Tax Guide for the Retail Industry

Introduction

At Ryans, we understand that tax can be time consuming, tricky, and burdensome. That’s why we’ve created this helpful tax guide to break down all the complicated information and make the complex clear for those who run a business in the retail industry, including those who operate online.

When you operate a business in retail, you will have to pay a number of taxes including Corporation Tax, National Insurance (and other payroll taxes), VAT and Business Rates. These taxes must be paid to HMRC via a one-off Direct Debit payment, a bank transfer or by a debit card or corporate credit card (corporate credit and debit cards are charged a fee. There is no fee for personal debit cards.) It is no longer possible to pay Corporation Tax via the Post Office.

Alternatively, you may also be able to file tax returns automatically if your business uses accounting software such as Quickbooks, Sage or Xero.

An important date to keep in mind is the 6th April, which is the beginning of the financial year for the great majority of businesses. On this date, you can start filing personal and corporate tax returns for the previous financial year, with a deadline of 31st January of the next calendar year, meaning for the 2020-2021 financial year, the absolute latest you can file your taxes is 31 January 2022.

Corporation Tax for the Retail Industry

Corporation Tax is a tax that must be paid by all limited businesses in the UK on their profits. Your business’ profit is any money left over once you’ve deducted your expenses (we’ll talk more about this later). Only limited companies have to pay corporation tax, which means sole traders are exempt. The main corporation tax rate is 19% and is levied on all profits and chargeable gains, which are profits made when selling off company assets. 

There are two parts to filing corporation tax: 

• Company accounts
• Company tax returns

Calculating Your Annual Company Accounts

Every year, you must file an account with Companies House that includes important information such as a balance sheet, a profit and loss account and a signed directors’ report. All of these must adhere to the strict guidelines.

Balance Sheet

The balance sheet is used to present an overall picture of your business at the end of the financial year (usually the 5th April unless you have chosen a different end of year date) and includes any cash, debt you owe and are owed, investors’ money and assets such as property and equipment. You should take into account the depreciation of your assets (the loss of value over time).

A quick and simple way to calculate the depreciation is by taking the asset’s purchase value, subtracting the salvage value (how much it will sell for when it’s no longer useful) and dividing it by the number of years you think the asset will be in use.

Most accountants can work depreciation out for you and there are a number of other methods that can be used to work out depreciation, however, this method is the simplest for smaller businesses.

Profit and Loss Account

The profit and loss account is a look at your business’ activities over the entire year, including your sales, other sources of income (e.g. investments) and how much you have spent on running costs (including payroll and payroll taxes). It’s important that this is accurate as your profits and loss account determines the amount of tax you pay.

To calculate your gross profits, use our handy online gross profit calculator.

The account doesn’t include any debts you owe or are owed or costs incurred from buying fixed assets. If your company is VAT registered, any figures on your profits and loss account must exclude VAT as this goes on your VAT return. If your company isn’t VAT registered, then all figures should include it.

For businesses with high numbers of sales each day, you can relieve some of the accounting pressure by exporting them to a spreadsheet and importing them into accounting software such as Quickbooks, Sage and Xero.

Directors’ Report

The Directors’ Report is a document that is required by law and must be signed by the company director(s). It must include:

• Names of the company partners
• A brief description of the business
• A declaration that the accounts comply with all UK laws.

Companies registered as a ‘micro-entity’ don’t need to submit a directors’ report. Micro-entities are companies with less than 10 employees, a turnover of up to £632,000 and less than £316,000 on the balance sheet.

Filling in Your Tax Return

Once you’ve calculated your profit and loss account, you can start filling in your tax return, which asks you to provide certain information about the following:

• Turnover from trade made this tax year
• Profits made or losses incurred this tax year 
• Losses brought forward from the past

By using these numbers, you can calculate your net trading profit.

You should also include information about loans, any money owed by creditors, money you owe, money made through other means e.g. bank interest, gains on investments and sales of assets. It’s also important to make deductions where possible including management expenses, capital allowances, charity donations (made in the business name) and gains from selling property.

There are other deductions you can make that you’re likely to encounter whilst managing your business (listed on HMRC’s website). 

