Business Startup and Taxes in UK

The proceeds from any business activity attract tax. The type and amount of tax depends on the nature of business, the revenues and the legal status of the business.

All businesses in UK become liable to pay either Income tax or Corporation tax on their net profits. If the business entity is a sole proprietorship or partnership, the net profits become part of the entrepreneur's taxable personal income and attract income tax. If the business entity is a registered company, the net profits become liable for Corporation tax.

Apart from such tax on profits, businesses attract Value Added tax (VAT) on trade goods and services and National Insurance contributions. Businesses importing or exporting goods from outside the European Union need to pay duty besides VAT.

The taxable income of an individual is gross earnings less allowable expenses and deductions. The net profits from an entrepreneur's sole proprietorship or partnership concern become part of taxable income, and hence liable for income tax.

The income tax rates for non-savings income are 20 percent for taxable income up to £37,400, 40 percent for taxable income between £37,401 and £150,000 and 50 percent for taxable income over £150,000. Individuals with income of £100,000 or less however become entitled to a personal allowance or a tax-free amount. The allowance stands at £6,475 for 2010-11, £7,475 for 2011-12 and £8,105 for 2012-13. An individual's taxable income attracts income tax only above this threshold.

Self-employed entrepreneurs who pay income tax also have to pay national insurance. Self-employed become liable for Class 2 and Class 4 National Insurance contributions. Class 2 contributions are £2.50 per week. Class 4 contributions are a percentage of the annual business profit and applicable when profits are more than £7,225 (2011-12).

The payment of Income Tax and National Insurance is through a Self Assessment system, by filing a tax return at the end of every tax year. The entrepreneur has to register with Her Majesty Revenue and Customs (HMRC), which has offices in Strand, WC2 (nearest tube stations: Charing Cross, Embankment and Covent Garden) immediately after starting the business to set up the National Insurance contribution records

Corporation Tax is a tax on the taxable profits of limited companies. The main rate of Corporation Tax is 28 percent for 2010, 26 percent for 2011 and 25 percent for 2012.Companies with profits less than £300,000 can pay Corporation Tax at a small profit rate of 20 percent.

Newly established companies need to fill in form CT41G (New company details) and submit the same to the appropriate Corporation Tax Office within three months of incorporation. A company registered by not yet having started trading activities need to submit Form CT41G (Dormant company insert).

Most business-to-business or business to customer transactions attracts Value Added Tax (VAT). The standard rate is 20 per cent. Some items qualify for a reduced rate of 5 percent and some other items enjoy a zero rate. Still other items are exempt or outside the scope of VAT altogether. New businesses however become liable to pay VAT only after the VAT taxable turnover for the previous 12 months crosses more than £73,000.

Businesses importing and exporting products outside the European Union become liable for import VAT and duty. The rate depends on the type of product and country or origin

All businesses become liable for taxes and the law does not distinguish between start-ups and established businesses in taxation matters. New businesses however benefit from a variety of tax allowances and relief that reduces their tax liability.

Startup businesses in one of the 21 new enterprise zones in the UK or businesses relocating to any such zone qualify for a 100 per cent tax exemption for five years. New businesses outside such zones may qualify for small business rate relief. Royal Docks, in the Docklands area of South East London is one of the 21 zones.

The Capital allowances relief provides Corporation tax relief for businesses on purchase of assets such as computers, vehicles, business tools and furniture during the first year of business.

Research and Development (R&D) Relief allow deduction of actual expenditure on most research and development cost when computing Corporation Tax liability. Small or medium-sized companies may opt to receive a tax credit rather than tax relief.

The Enterprise Investment Scheme offers income tax relief of 20 percent (30 to 50 percent from April 2012) for investors investing up to £100,000 (£200,000 from April 2012) into new ventures. The gains realised from this investments in 2012-13 would also enjoy exemption from capital gains tax when reinvested in new ventures in the same tax year.

People aged above 25 years and working a minimum of 30 hours a week but on a low income may avail Working tax Credit. The amount of credit depends on the actual income. This scheme helps startup entrepreneurs yet to gain sufficient traction in their business.