The creation of your own business brings with it a range of responsibilities and duties to comply with all laws and regulation in respect of business management that you may never have come across before. Trade licensing and data protection, employment laws and the administration of the business' tax and social insurance affairs are inescapable realities of the small business and best dealt with from the very beginning.
As you juggle a hundred different to-do lists, tens of jobs required and a million ideas, it’s easy to let the simplest things get through the net. Keeping a close eye on your expenses, keeping receipts and then preparing some kind of record for your accountant ("you need one of those?") to then sift through in order to prepare your annual accounts is something of an afterthought for many entrepreneurs. Whilst it is understandable that the main focus of an entrepreneur's efforts will be on ensuring the business succeeds, losing sight of the requirements of the law in respect of tax and social insurance could land the business in all sorts of trouble; reputational, operational and, ultimately, financial.
Income Tax is payable in respect of various sources of income, the treatment of which will vary according to the particular circumstances of the small business. As a sole trader, the individual will be liable to pay income tax on all profits of the business in accordance with the relevant tax bands. The sole trader will also be required to make social insurance contributions at a higher weekly level than employees attract. If a business is owned by a limited company, the company will pay tax on profits and, depending on the setup, the owners will also pay tax on dividends received from the company.
It’s not all doom and gloom though, far from it. Keeping a tab on your income and, importantly, your expenses, means that you'll have an accurate record of all the money you spent on the business which you can then claim as an allowable expense for tax purposes. The establishment of a new business costs money, lots of money. You might only start to break even after a year or two and it is crucial that, in the early stages, you have an appreciation of the income vs. expenses situation; the reality of which will probably be that, as you expected, you spent much more than you made. If you failed to generate profit, there's no profit to tax!
Although this is a necessarily simplistic take on how the assessment of tax on profit is conducted, it is enough to give you an understanding of the general idea. The nature and extent of the expenses will be assessed by the Income Tax Department in each individual case and whether or not certain expenses are allowed will depend on whether they are relevant to the business, and to what extent.
In addition to tax on profits, a company/business employing staff will be required to make payment of tax on the income of its employees under the Pay As You Earn scheme as well as the staff's weekly social insurance contributions. Paying your dues and keeping the government's bean-counters happy should be treated with the same respect as the payment of electricity, water and telephone charges. This, however, is not usually the case simply because if you don't pay for your utilities, you get cut off and you simply cannot let that happen, can you? The government can wait. You've got a business to run and that’s more important, right? Not really.
The nature of the tax collection machinery means that organisations are afforded plenty of opportunity to let the administration of its tax affairs fall by the wayside but, in much the same way as, 'if you give someone enough rope, they'll hang themselves with it,' so too will a business that allows itself to leave its tax affairs unattended have to deal with undesirable consequences. Where businesses fail to account for income and expenses, the Income Tax Department has powers to issue estimated assessments which, if neither paid or disputed in a timely fashion, could lead to serious consequences such as an application for the winding-up of a company for non-payment of its debts. If financial affairs are not up to date when the tax man comes knocking on your door you'll face the prospect of trying to draw up accounts a number of years in arrears and/or be forced to make payment of crippling levels of income tax.
The simple truth is that whether you pay today or in three years’ time, you will eventually have to pay up. However you look at it, understanding your financial position and staying up to date are your best bet for succeeding in the ‘game.