The self-assessment tax deadline is tomorrow, and it isn’t just individual taxpayers feeling the heat. Many small businesses, particularly those structured as limited liability partnerships, will also need to file their tax returns and make payments to HMRC.
Tax – whether corporation tax, business rates or VAT – can be a tricky issue for smaller businesses. Andy Davies, sales director at LDF, explains why and what they can do about it.
What common issues do small businesses face when paying their tax bills?
The main issue, particularly in January, tends to be the time-scale. For most businesses, December generally is the month when billings are at their lowest because people have time off over Christmas. Expected payments can also end up coming later than they might do in other times of the year. So at the beginning of January, they’re already suffering to some extent because they’ve had less revenue coming in. And then in three or four weeks, they have to make their tax payment, so it can be a struggle to get the cash flow ready to meet it. This is particularly tough for partnerships, in which the partners have to pay personal tax.
What scenarios tend to be toughest for smaller businesses?
One, ironically, is if the business has had a very successful year. If you’re growing and profits have increased, you have to pay more tax when you’re probably also investing to maintain that growth. So the tax payment can act as a brake on growth, both because it ties up cash flow and, psychologically, because the business owner knows they need to put money aside that might have been used for investment.
What options do they have to make the process smoother?
To avoid tying up their cash flow, businesses can apply for a loan facility to fund the tax payment. This allows them to spread the cost of the payment over a period of time, instead of needing to commit a relatively large sum of money all at once. Unsurprisingly, it’s a very popular option at this time of year: we tend to have our busiest days for this type of financing in the last five days of January.
While enabling the business to continue with their plans as normal, it’s psychologically beneficial too. We generally find that once people have made the decision to finance their tax bill, it takes the pressure off and allows them to get on with their day job.
Decisions can in principle be made within a few hours, but this isn’t just an option for people who have yet to make their tax bill. Even if you have already made the payment, it can still be refinanced. In the first few weeks of February, small business owners often realise that their tax payment has made their cash flow significantly less favourable, so look to this sort of facility so they can continue to move forward with their investment and plans.
What can smaller businesses do to make paying tax as easy as possible?
Planning is key. The best thing is to understand what your tax bill is early, so there are no surprises. You want to have as much breathing space as possible so you can continue to run your business as usual.