The True Tax Cost for Entrepreneurs

The UK has a proud history of an entrepreneurial spirit.  Today’s entrepreneurs collectively contribute huge amounts towards the UK exchequer, and are responsible for the employment of millions of people. 

They are the backbone of the UK economy.  However, they are also subject to tax at every stage of their personal and professional lives.

The taxes that these entrepreneurs and their businesses contribute to the UK are significant.  Business owners often take huge personal risks to start their business.  Our view is that HMRC should do more to encourage entrepreneurs in their business ventures, particularly early on in their business life.

To illustrate the taxes that entrepreneurs suffer or handle on behalf of HMRC, imagine Rob, who has set up his own company:

• For every £120 in sales, HMRC will take £20 if the business is VAT registered. If Rob’s customers are individuals or businesses unable to recover VAT then this is a real cost to them.

• The business would be liable to employer NICs at 13.8% on their wage bill. The company will also be responsible for collecting PAYE and employees NIC on behalf of HMRC.

• It may be necessary for the employees to have company cars – this will attract further NICs based on the list price and the CO2 emissions of the vehicle.

• The business could suffer taxes in other forms, for example insurance premium tax, business rates as well as others.

• Any profit remaining after all these costs would be subject to corporation tax (currently 20%).

• After all this, there will hopefully be some retained profit left for Rob, which the company may pay him as dividends. These will be subject to income tax (currently at rates of up to 38.1%).

• In his personal life Rob is then subject to the same taxes as any individual. He may use his income to buy a new car (subject to VAT), petrol for his car (fuel duty and VAT), a house (stamp duty land tax), energy to power his house (VAT), food (potentially VAT), or perhaps just a beer if that’s all he has left (subject to alcohol duty).

• If he is lucky enough to have any left, Rob may perhaps buy some shares as investments for his retirement (subject to stamp duty), or save some in his bank where it may attract interest (subject to income tax).

• If any of his investments go up in value, then he may suffer capital gains tax at 20% when he comes to sell them.

• And then the end comes, and Rob passes away, when his estate could be liable to Inheritance tax at 40%.

At all stages of his business and personal life, Rob is contributing to the UK exchequer through the tax system.  According to a recent survey by the Department for Business, Energy and Industrial Strategy), there are 5.5 million similar businesses to Rob’s in the UK, which employ over 15.7 million people.  Clearly, entrepreneurs such as Rob have a huge impact on the UK economy, and are vital to the growth of the UK.

There has been much attention in the media recently about corporation tax rates.  Hopefully this article illustrates that corporation tax is just a small part of the taxes imposed on entrepreneurs.

If you would like would like to explore how Shorts can help you and your business, or discuss your tax affairs in general, please contact us.