Tax & admin · 11 December 2015

Working with HMRC as a small business

It's important to know where you stand with HMRC
It’s important to know where you stand with HMRC

Running a business brings with it a number of obligations and responsibilities – not least with the tax authorities.

The first step is to register your business which should be done early in the process of setting up for new business owners, but many don’t realise it’s a necessity until they’re a few months in. KPMG’s Bivek Sharma says he often receives confused calls as to whether an owner needs to do anything “months down the line”. So what do you need to make sure you’ve done when it comes to registering a business and how early on does it need to happen?

Firstly, a new firm needs to register with HMRC within three months of trading and this can be done online. It’s not that difficult, but it can take a bit of time as the current system is fairly disjointed – you need to register for the various taxes separately, so will find yourself re-inputting the same information a few times. Sharma pointed out the incoming digital tax system should help to save time for business owners in this respect however, “as everything will be all in one place”.

“You’re either a sole trader, an incorporated company or a partner, and if you’re an incorporated company, you’ll have to register with Companies House too,” Sharma explains. “You have to register for the various taxes individually, so your VAT, your PAYE if you’re taking on staff, corporation tax and so on.”

Many small firms choose to take on an accountant at this point, to help keep on top of the various deadlines – “your PAYE is real-time so monthly, VAT is quarterly and then your tax return is at the end of the year and you need to make sure you’re on top of all of these,” Sharma explained.

Incorporated companies need to be registered on the Companies House website – so you can register a firm if it’s a private company limited by shares, using model articles of association and the name doesn’t contain a word you need permission to use.

It doesn’t cost much to do, online applications cost £15, while postal ones cost £40. The full list of costs can be found here. You’ll need to have pulled together information beforehand including a company name, company address, director’s name, shareholder’s name and written rules about how the company is run. Once registered, you’ll receive a certificate of incorporation – providing confirmation the company legally exists. You will also receive a Unique Taxpayer Reference (UTR), which HMRC sends to the company’s registered address once you’ve registered with Companies House.

This also means you need to register for corporation tax within three months of starting the firm.

The next few years of business will require constant attention to detail and an upkeep of accounts – monitoring purchases and expenses and keeping everything up to date. It is, Sharma admitted, fairly time-consuming, which is why many do opt for an accountant here, if they haven’t done already.

Additionally, firms will then have to make the decision about registering for VAT. You have to do that if your taxable turnover for any consecutive 12-month period exceeds the VAT registration threshold, currently standing at £81,000. Sharma said he encounters many businesses around the £50,000 to £60,000 mark which decide to register, after assessing they’ll be better off for doing so.

The benefit to registering before a company hits the VAT threshold is that, even though there will be a requirement to charge the tax, a business can also reciam VAT that is charged by other firms. As long as input tax is more than output tax, then the difference can be claimed from HMRC. Furthermore, companies are able to appear larger by registering for VAT. Not being registered implies turnover of less than £81,000.

In terms of the role HMRC has to play when it comes to helping smaller firms, Sharma added its main card to play will be improving processes to save time and costs for business owners, and helping improve efficiency. The digital tax system is one way he thinks should help, “freeing up time for owners to focus on the running of their business”.

At the same time, Sharma pointed out the system won’t start being rolled out until next year and won’t be wholly in place until 2020, so small businesses will have to wait a while longer before they see the benefits. Small business owners need to make sure they staying up to date with pending and proposed changes.

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Bivek Sharma has been a partner with KPMG for over ten years, specialising in accounting, tax and software. He started the Small Business Accounting division over two years ago with a goal to transform accounting services for small businesses. The team works with a huge variety of industry sectors and companies including coffee shops, technology companies, manufacturers, pubs, restaurants and retailers.