In the same way that there are different types of taxpayers, there are also different types of businesses, and this will dictate your eligibility to claim a tax refund in the UK.
Can UK Businesses Claim Tax Refund?
Yes. Same as with individuals, businesses in the UK can claim a tax refund when they have paid more tax than was due on their return. Generally, limited companies are the only type of business entity eligible for a tax refund, but other businesses can also claim a tax refund as long as it overpays on payroll or sales taxes.
One of the essentials of running a business in the UK is filling out your tax returns and paying your tax as when due. However, you are allowed to claim a tax refund for any overpaid tax from HMRC, and how you can do that will depend on how you initially registered to pay tax as a business in the UK.
HMRC strives to make sure everyone pays their taxes, and it wouldn’t want anyone paying too little or too much due to poor tax calculation. At the end of each tax year, HMRC tends to balance its books by reconciling every PAYE taxpayer’s position.
They will look at information from every business, noting how much each has earned, the value of any benefits-in-kind, and how much income tax each has also paid. If you are due to get a refund, you will then receive a P800 tax notice, which states the accurate result of this calculation.
If they discover you have paid too much income tax, you will get a tax refund, and it’s usually paid back to you. If you don’t submit your banking details, your refund will be used to offset any other company taxes, such as VAT or PAYE, or your next corporation tax bill. Other things like work expenses and business allowances are never refunded automatically.
What Type of Businesses are Eligible to Claim Tax Refunds in the UK
Just as it was noted above, limited companies are the only type of business entity in the UK eligible for a tax refund, howbeit, other business can also claim a tax refund as long as it overpays on payroll or sales taxes. Note that what differentiates a limited company from other business entity types is that its profits are taxed separately from its owners. It simply means that these businesses pay income tax directly to the HMRC.
For sole traders and partnerships, claiming a tax refund can be quite complex because it can be difficult to differentiate between business expenses and personal expenses. To claim a tax refund, these businesses are expected to prove that those expenses are apportioned on a just and reasonable basis.
How to Claim UK Tax Refund for Business
Note that how you claim a UK tax refund for your business from HMRC will depend on how you initially register to pay tax as a business. Read on to understand how you can claim a tax refund depending on your business entity and situation.
Sole Traders and Partnerships
If you register as a sole trader or as a partnership, you will have to pay your income tax through a self-assessment tax return, and this will mostly involve making two payments over the tax year to see to your future tax liability. Have in mind that this can sometimes lead to overpayment.
Starting a business as a sole trader has remained a top choice, with over 60% of UK self-employed professionals choosing this route. This business entity comes with some forms of benefits such as it costs less and requires less administrative taxes to be paid.
However, note that you will pay more tax overall and are solely responsible for any business debt. Under this business entity, note that how you can claim a tax refund on your self-assessment income varies based on whether you are doing it for the current year, or previous years.
- For the current year: You are allowed to claim a refund if your income has fallen below last year’s figures, and you have been keeping up with your tax payments. According to reports, you don’t need to do anything to claim this refund as it will be automatically paid into the bank account of your choice once you have filed your current self-assessment tax return. You aren’t mandated to file a separate tax refund claim to claim the money back.
- For previous years: For any tax refunds for previous years, you will have to contact the HMRC. This should be unlikely if you have been filling out your self-assessment tax returns correctly, however, if you think you are due for a refund, it is imperyou must consideraccountant to ensure everything is in order before you go on contact HMRC to claim a refund. Have it in mind you will need to file a claim within four years of the tax year’s end to reclaim any overpaid tax.
In the United Kingdom, all limited companies are expected to pay corporation tax, and this is payable against your profits. These businesses don’t get any tax-free allowances; however, expenses and deductions can be made for things like employee salaries (even if you are the only employee), travel, and equipment.
Note that this can all help to make your total corporation tax bill smaller. The current corporation tax rate as of 11th February 2022 is 19%. To successfully claim a corporation tax refund, you will first have to file a Company Tax Return to notify HMRC that you have overpaid.
Note that you can do this online and you will find a space for bank details, allowing HMRC to automatically process your claim and transfer any refund due. If you don’t submit your banking details, your refund will be used to offset any other company taxes, such as VAT or PAYE, or your next corporation tax bill.
Have in mind that not every business can claim a tax refund. However, small-business owners who don’t qualify for a business tax refund can still find a way to get their money back on their tax returns.
Also note there are steps you can leverage to increase the amount of money you get back on your return, such as prepaying expenses and keeping track of tax credits you are eligible for. As with all things tax-related, to ensure you can claim your tax refund successfully, it is recommended you work with a qualified accountant or tax preparer.