Once you’ve filled these figures in, either your accountancy software or HMRC’s online form can work out the tax you owe and any reliefs or credits you are eligible for. You are also able to claim back overpaid taxes.

If you have made a sale on any business properly, equipment or other assets, you may have to pay capital gains tax, meaning if you bought your property for £175,000 and sell it for £257,000, you’ll have to pay 28% tax on the £100,000 profit which is £28,000.

Tax as a Sole Trader or Partnership

If you’re a sole trader, or are in a partnership where you have personal liability for your business then you are exempt from paying corporation tax and you don’t need to file accounts at Companies’ House. Because there’s no legal separation between yourself and your business, the money your business makes is classed as personal income, which you’ll have to pay income tax for instead.

Corporation tax is paid at a flat rate whereas income tax is progressive, meaning the percentage you pay increases depending on the amount you make. As of 2020-2021, the income tax bands are as follows:

Band	Taxable Income	Tax Rate
Personal Allowance	Up to £12,500	0%
Basic Rate	£12,501 – £50,000	20%
Higher Rate	£50,001 – £150,000	40%
Additional Rate	£150,001+	45%

Whilst the tax return you submit as a sole trader/partnership is simpler than the corporation tax document, you are still required to calculate your turnover, profits and expenses in a similar method.

Get Professional Help with Your Corporation Tax

Corporation tax represents a substantial part of your trading costs and ensuring you are complying with the law can hold a heavy burden, especially with the increase in reporting obligations, stricter investigation policies from the tax authorities and harsher penalties for non-compliance.

Efficient corporate tax planning can potentially result in great increases to your bottom line. Maximising your net profits whilst ensuring you’re complying with the law is a win win.

Calculating your taxes and submitting your tax returns can take up lots of time and resources, which is why we offer a range of services to help you minimise your corporate tax exposure and relieve you of the administrative burden of complying with tax legislation. These services include:

• Determining the most tax effective structure for your business
• Taking full advantage of tax opportunities and reliefs
• Achieving the optimum capital or revenue tax treatment
• Reducing tax on disposals and maximising relief on acquisitions
• Making good use of tax opportunities specific to your industry
• Meeting the strict demands of compliance including corporation tax self assessment
• Acting on your behalf in discussions with the tax authorities

National Insurance and Payroll Taxes

Whether you’re a sole trader or limited company, every business must contribute to their Employers’ National Insurance contributions as well as their employees’ portion of National Insurance payments, income tax and student loan payments. This is all part of running payroll and is referred to as payroll taxes.

You must pay Employers’ National Insurance for any employee who you pay over £157 a week. You must also count yourself as an employee, though if you pay yourself through dividends as opposed to, or as well as, payroll you’ll need to pay dividend tax. As of 2020-2021, the dividend tax bands are as follows:

Tax Band	Tax Rate
Dividend Allowance (£2,000)	0%
Basic Rate	7.5%
High Rate	32.5%
Additional Rate	38.1%

To calculate your dividend tax, use our handy online dividend tax calculator.

When running payroll, it is incredibly important to have a diligent system in place. Although HMRC offers a basic system, it’s limited in its abilities and cannot generate a payslip in the way accounting software such as Quickbook, Sage and Xero can.

Once you have an effective system in place, you’ll need to run payroll every month and provide your employees with payslips which detail their gross pay, PAYE deductions and their net pay. Student loan payments and pension contributions are deducted from employee payslips.

It is a requirement of HMRC for you to submit Full Payment Submission by 22nd of the month one payroll has been run, which is a report containing information on the total amount you are paying your employees as well as the deductions. You must also pay the full balance for your PAYE taxes by this same date.

If you run payroll, you must also calculate tipping if this is relevant to your business. If tips go directly to staff, they must claim it as part of their personal income. If you collect tips as part of the service charge and distribute them yourself, this must go on your employees’ paychecks. If you manage tips with a tronc service, the troncmaster will organise the payment and taxes for you.

To calculate your payslips, use our handy online payslip calculator.

Get Professional Help with Your National Insurance and Payroll Taxes

Administering your payroll can be time consuming and inconvenient, forcing you to redirect energy and resources from your business’ core activities. The task is made all the more tricky by the growing complexity of taxation and employment legislation as well as the accompanying regime of penalties for non-compliance. 

