Common tax traps to avoid when starting a business

Setting up your own businesses can present a number of challenges but you can get your new venture off to the right start by avoiding these common tax traps.

Tax Penalties

As soon as you have set a start date, ensure that you notify HMRC of your intention to commence trading. Self-employed individuals, partnership businesses and limited companies face penalties for failure to notify HMRC that they are liable to tax. Understand your filing deadlines for your tax returns to ensure that you are ready to meet these. 

VAT Penalties

Do not represent yourself as registered for VAT if you are not, as this is considered to be fraud. If you do register for VAT, submit your returns and pay your dues on time to avoid late filing penalties, interest and surcharges. 

Missing Invoices

Always obtain a proper invoice for any business purchase and a VAT invoice if you are registered for VAT. If you fail to do so, you may find that your claim for tax relief will be denied, as will your VAT reclaim.

Company Car

Whether you are self-employed, a member of a partnership or operating as a limited company, planning for the use of a car in your business needs to be thought through carefully. Self-employed individuals and partners will need to keep a log of business mileage to backup any claim for tax relief. Limited company owners will need to compare whether the cost of using a car owned by the company will be more cost effective than using a privately owned vehicle for business purposes. The tax implications vary considerably depending on many factors, which is why a careful review should always be undertaken in order to minimise any tax charges and maximise any reliefs.

Know what expenses you can claim 

Having a broad understanding of what expenses you are able to claim against your profits whether as a sole trader, partnership or limited company will help you to minimise your tax and prevent any surprises. 

If you are VAT registered it is also important that you understand the rules here as they can be different and more complex than other taxes.

Extracting funds when using a Limited Company

Although considered to be the most tax efficient structure if planned properly you do not have the same freedom to use company funds that you would as a sole trader or partnership. There are additional rules that mean taking loans from the company, using a company car or having the company pay for private expenses can have additional tax implications.

More information for Start ups

We have hub of information dedicated to supporting start ups here or, to find out more about how we can help you, book a free, no obligation meeting with an accountant local to you by calling 028 2565 3002.

Date published 26 Jun 2020 | Last updated 20 Mar 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.