Introduction
At Ryans, we know that tax can be time consuming, tricky and, well, taxing. That’s why we’ve created this tax guide to break down all the complicated information and make the complex clear for those who run a business in the hospitality industry, including cafes, bars, restaurants and hotels.
When you operate a hospitality business, you will have to pay three types of taxes: Corporation Tax, National Insurance (and other payroll taxes) and VAT. 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 remember is the 6th April, which is the beginning of the financial year for most businesses. On this date, you can start to file personal and corporate tax returns for the previous financial year, with a deadline of 31st January of the next calendar year, meaning for the 2019-2020 financial year, the absolute latest you can file your taxes is 31 January 2021.
If you are self-employed, this date is also the deadline for the first payment on account for the previous financial year’s taxes. Payments on account are tax payments made bi-annually by self-employed people to spread the cost of some of the year’s tax. The second payment is due on the 31 of July of that same year and the final payment is due on 31 January the following calendar year.
Corporation Tax for the Hospitality Industry
Corporation Tax is paid by all limited businesses in the UK that is payable against the profits a company makes. Any money after deductible costs and expenses is classed as profits. Only limited companies pay corporation tax, meaning sole traders are exempt. The single corporation tax rate is 19%, levied on all profits and chargeable gains (applicable profits made when selling off company assets). There are two parts to corporation tax filing: company accounts and company tax returns.
Calculating Your Annual Company Accounts
Every year, you must file an account with Companies House every year, including important information that follows strict guidelines, including a balance sheet, a profit and loss account and a signed directors’ report.
Balance Sheet
The balance sheet is an overall look at 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 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, which means the loss of value over time.
A quick way to calculate the depreciation is by taking the assets 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 it will be useful.
For example a new printer may cost £300 and has an average lifetime of 5 years, and would likely sell for nothing if broken beyond repair, which would mean an annual depreciation of £60.
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 activities over the entire year, including your sales, other sources of income (such as investments) and how much you’ve spent on running costs (including payroll and payroll taxes). It’s important to get this accurate as the amount of tax you pay depends on your profits and loss account.
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 registered for VAT, any figures on your profits and loss account must exclude VAT as this goes on your VAT return. If your company isn’t registered for VAT, then all figures should include it.
For businesses with a high number of sales each day, you can make accounting easier 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 the names of the company partners, a brief description of the business and a declaration that the accounts comply with all UK laws.
Companies registered as a ‘micro-entity’ do not need to submit a directors’ report. Micro-entities are companies with fewer than 10 employees, a turnover of up to £632,000 and less that £316,000 on the balance sheet.
Filling in Your Tax Return
Once you have calculated your profit and loss account, you can start filling in your tax return, which asks you to provide certain information. This information includes:
- 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 detail information about loans, money owed by creditors, money you owe, money made through other means e.g. bank interest, gains on investments and sales of assets. It is 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 have filled these figures in, either your accountancy software or the HMRC’s online form can calculate 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 are 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 do not need to file accounts at Companies’ House. Because there is no legal separation between yourself and your business, the money your business makes is classed as personal income, which you’ll instead have to pay income tax for.
Corporation tax is paid at a flat rate whereas income tax is progressive, which means that the percentage you pay increases depending on the amount you make. As of 2019-2020, 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.
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 significant 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 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 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 2019-2020, 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 is 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.
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.
Fresh thinking, smart support.
How can our experts helpVAT
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%
- The reduced rate of 5%
- The standard rate of 20%
As your business is within the hospitality industry, you are most likely going to provide both zero-rated and standard-rated goods, though there are a few technicalities you need to consider.
- 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 purchased 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 an 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.
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
To save yourself a job and a half (and potentially a lot of money), why have a chat with us? Get in touch today by calling us on 01204 523263 or by leaving us a message.
Although we have tried to make this guide as comprehensive as possible, it is not a substitute for exhaustive professional help and advice.
For more tips, information and tax guides, check out our helpful blog and resources.