In this blog, Darren Stone, partner at Leon and Company Chartered Accountants writes about the importance of putting aside enough cash so that a business can pay its taxes on time.
As accountants, we are always being asked about tax and other liabilities which need to be paid over to the authorities, like HMRC, Companies House etc. One thing that I often talk about is the importance of planning for the tax that is due.
Most business owners will be well aware of the regular taxes, i.e. quarterly VAT, monthly PAYE and National Insurance Contributions if you have a payroll, and of course personal or corporation tax on the end-of-year profits.
What many business owners – especially those new to the game – often overlook is the benefit of setting up two bank accounts. One is to manage the business’s day-to-day banking, like paying suppliers, staff, etc. The other is a reserve account (often known as the “number two” or “saver” account); this account is where you can deposit all future monies required to settle the company’s tax, VAT and payroll liabilities. Many people overlook this simple step – and yet it can resolve so many problems.
I am sure many will recognise the old scenario of waiting for a payment to arrive from that stubborn customer, when in the meantime, your own suppliers are waiting to get paid. When you finally get paid, the temptation is to take the whole of that money and pay yourself some (of course!), and pay off your most pressing suppliers, contractors, etc. But hang on a minute! That payment included 20% for VAT, possibly 19% for corporation tax. And what about the PAYE and NICs due on your payroll? Essentially, this is the old “robbing Peter to pay Paul” scenario. And moreover, this pushes the problem down the line. Imagine getting to the end of the quarter, or year, and there’s no cash in the reserves to pay the VAT or tax when it falls due.
This is why I always recommend setting up a reserve bank account on day one. As soon as cash rolls in, it is wise to remember that not all of it belongs to the business. Some of it belongs to the tax man, and as such, should be immediately transferred to this secondary bank account. I realise people will be saying that this is not living in the real world, but I say that not being able to pay your taxes will soon wake up a business owner to the real world.
I strongly recommend speaking with your accountant to work out a guide as to how much you should be putting aside on a regular basis. For many, this is the beginning of cash-flow planning, and moreover, will enable the vast majority to keep on track, avoiding ‘robbing Peter to pay Paul”, and allowing the business owner to get on with growing their business.
