Tax accounting - What is tax accounting?
Tax accounting focuses on tax returns and payments rather than the preparation of public financial statements.
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In the UK, the kind of tax return(s) you should submit depends on the nature of your business and whether or not you are VAT registered.
You may choose to take responsibility for your own tax returns or find an accountant to help. An accountant or tax advisor can also help you calculate how much tax you should be paying, how to finance your future tax payments, and which tax accounting methods work best for your business.
Tax accounting and Self Assessment
For employees and pensioners, Income Tax is usually taken out of wages and pensions automatically. However, if you are self employed, have an income of more than £100,000, or meet certain other criteria, you will need to file a Self Assessment tax return.
For partnerships and sole traders, there are specific records you should keep in order to complete your Self Assessment, including records of:
- Sales and income
- VAT records (if you are registered for VAT)
- PAYE records (if you employ others)
You should keep these records for a minimum of five years, and you may need to submit extra information if you use accrual accounting – including inventory at the end of your accounting period and your year end bank balances.
Tax accounting and Corporation Tax
If your businesses is liable for Corporation Tax, you must submit a Company Tax Return to HMRC at the end of your accounting period. When you send a Company Tax Return you need to calculate:
- How much profit or loss you made in regards to Corporation Tax
- How much you need to pay for your Corporation Tax bill
Even if you have no Corporation Tax to pay, you must still submit a Company Tax Return. Sole traders and partnerships do not have to subsmit Company Tax Returns as they are eligible for Self Assessment instead.
Tax accounting and VAT
If your business is registered for VAT, you will need to file a VAT Return to calculate how much VAT you owe, or how much you should be reimbursed. There are several ways you can account for VAT, including:
- Standard VAT Accounting Scheme: this scheme follows the principles of accrual accounting, meaning that VAT is reported when a VAT invoice is issued to a customer or received from a supplier.
- Cash Accounting VAT Scheme: following the principles of cash accounting, the Cash Accounting VAT Scheme dates VAT according to when payment was made, rather than when the invoice was issued.
- Annual Accounting VAT Scheme: whereas VAT Returns should usually be submitted four times per year, under the Annual Scheme, VAT Reports only need to be sent once a year. Businesses enrolled on this scheme make quarterly or monthly payments towards their final VAT bill.
- Flat Rate VAT Scheme: to simplify the VAT Returns process, the Flat Rate Scheme lets businesses with an annual turnover under £150,000 pay a fixed rate of VAT. The fixed rate is calculated based on the kind of business you run, how much you spend on goods, and your annual turnover.
If you are registered for VAT, you will need to submit a VAT Return on top of your other tax returns. You will also need to consider VAT when submitting Self Assessments and Company Tax Returns.