How to manage your VAT, Corporation tax and Personal Tax

Tax bills are one of the biggest and most common causes of cashflow problems and businesses getting into difficulties.

There is only one way to deal with tax to make sure it never hurts your business and that is:

  • Always know exactly what your liabilities are up to the current month
  • Put that money away into separate bank accounts and never touch it until you need to pay that particular tax bill.

It may seem like overkill but the easiest way to manage your tax is to set up a separate business reserve account for each type of tax – VAT, corporation tax and (any personal tax if the payments will be coming out of the business.) This makes it much easier to control and keep a check on how much you have put away for each tax.

IF you need to use tax money to run your business then there is something wrong with your business that the tax money is propping up and disguising.

There is a simple fact here – the money owed to the tax man IS NOT YOURS and if you need it to run your business there is something wrong. By putting all your taxes away every month you immediately eliminate one of the main peaks and troughs of cashflow that make life so difficult.

VAT

The VAT you owe to HMRC is the net of the VAT you’ve added onto your sales and the VAT you’ve paid on your purchases. Remember that this VAT collected on behalf of HMRC so you should never think this is part of your cashflow.

Every month you can run a dummy vat return which will tell you how much you owe for that month. At the end of the month transfer this money into a reserve account so it’s not part of your business cashflow.

If you get management accounts that have a balance sheet, this will also show your total liability to date so you can check every month that you’ve got enough money in your reserve account.

When your VAT return is due you need to make sure you transfer the VAT amount back to your current account in time for the direct debit. Alternatively you can change the direct debit to take the payment from your VAT reserve account

 

Corporation Tax

The best and most accurate way to know how much Corporation Tax you owe is to have accurate monthly management accounts that calculate a 20% estimate on each month’s profits.

If you really don’t have this information you could base an estimate on what you paid last year, but remember to factor in an increase if your turnover / profits are higher this year. If you do this, divide your estimate by 12 and put this amount away each month.

Even though this tax isn’t due until 9 months after your year end, remember that this IS NOT your money and is NOT a part of your working capital. Putting the money away each month will make sure you focus on the real profitability and cashflow of your business.

 

Personal tax

Many business owners take money out of the business to pay personal taxes, so if you do this, it’s important to plan for them.

Estimate how much your personal tax bill is going to be. This is a good reason to get your tax returns done early so you don’t get nasty surprises when the tax is due. If you don’t know, see if you can estimate how much it will be based on last year. Then put a monthly amount away so that you will have enough for the payments when they are due. Don’t forget the July tax payment if you have one.