Understanding Tax for Small Businesses

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Understanding Tax for Small Businesses

If you are considering buying a small business, or already have made the purchase, you should probably think about business tax. For those who have never run a small business before, it’s in your best interest to understand how these taxes work.

The type of taxes you pay when running a small business can depend on the structure of the business. In our latest guide, we’ll explain some of the different taxes you should expect when you begin to run a small business.

This includes:

  • Corporation tax
  • VAT
  • Business rates

Corporation Tax

Corporation tax applies to limited companies and has a flat 19% charge, no matter what profit your business makes. Corporation tax is calculated after salaries and other expenses have been paid, but before any dividends are withdrawn.

Corporation tax must be paid on all profits; there is no personal allowance as with income tax.

Filing and paying corporation tax can be tricky, as each business’ accounting year differs. Filling out a company tax return to HMRC is due 12 months from the end of your business’ accounting date. However, the deadline to pay the bill is 9 months and 1 day after the end of your business’ accounting date. 

It is down to you as the business owner to declare how much corporation tax the business needs to pay; HMRC will not inform you. 


Value-added tax (VAT) is added to most goods and services, usually with a standard rate of 20%. Some items, like car seats for children and home energy, have a reduced rate of 5%.

If your business is VAT-registered, you need to charge VAT on top of your prices. However, you can also reclaim VAT on business expenses. It is important to note that businesses don’t need to register for VAT unless their annual taxable turnover exceeds the threshold. For 2019-20, this is £85,000.

You have to submit VAT returns every 3 months even if you don’t have anything to pay or reclaim. From April 2019, businesses need to send their returns under the Making Tax Digital initiative. This means you need to register for the initiative and keep digital VAT records.

Business Rates

If your business is run from a commercial property like an office, shop or warehouse, you will probably be charged business rates on the property. This is similar to council tax, in the way that business rates are calculated and sent out by local authorities. 

You will receive the business rates bill in February or perhaps March, letting you know what you need to pay for the financial year starting on 1st April.

Business rates are calculated based on the property’s estimated value on the open market if you were to sell. However, there is a small business rates relief. If your property’s rateable value is less than £15,000 and your business only uses one site, you may be eligible for business rates relief.

For properties with a rateable value of less than £12,000, you will not pay any business rates.

You will usually pay business rates to the local authority, with the bill split into 10 payments over the course of the year.

So, if you’re hoping to buy a business, at least you can understand the taxes that come with it!

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