HMRC claim that over 80% of data quality problems are caused by holding incorrect information about an employee’s name, date of birth or National Insurance number.

Under PAYE Real Time Information (RTI), the information that you submit to HMRC every time you pay your employees is matched against records HMRC stores on their National Insurance and PAYE Service (NPS).

Failure to run your payroll effectively can also lead to unhappy employees in the least and no employer wants that added worry. If the records you submit don’t match, you may create duplicate or inaccurate records which could result in incorrect tax calculations or HMRC compliance checks.

Luckily, we have a dedicated team of trained staff who can relieve you of this burden by providing a comprehensive and confidential payroll service, including:

• Customised payslips
• Administration of PAYE, national insurance, statutory sick pay, statutory maternity pay, etc
• Completion of statutory forms, including year end tax returns, to issue to your employees and submit to HMRC
• Summaries and analyses of staff costs
• Administration of incentive schemes, bonuses, and ex-gratia and termination payments
• Administration of pension schemes

Even if you have only a few employees, you will make savings by hiring us to administer your payroll. We can help you to make sure the information you hold about your employees is correct, so you can avoid any unnecessary stresses.

VAT

If your business has a monthly turnover of £83,000+ in the last tax year, you must register for VAT, though you can also do this optionally if you earn less than £83,000. If VAT-registered with HMRC, you have to  document and add VAT to every transaction you make. You can also claim back VAT on business purchases.

There are 3 rates of VAT:

• 0% (zero-rated services e.g. most food and children’s clothing)
• The reduced rate of 5% (some goods and services e.g. children’s car seats an energy for your home)
• The standard rate of 20% (most goods and services)

As your business is within the retail industry, you are likely going to provide a mixture of zero-rated, reduced-rated and standard-rated goods. It’s important to know the following:

Clothing & Footwear and Protective & Safety Equipment

• Babywear (0%)
• Children’s clothing and footwear (0%)
• Carrycots with restraint straps (0%)
• Children’s car seats, booster seats and booster cushions (0%)
• Children’s safety seats with bare wheeled framework (0%)
• Cycle helmets – CE marked (0%)
• Motorcycle helmets that meet safety standards (0%)
• Protective boots and helmets for industrial use (0%)

Publications

• Books (0%)
• Children’s painting and picture books (0%)
• Maps and charts (0%)
• Magazines (0%)
• Newspapers (0%)
• Printed or copied music (0%)
• Publications (0%)

Health

• Incontinence products
• Maternity pads
• Sanitary protection products
• Smoking cessation products – nicotine (5%)
• Mobility aids for the elderly (5%)
• Equipment for disabled people (0%)

Leisure 

• Lottery ticket sales (exempt)
• Physical education and sport activities (exempt)

Food

• All food and drinks are standard-rated when they are consumed on your premises
• Cold prepared food such as sandwiches and salads is zero-rated when takeaway, but standard-rated when eaten-in. However, crisps, sweets and bottled drinks are always standard-rated.
• Hot food is almost always standard-rated unless it is heated up in-store and left to cool, in which case it is zero-rated. Any food that is kept hot (fish and chip hot counters for example) and food that is specifically advertised as ‘hot’ is also standard-rated.
• Bundles of hot and cold items (e.g. a meal deal with hot chicken and a cold snack) required individual VAT calculation on each item.

When generating receipts and invoices you must show your VAT number and information and show the ‘time of supply’ which is the date the transaction took place for when it comes to doing your taxes. You are able to reclaim VAT that you have paid for almost all business purchases and employee travel expenses so long as you register the purchases on your VAT return.

This return is submitted via HMRC’s Government Gateway and must include all invoices and receipts that you generate in that quarter and any import/export documents. 

The most effective way of keeping track is by using a dedicated VAT account. This account notes details of any applicable purchases or sales, including gold sold or bought from vendors in other European Union countries. (This may change after the UK officially leaves the EU.) Keeping this account up-to-date allows you to calculate the VAT you owe HMRC and any VAT you can claim back.

Keeping your accounts in order is essential in the event that HMRC conducts an inspection. You must keep VAT records for at least 6 years (or 10 if you use the VAT MOSS service). They can be kept on paper, electronically or as part of a software such as Quickbooks, Sage and Xero.

