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What is Tax Accounting?

Businesses are responsible for producing financial statements like the balance sheet and cash flow statement. Yet when formulating an accounting strategy, it’s also important not to forget about the tax accounting side of things. You’ll need to set up a business tax account to track and manage payments to HMRC.

What is tax accounting?

Rather than preparing public financial statements, tax accounting focuses on preparing company tax returns and managing payments. Within the UK, the type of tax return you’re responsible for will depend on your business size, structure, and whether or not you must register for VAT.

Tax accounting takes revenue into account to work out your business taxable income, along with any deductions and government credits you might be eligible for. For this reason, your taxable income will often be different from what’s reported on the income statement. Taxable income is subject to the latest HMRC regulations, which change from one year to the next.

For smaller businesses and self-employed individuals, it’s easy to set up a business tax account with HMRC to handle these payments yourself. However, larger companies might need to enlist the services of a corporate tax accountant due to more complicated returns and reporting requirements.

Elements of tax accounting

There are two primary items that must be recognised in tax accounting, including:

  1. Current year liability: This is based on your estimated income taxes payable or refundable for the current tax year in question.

  2. Future year liability: You’ll also need to think about your future liability in order to plan ahead and make estimated tax payments.

Many factors are considered in a business tax account, including profit, loss, and expenses. Earned interest and tax credits will also factor into the equation.

How to manage a business tax account

While business employees will have their income tax automatically deducted from wages and pensions, others will need to file a Self Assessment tax return with HMRC directly. This includes anyone who is self-employed, whether it be through a sole trader or partnership business structure. It also applies to business owners with a taxable income greater than £100,000.

To manage your HMRC tax account, you’ll need to keep records regarding the following areas of your business:

  • Sales and income

  • Business expenses

  • PAYE records (if you have employees)

  • VAT records (if you’re VAT registered)

These records must be kept in business tax accounts for a minimum period of five years. If you use the accrual accounting method, you’ll need to also pull together your year-end bank balances along with any remaining inventory value.

Corporation tax is another factor to consider in tax accounting. Businesses liable for corporation tax must submit their Company Tax Return at the end of each accounting period to HMRC. This will include information including profit and loss as well as payments owed.

HMRC tax account and VAT

Value added tax, or VAT, is also something that can be handled when you manage tax accounts with HMRC. How do you know if you’re required to register for VAT? Here are the minimum requirements:

  1. Your taxable turnover will be greater than £85,000 in the next 30-day period

  2. You had a taxable turnover over £85,000 in the past 12-month period

Those with a taxable turnover greater than £85,000 but less than £150,000 qualify for the Flat Rate Scheme, which lets you pay a fixed VAT rate.

When to use a corporate tax accountant

While most tax issues can be managed directly in your HMRC tax account online, it’s worth hiring a corporate tax accountant for companies with more complex accounting needs. They can help manage tax account issues like:

  • Risk mitigation

  • Business growth

  • Corporate tax

  • Efficiency analysis

  • Internal audit procedures

  • Changes to tax procedures

All of this can have an impact on your bottom line. Accountants can also help you find ways to better prepare for future tax account payments, so that you’re better placed to budget for the next tax year.

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