Reputation Damage
Much has been made since the global financial crisis about companies avoiding taxes, Starbucks, Google and Amazon are all mutli-national corporations which have suffered from reputation damage due to their inability to pay what is deemed fair taxes in their countries of business. Being global company means that profit redistribution is common place to pay lower taxes. The drive for paying lower taxes is to boost profits and provide shareholders with further growth. With countries across the world setting different tax regimes it is easy to be tempted into paying as little as possible by transferring profit to these low tax economies. Of course being caught doing so will cause you harm from the residents of the country you are avoiding paying taxes in.
There are many campaigns aimed at highlighting tax avoidance and bringing those people responsible to account, this can have a real impact on sales. War on Want is an example of how the rise in Internet usage can really fuel insights into companies tax avoidance schemes. You do not want to end up with campaigners at your place of work, especially if you're a retail business, Starbucks recently discovered this first hand with UK uncut protests.
Cash-flow problems
For smaller and medium sized business the option of offshore tax havens is not there so they need to ensure that cash-flow issues do not arise. Paying tax annually may be a good way of using cash-flow to boost stock, but with that practice comes risk. Using tax cash to invest in business growth may work out well for some business but should your tax become due and cash-flow not present then the outcome can be catastrophic. Do not rely on new business to pay your tax bill, ensure that existing business has sufficient cash-flow to meet your tax requirement. Of course as a new business it is unlikely you will have made much profit, being able to offset any profit with the costs associated with setting up is possible if you keep good records of outgoing payments. Be sure to keep valid receipts of purchases, there is some leniency in the receipts needed with certain values being acceptable to have no receipt for.
HMRC provide comprehensive checklists and advice for Corporation tax receipts, payment due dates and proof required.
Employee Taxes
If you have paid employees then monthly payments of both tax and national insurance will be deemed necessary, called PAYE tax. This system is very straightforward, with reporting of hours and pay reported monthly and calculations provided as to tax liabilities. It is vital to keep up to date with employee taxes and national insurance, integrating this into your payroll system will reduce time spent on payments and calculations.
SAGE offer integrated systems to manage this real time and ability to keep up to date with your outgoing payroll and tax liabilities. SAGE offer systems to all sizes of business.
Sole trader and freelance taxes
If you are a small business it may be more appropriate for you to pay corporation tax on profits if you are the sole worker in the organisation. This is likely to be less than the tax payment needed for personal tax. Also you may wish to hire people on freelance terms, meaning they are responsible for their own tax, whilst freelance workers may be more difficult to manage and train it will reduce your tax responsibilities, important if you lack the structure and logistics needed to have a payroll department and do not wish to pay for accountant services.
As a freelances it is imperative that you keep some money aside to pay taxes, keep a log of all income earned, on a basic spreadsheet with receipts. Using a system like PayPal helps to keep all your records in one place or an income account which has record of all payments received. You may also have to provide invoices to companies for them to pay you, ensure you do so in a copy book so you retain a record of the invoices. National insurance is a key requirement to keep up to date with as this will ensure you receive a state pension in future. The tax process may feel cumbersome and difficult to submit, but if you keep clear records then it should not be difficult or time consuming. Some accountants will offer flat fee rate for this service, but the HMRC have a very comprehensive guide to this process which if you can familiarise yourself with negates the need to pay someone else to do the job for you.
Winding up Order
As a company, not paying your taxes can result in a winding up order from HMRC. Thinking they won't will not solve the issue as they have issued these on some very large companies. This means they will stop your company from trading, sell your assets and you may be banned from having your own company in the future.
Bankruptcy
As an individual not paying your tax liabilities could end up in court proceedings, and eventual bankruptcy. This would cause many future problems in sourcing credit, getting a job or starting your own business.
Great advice! I would add also that 'you' - either as an individual or as a company - should pay taxes not because it's the law but because you benefit from operating or living in a place or country and therefore if you are profitable because of this, you should make a reasonable contribution to the operation of that country. I hate the culture that seems to be like it's a victory when someone minimises the amount they pay in. No-one likes high taxes, but if everyone did their bit, there would be no need for high taxes. I would love to be in a position to have to pay a lot of tax because it would mean i had done well, and I would not begrudge one penny going back to the country that had enabled my entrepreneurship. That's why bigncompanies should pay their taxes, not because it's the law, but because it's their moral duty.
ReplyDeleteThanks for the comment Joanne, I totally agree unfortunately once a company gets to a certain size they no longer have one person who is responsible, instead being a collection of departments, a board of executives and an entire conference hall full of shareholders and each have one mission - Grow profit. The legislation and law of the land give too much credit to companies acting responsibly, they should just make it impossible to get around. Gone are the days of huge companies owned by one man who will provide a legacy, a lot of the best public buildings in the UK were indeed built by rich businessmen doing philanthropy. If you look at the banking sector problem, they almost destroyed the entire economy but nobody was individually held to account because the banks were driven by a culture of eternal growth and profit forcing them into more and more unsavoury and risky markets. Shareholders push this agenda continuously and then they sue when they lose their entire investment, as the case of RBS.
ReplyDeleteUnfortunately the small local business is often so unused to tax procedures they are hit with higher costs than necessary and tax puts many local small businesses in negative cash-flow before they are even up and running properly. If we closed the loops at the top and simplified the system at the bottom, perhaps a first two years refund if our small business makes it past 5 years in operation it would encourage growth at the bottom end and reinvigorate our local communities.