Running a small business comes with many responsibilities and managing tax obligations can often feel overwhelming. Unfortunately, many small businesses in the UK make avoidable tax mistakes, leading to penalties, unnecessary stress and even cashflow problems. Understanding these common errors and taking steps to prevent them is crucial for long-term business success.
Below, we’ll explore some of the most frequent tax mistakes made by small businesses and offer practical advice on how to avoid them. We’ll also highlight the importance of keeping up with the latest tax rules, particularly for the 2024/25 tax year, to ensure your business remains compliant and efficient.
1. Missing key tax deadlines
One of the most common tax mistakes small businesses make is missing key deadlines for submitting tax returns or paying tax liabilities. For example, missing the deadline for filing a self-assessment tax return can result in a £100 penalty, and this can escalate if the delay continues. Similarly, VAT returns must be submitted quarterly, and any late submissions can result in fines and interest charges.
How to avoid this mistake: To avoid penalties, ensure you have a reliable system for tracking important tax deadlines. This could involve using accounting software that sends reminders or working with an accountant who can help you stay organised. A professional accountant will also help you navigate complexities like quarterly VAT returns or annual corporation tax filings.
2. Failing to claim allowable expenses
Many small business owners either overlook or are unsure about what expenses they can claim against their tax liability. Claiming allowable business expenses, such as office costs, travel expenses and even certain utility bills, can reduce your taxable profit and, in turn, lower your overall tax bill. However, claiming too much or inappropriately can also lead to issues with HMRC.
How to avoid this mistake: Keep detailed records of all your business expenses, and ensure you understand which ones are allowable for tax purposes. For example, travel expenses for business meetings are typically deductible, but personal trips are not. A professional accountant can help you identify what expenses are allowable and ensure you’re maximising your tax efficiency.
3. Misclassifying employees and contractors
Misclassifying workers as self-employed contractors when they should be treated as employees is a mistake that can have serious tax implications. HMRC is increasingly cracking down on this error, particularly in industries like construction and tech, where the use of contractors is common. If you misclassify employees as contractors, you may be held liable for unpaid national insurance contributions, PAYE and other penalties.
How to avoid this mistake: It’s important to understand the distinction between an employee and a contractor. Employees typically work under a contract of employment, receive benefits like holiday pay and are subject to PAYE deductions. Contractors, on the other hand, work independently and invoice for their services. If you’re unsure, seek professional advice to avoid potential issues with HMRC.
4. Misunderstanding VAT thresholds
In the UK, businesses must register for VAT if their taxable turnover exceeds £90,000 over a 12-month period. However, some businesses either fail to monitor their turnover correctly or assume they don’t need to register for VAT until they have been trading for a year. Failing to register for VAT when required can lead to significant backdated payments and penalties.
How to avoid this mistake: Ensure you regularly monitor your taxable turnover, particularly if your business is growing. Accounting software can help you track your turnover and alert you when you’re approaching the VAT threshold. If you reach the threshold, you must register for VAT promptly and start charging VAT on your sales. We can assist you in navigating the registration process and ensure your VAT compliance moving forward.
5. Poor record-keeping
Accurate and thorough record-keeping is essential for any small business, yet it’s an area where many fall short. Poor record-keeping can lead to errors in your tax returns, missed deductions and difficulties during HMRC investigations. Keeping track of income, expenses and other financial transactions is not just a legal requirement, it’s a key part of ensuring your business’s financial health.
How to avoid this mistake: Invest in reliable accounting software that makes record-keeping straightforward and efficient. This software will help you stay on top of invoices, receipts and other key documents that HMRC may request. Alternatively, consider outsourcing your bookkeeping to ensure your records are accurate and up to date.
6. Overpaying or underpaying tax
Small businesses often overpay or underpay tax due to misunderstanding tax allowances, reliefs and rates. Overpaying means you’re unnecessarily losing money, while underpaying can result in fines and interest charges. This is particularly important for construction businesses and engineers, where specific tax reliefs may apply, such as the Construction Industry Scheme (CIS) or research and development (R&D) tax credits.
How to avoid this mistake: Stay informed about the tax reliefs and allowances available to your business and seek professional advice if you’re unsure. For example, businesses involved in innovative projects could be eligible for R&D tax credits, which can significantly reduce your tax bill. A professional accountant will ensure you’re taking advantage of every opportunity to save.
7. Not seeking professional advice
Many small business owners try to manage their tax affairs themselves, assuming it will save them money. However, the complexity of the UK tax system means it’s easy to make costly mistakes, especially when it comes to VAT, allowable expenses and tax reliefs.
How to avoid this mistake: Seeking professional tax advice can save you money in the long run. Accountants are equipped with the latest knowledge about tax regulations and can ensure your business is operating as tax-efficiently as possible. We’re here to help you with everything from filing your tax returns to understanding your obligations under schemes like CIS.
Final thoughts
Small businesses often fall into common tax traps but, with the right approach, you can avoid them and keep your business running smoothly. From missing deadlines to failing to claim allowable expenses, there are simple steps you can take to minimise errors and ensure your tax affairs are in order. If you’re unsure about any aspect of your business’s tax obligations, seeking professional advice is the best way to avoid costly mistakes.
Reach out today to discover how we can support your business’s growth and success.