To calculate your VAT tax, use our handy online VAT calculator.

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Get Professional Help with Your VAT

The constant detailed changes being made to VAT regulations and the ever growing demands of HMRC call for a trained professional eye to ensure that you do not fall foul of the regulations and end up paying the Exchequer more than you need to!

At Ryans, we provide an efficient cost effective VAT service, which includes:

• Assistance with VAT registration
• Advice on VAT planning and administration
• Use of the most appropriate scheme
• VAT control and reconciliation
• Help with completing VAT returns
• Planning to minimise future problems with HMRC
• Negotiating with HMRC in disputes and representing you at VAT tribunals

Business Rates

If your business operates in an office or retail premises then you’ll likely have to pay business rates. Business rates are charged on most non-domestic properties such as:

• Shops
• Offices
• Pubs
• Warehouses
• Factories
• Holiday rental homes/guest houses

Around February and March each year, your local council will send you a business rates bill for the following tax year.

If you run your business from home, you are usually exempt from paying business rates as well as council tax, however, there are some exceptions including:

• If you employ staff who also work in your home
• If you sell goods or services from your home to customers that visit
• If you have transformed your home into a workspace e.g. converting your shed or garage into a beauty salon.
• If your property is part business part domestic e.g. running a pub and living above it.

Other premises such as farm buildings are automatically exempt from business rates.

Business Rates Relief Schemes

If you are struggling to pay your business rates, you may be able to get relief from your local council by applying for a reduced bill or grant. You may be eligible for the following relief:

• Small businesses rate relief
• Rural rate relief
• Enterprise zone relief
• Hardship relief
• Retail discount

You can apply for small business rate relief if your property has a rateable value under £15,000. With this relief, you won’t pay business rates on property with a rateable value of £12,000 or less and the relief on properties between £12,000-£15,000 will decrease gradually from 100% to 0%.

The rural rate relief is eligible to businesses operating in rural areas with populations of less than 3,000 people. You can get 100% relief if your business is also either the only village shop/post office with a rateable value of up to £8,500 or if it is the oblh public house or petrol station with a rateable value of up to £12,500.

If you’re experiencing financial difficulties, you could qualify for hardship relief. In order to qualify, you must satisfy your council that you would be in financial hardship without the relief and that the relief would be in the interest of local people.

If you’re eligible for retail discount, you could get 100% off your business rates bill for the 2020-2021 tax year.

Online Retailers

If your business operates online, you may still be required to pay certain taxes. If you’re self-employed, you’ll still be required to register with HMRC and complete your annual Self Assessment Tax Return. When filling this in, it’s important to have a clear distinction between what you sell as part of your business activity and what’s not e.g. selling some old unrelated possessions on eBay that you no longer want. 

As an online seller, you’re allowed to earn up to £1,000 a month in online sales before paying tax. This applies to all online selling sites including eBay, Etsy and Depop. You may also have to pay:

• Income tax
• Corporation tax
• National insurance contributions
• VAT
• Employers’ PAYE
• Business rates

New Online Sales Tax

Currently, the government is considering a new 2% sales tax for online sellers in order to give the high street a boost. There are also talks of a new home delivery surcharge that customers must pay in order to have online goods delivered. Whilst there appear to be no solid plans yet, any changes are due to be introduced around Spring 2021.

Get Professional Help with Your Taxes

At Ryans we have considerable experience acting for the retail sector, and understand their special requirements clearly – especially the need for real-time, proactive advice on how to maintain and improve their position.

Perhaps the biggest bane of a retailer’s life is the stringent demands of the VAT regime. We can relieve you of a lot of unnecessary time and expense by advising on the most appropriate scheme, and handling your VAT planning and administration as well as handling your other tax related matters.

Whether you’re a small shopkeeper, a High Street retailer, a mail order company or an Internet trader, our team of experienced professionals is here to help you achieve your business objectives.

Although we have tried to make this guide as comprehensive as possible, it is not a substitute for exhaustive professional help and advice. To save yourself a job and a half (and potentially a lot of money), why not have a chat with us? Get in touch today by calling us on 01204 523263 or by leaving us a message. For more tips, information and tax guides, check out our helpful blog and resources.