Many business owners are so busy running their company they can be caught off guard when the time comes to pay VAT or year end tax bills.
Tax bills are part and parcel of running your own company. But because necessary payments are not always immediate they can easily be forgotten.
Paying for stock, salaries, rent or equipment hire is often the priority. But budgeting for tax is very important – and here’s why.
Why budget for tax bills?
Budgeting, especially watching cash flow, keeps your business from overspending and getting into trouble with making payments. There are too many stories of businesses closing because they didn’t have the cash in reserve to pay the bills.
It sounds simple – and it is – but basic planning and budgeting can make the world of difference. It keeps you on track and allows you to know what you can and cannot spend.
Tax budgeting keeps you from having unexpected payments when the bill lands. It also keeps taxes to a minimum – through good tax planning usually implemented via your accountant.
Of course, HMRC expects bills being paid on time. If you haven’t the money when a bill arrives, you might face penalties, interest payments and, in the most severe of cases, be closed down.
How to budget for tax
It’s best to set aside a percentage of income per month just so you can be certain the money will be there when you need it. As a starting point, look at the tax you paid in the previous year and then adjust it depending on how your turnover is performing now.
If you save monthly, you won’t be facing a big bill. It’s a little like saving up for your holiday… it’s hard to pay in one go.
Setting aside some money each month is manageable and there is cash to pay the bill when it lands. You’re better equipped and ready in case the tax man throws you a surprise.
VAT needs paying quarterly and as a result, it can be easy to get caught out. Time really does fly and in business, it seems to go more quickly as your work for clients or customers takes over.
Putting your VAT bill on the back burner for a six weeks or so after your most recent payment seems reasonable.
The big issue, however, is that in doing so time moves swiftly. And before you know it, your next VAT bill becomes due!
Having a budget for your VAT means that when the next bill arrives, you’re not surprised and have funds available to pay it.
One advantage of saving for your tax bills is if you over budget! Doing so means you have surplus cash to invest back into your business at the end of the tax year.
It’s prudent to have extra cash in your bank account than run at a deficit for any unexpected circumstances.