Sage’s research shows that small business owners are baffled by the jargon used by HMRC.
For example, 42 percent said they couldn’t explain the government’s Making Tax Digital initiative, nearly one in five would struggle to define the wage bill, and more than a fifth couldn’t tell the difference between the minimum wage and the living wage.
But with some planning and John’s best tipstax filing season doesn’t have to be terrifying.
He breaks down some of the jargon used in the tax world to make it easier to understand and give you a handle on your taxes before next month’s deadline.
VAT – Value Added Tax
VAT is a tax levied on most products and services sold by VAT registered businesses.
It is literally a tax on value. But the rates and things it applies to vary, so your lunch meal deal doesn’t have VAT, but your tank of gas does (20 percent).
There is no VAT on your train ticket, but there is VAT on the gas you use to heat your house (5 percent). Believe it or not, the pie you buy at your local deli has undergone five tests to see if it meets the VAT criteria.
You don’t need to know the intimate history of every pie you buy, but the receipt should show how much VAT has been charged.
Once that information is in your accounting software, it helps you do the rest.
PAYE – Pay as you earn
This is the piece on your monthly pay slip that puts a grimace on your face.
After six months of self-employment, I would wish those calculations were done by some accountant.
PAYE is in fact an automatic deduction from your wages before they reach you. It stands for “pay as you earn,” and means the money you earn that is owed for income tax, national insurance, and student loan payments.
In other words, the money that doesn’t get into your pocket before it’s passed on.
And while this may seem annoying, it saves you a tax return each year and, most importantly, protects you from the horrible realization that you’ve spent all that money when the bill comes — a lesson I’ve had a hard time learning in my case.
People who do not have a tax deduction through PAYE are usually self-employed and are responsible for calculating what they owe themselves.
But this doesn’t have to be stressful with the help of good software and a trusted accountant by your side.
Gross and net income
Let’s say you are making delicious jam tarts for your family because if you are honest they are easy and you are out of ideas. But not every grain of flour and raspberry ends up on their dessert plate.
When you came back from the supermarket with all the groceries, you had the dirty ingredients. But when you made the jam tarts, some flour may have spilled out of the bowl.
You didn’t use all the jam. And there was still some dough left. What comes out of the oven is the net profit of those gross ingredients.
The same goes for your earnings and income.
Your business may have many revenue streams, bills paid, products sold, interest, capital gains, and even tips. These are the ingredients. If you add all of this together, it’s your gross income, or sales.
But if you were only taxed on that, it wouldn’t be fair, because providing those products and services costs you money. Things like petrol, packaging, utilities and the subscription to your accounting software.
An accountant can help you find out which costs can and cannot be reclaimed. The amount left after you subtract all expenses from your gross income is your net income, which is the amount you pay taxes on.