.
    • Corporation Tax: The main Corporation Tax rate is 25% on profits over £250,000. On profits between £50,000 and £250,000, marginal relief applies, tapering the tax. Profits under £50,000 are only subject to corporation tax at 19%. As with VAT, it’s very rare that your Corporation Tax bill will amount to the full 25% you collect on sales, as it’s calculated on profits and not revenue. Assuming you offset allowable business expenses and applicable tax reliefs, your profits may fall into a lower threshold, meaning your tax bill could be much less.

    4) Set up Automated Transfers: Use automated transfers to funnel the designated amounts regularly into each savings account.

    5) Don’t Touch the Money. Once you have put money into the savings account, resist the temptation to dip into it – it should be for emergencies only. If you find yourself withdrawing funds regularly, it’s probably indicative of other issues within your business, such as cash flow restrictions or profitability issues.

    What happens if you haven’t got enough to pay for your company tax return?

    If you find yourself unable to meet your company tax obligations on time, it’s crucial to address the issue promptly to avoid or minimise penalties for late payment.

    Here’s a step-by-step guide on how to handle the situation:

    1) Immediate Communication with HMRC: Contact HMRC as soon as you anticipate a payment delay. Early communication can open up more flexible options and demonstrate your commitment to resolving the issue.

    2) Assess Financial Penalties and Interest: Understand that late payments incur immediate penalties and ongoing interest. This can significantly increase the total amount owed, making swift action essential.

    3) Explore Payment Plans: HMRC may allow you to pay your tax bill in instalments. This is particularly helpful if you’re experiencing temporary cash flow issues. Requesting a payment plan involves detailing your current financial situation and how you plan to meet your tax liabilities.

    4) Seek Professional Advice: Consider consulting a qualified accountant. They can provide guidance on managing your tax liabilities and may help negotiate terms with HMRC.

    5) Avoid Further Delays: Once a payment plan is in place, adhere strictly to the agreed terms to avoid additional penalties or more severe legal consequences, such as a winding-up petition.

    Stay on top of your company finances with Jameco Group

    At Jameco Group, we understand that managing your company’s finances is complex and time-consuming. Our expert team is dedicated to providing comprehensive accounting, tax, and business advisory services tailored to your business and personal finance needs.

    With our support, you can ensure your company stays compliant, maximise tax efficiencies, and make informed financial decisions.

    Whether you’re a start-up, a growing business, or an established company, our goal is to help you achieve financial clarity and stability. Let us take the stress out of financial management so you can focus on what you do best – growing your business.

    Contact us today to learn more about how we can help you achieve financial clarity and prepare for your company tax bills.

    James Wheeler, founder and managing directors of Jameco Group
    James Wheeler

    James has over 10 years of experience in accountancy and taxation. He has a real passion for business and truly believes SMEs are the heart of the UK economy. In 2017, he founded Jameco Group to provide first-class accountancy, taxation, and business advisory services to individuals and SMEs across the UK.

    Request a Callback

    Fill out the form below and one of our team members will call you back about your query…

    Related Posts

    Let's Work Together!

    Whether you’re requesting a quote or you just have some questions, feel free to get in contact with a member of our team. Please complete our website contact form for a message or call back. We aim to respond quickly.