Growing a business is exciting. Gaining more customers, watching turnover rise and appointing your first employees are rewarding steps for any small business owner.
But growth also brings new tax responsibilities, and the things that worked when you started out may no longer suit you.
Here are some of the common tax mistakes small businesses make as they grow – and how to avoid them.
- Not keeping up with bookkeeping
It’s easy for small businesses to put bookkeeping on the back burner when there are customers to look after and work to deliver. But as your turnover increases, so does the financial information you need to keep track of.
Leaving your bookkeeping until the end of the year makes it harder to see how the business is performing – and can also lead to missed expenses, inaccurate tax calculations and unwelcome surprises when that tax bill arrives.
Keeping your records up to date throughout the year gives you a much clearer picture of your profits and tax position.
- Forgetting about VAT
VAT is an area that can catch growing businesses out. If your taxable turnover goes over the VAT threshold you need to register for VAT. Note that the threshold is currently £90,000 a year, based on a rolling 12 month basis, not per tax year.
VAT can also affect your pricing, cash flow and bookkeeping, so it’s important to understand it. You need to know how VAT rates work – and not just trust your customer/supplier to get it right. If you don’t collect enough, HMRC will look to you for the difference.
Speak to your accountant when you’re approaching the threshold– don’t wait until you’re already over it.
- Mixing business and personal money
Keeping business and personal finances separate becomes increasingly important as a business grows.
Having a single account for business and personal income and spending makes bookkeeping much more complicated. It’s harder to see how much money the business has available.
Setting up a separate business bank account and having a clear process for recording expenses saves you a lot of time and hassle.
- Failing to keep on top of invoices
As you grow, cashflow is even more crucial. Make sure you set sensible payment terms and chase invoices when they become due – don’t let payees become complacent about your bills. Bookkeeping software can assist with tracking and chasing.
- Getting caught out by payments on account
For sole traders and partners, a higher tax bill can also mean higher payments on account.
Payments on account are advance payments towards your next Self-Assessment tax bill. If your profits increase significantly, you may find that your January tax bill includes both your balancing payment and the first payment on account for the following year.
That can come as a shock if you’ve only budgeted for tax based on the prior year. As your profits increase, it’s important to plan ahead to meet your tax liabilities, rather than treating the tax bill as something to deal with when it arrives.
- Hiring employees without fully understanding the impact
Taking on your first employee is a major milestone, but there’s more to it than simply paying their wages.
You’ll need to register as an employer, operate PAYE, make the appropriate deductions and meet your payroll reporting responsibilities. There are also employer National Insurance contributions, workplace pension duties and other employment costs to consider.
Before you take someone on, make sure you’ve worked out the full cost of employing them – not just their salary.
- Doing everything the same way as before
One of the biggest mistakes is failing to review financial arrangements as the business changes.
The structure and processes that suited you when you started may not be the most tax-efficient or practical once turnover and profits increase.
You don’t necessarily need to change from sole trader to limited company, for example, but it’s worth reviewing your position regularly and considering whether your current setup still makes sense.
- Not putting money aside for tax
It’s a great idea to have a separate bank account to squirrel money away for future tax, whether that’s corporation tax, VAT, self-assessment income tax or payments on account. It can even offer a safety net when cashflow becomes difficult.
Some accounts let you automatically move a percentage of all income over to that account, or you can do it manually on a regular basis. For example, you might set aside 20% of income for VAT and a further 25% for corporation tax.
You could also choose a percentage that’s a little higher than the tax owed – giving you a personal bonus at the end of the year.
- Assuming you know HMRCs rules and allowances
HMRC’s rules and allowances aren’t always straightforward, and the rules change frequently. Keeping abreast of things is really important. Don’t just follow other business owners, friends or social media – always double check the details.
The best solution is to work with a professional accountant to stay compliant and make the most of allowances that could benefit you.
- Not seeking advice
Tax doesn’t have to be complicated, but it becomes even more important as your business grows.
The key is not to wait until something goes wrong. Keeping good records, planning for tax bills and reviewing your position frequently will help you stay in control.
If your business is growing quickly, talk to your accountant. A conversation now could help you avoid an expensive mistake later – and ensure your financial arrangements are keeping pace with the business.
Need some professional support? Our team of Lune Valley accountants are here to manage the financial side of your business as you grow. Contact us today.