How do Taxes Change Between Small and Medium Businesses in the UK?

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The goal of any business is to make money, and as that happens, the company begins to grow and change. As these changes happen, so to do the responsibilities and thresholds where tax is due, and reporting is required. 

If you’re not ready for the adjustments that comes from growth, these additional requirements and taxable levels can be a nasty, and expensive shock. 

What is Actually Considered to be a Small and Medium Business? 

Small to Medium Enterprises (SMEs) can be discussed together in some areas of finance and taxation but have very different obligations in others. There are actually three different size levels batched together under the term SME, these are Medium, Small, and Micro: 

Medium sized businesses have less than 250 employees, and a turnover of less than £50 million or a balance sheet total less than £43 million. 
Small businesses have less than 50 employees, and a turnover or balance sheet of less than £10 million. 
Micro businesses have less than 10 employees, and a turnover or balance sheet of less than £2 million. 

These definitions have been subject to change over the course of the last few years (with the impact of the COVID pandemic and cost of living crisis), and on 3 October 2022, the Government announced an extension of the definition of a small business for regulatory purposes to those with less than 500 employees (where, as you can see above, it was less than 50). 

Why are These Size Limits Important? 

These levels have been set in order to define what a Small, Medium, or Micro business actually is, and to reduce regulatory burdens on smaller companies who might otherwise be hamstrung by them. 

Certain reliefs, benefits, and tax credits are only available to SMEs, so it’s important to know where abouts on the scale your business falls, especially if it’s bordering one threshold to another. 

Other taxable benefits are only available under set circumstances – such as Employment Allowance, which allows employers to claim up to £4,000 against Class 1 National Insurance per payroll, and is available for businesses with employees, who pay Class 1 NICs and have liabilities of less than £100,000 in the previous tax year. In this instance, Limited Companies with only one Director and no other employees, or Self-Employed contractors / freelancers who only pay Class 2 or Class 4 are not eligible. 

Another example is Business Relief rates – Small Business relief is available to small businesses whose property rateable value is £15,000 or less and the company only uses one property. 

Understanding what you are entitled to, and how expanding either in size, workforce, or profitable circumstances will affect your tax obligations is essential for proper planning. 

What Types of Tax Do You Need to Think About? 

How you handle your tax affairs and maintain your ability to provide your company with consistent growth isn’t an easy affair. Whilst it might seem that fast growth, extra profits, and an increased turnover is the perfect result for your business, in practice it’s a little more complicated. 

Some rates and reliefs can be carried across to different years, and others are limited to certain time frames for their usage. This includes disposal of assets, Research and Development (R&D) and registering for VAT (which you can choose to do before you hit the £85,000 threshold, should you choose). 

Working with experts, who understand the tax calendar, the legal obligations, and the best times to make the most of your money, is crucial. If you rush to complete tasks, simply to get them done, you could be missing out on tax relief, the ability to defer tax due, and financial benefits that come from timing your actions carefully. 

When you’re planning on expanding your company, or you’re about to hit a grey area between the defined thresholds, seeking out qualified advice and assistance is in your best interest, and the best interest of your company. 

If you’re about to reach one of these points, or you want to plan ahead for your future, we highly recommend booking a consultation with one of our team today. We can go through your finances, evaluate the health and growth of your business, and help you plan your tax calendar, so you make the most of every penny. 

At Yorkshire Accountancy, we pride ourselves on bringing you the most effective solutions, and a timely service that makes your tax affairs less taxing. Get in touch today, and let’s work together to take your growth into account. 

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