Business Taxes and Your Barber Shop
The legal structure and income of the barber shop will largely dictate the business tax payable and there are other considerations if the business is VAT-registered and employs people. This will involve regular bookkeeping work and, although some of this can be done in-house, many businesses prefer to turn to an accountant for at least some of it.
Weigh up the time it will take, the cost and the know-how required and consider what would be more efficiently and effectively outsourced to an accountant and what must, by law, be done by a qualified person.
Most barber shop businesses will operate as either a sole trader or a partnership. A sole trader must register with HM Revenue & Customs (HMRC) as self-employed, complete a self-assessment tax return every year and pay Class 2 and Class 4 National Insurance contributions (NICs). A partnership must also register with HMRC as self-employed and complete a partnership self-assessment tax return every year. In addition, each partner has to complete an annual self-assessment tax return and pay their own Class 2 and Class 4 NICs.
Self assessment tax returns are issued in April each year and cover the year from the previous 6th April to 5th April. For instance, the 2008-09 tax year covers the period from 6th April 2008 to 5th April 2009. Normally, HMRC will send a tax return if one has to be completed, but if they do not, it is the responsibility of the barber shop to ask for one.
Paper returns are due by 31st October and online returns by 30th December, otherwise HMRC cannot guarantee to do the calculations and collect tax through the applicant’s tax code if less than £2000 is owed. In any case, returns must reach HMRC by 31st January, or an automatic penalty of £100 will be due and additional penalties and interest may be charged on any overdue tax payments.
Regular bookkeeping is essential. Not only does it makes it much easier to manage the barber shop and complete tax returns, it is also a legal requirement. Everyone must keep records of their income and any capital gains for at least 22 months after the end of the tax year. If in business and self-employed as a sole trader or a partner, records must be kept for at least five years and 10 months after the end of the tax year.
There are other legal structures the barber shop can adopt. If the business is a private limited company, every year it has to supply a set of accounts and completed corporation tax return to HMRC, as well as a signed set of accounts and completed annual return to Companies House.
The process is a little more complicated if the barbers is a limited liability partnership (LLP). Register with HMRC as self-employed and complete a partnership self-assessment tax return every year. In addition, make sure each partner completes an annual self-assessment tax return and pays his own Class 2 and Class 4 NICs. An LLP still has to supply a signed set of accounts and completed annual return to Companies House.
A VAT-registered barber shop has to complete a VAT return form for each tax period – usually every three months. This will detail how much VAT the business has charged its customers, been charged by its suppliers and owes or is owed by HMRC. If the barber shop employs staff, it has further business tax obligations. Pay As You Earn (PAYE) is the system used by HMRC for collecting income tax from the pay of employees as they earn it. An employer has to deduct income tax and National Insurance contributions from employees’ pay and submit the deductions to HMRC.