UK tax basics every tech startup needs to know.

Tax mistakes are expensive in two ways: penalties and interest, and the cash shock of an unexpected bill. Most tech founders do not need to be tax experts, but they do need to know which taxes apply, when they are due and when to ask for help. This guide is general information, not tax advice. Rates, thresholds and rules change regularly, so check GOV.UK and confirm with your accountant before acting.

Corporation Tax

A UK limited company pays Corporation Tax on its taxable profits. You must register for Corporation Tax within three months of starting to do business. For smaller companies, the tax is normally due nine months and one day after the end of the accounting period, and the company tax return is due twelve months after it ends. Accounts also go to Companies House. At the time of writing, the main rate is 25 percent for profits over £250,000, a small profits rate of 19 percent applies to profits up to £50,000, and marginal relief applies in between. Many early tech startups make losses; these can usually be carried forward against future profits, so keep good records even when no tax is due.

VAT

You must register for VAT if your VAT-taxable turnover goes over the registration threshold in a rolling 12-month period, or you expect it to in the next 30 days. At the time of writing the threshold is £90,000 and the standard rate is 20 percent. You can register voluntarily below the threshold.

• Voluntary registration can make sense if most customers are VAT-registered businesses, which can reclaim the VAT you charge, and you want to reclaim VAT on your own costs.
• It can hurt if you sell to consumers, because your prices effectively rise or your margin falls.
• Selling abroad brings place-of-supply rules for digital services that differ by customer type and country. Get advice before you sell digital services to consumers outside the UK.
• Making Tax Digital requires VAT-registered businesses to keep digital records and file returns with compatible software.

Treat VAT you collect as HMRC’s money. Some tech founders move it into a separate account each month so it is never spent.

PAYE, National Insurance and pensions

When you first pay an employee, including a director drawing a salary, you normally need to register as an employer with HMRC before the first payday. You then run payroll, deduct income tax and employee National Insurance, pay employer National Insurance, and report to HMRC in real time on or before each payday. You must also assess staff for workplace pension auto-enrolment. The people playbook covers hiring in more detail, and running payroll on GOV.UK sets out the process.

R&D tax relief

R&D tax relief rewards companies that spend money resolving scientific or technological uncertainty. Much routine software development does not qualify; projects that advance the state of technology, rather than applying known techniques, may. The schemes have been reformed in recent years, including a merged scheme and extra support for R&D-intensive loss-making companies, and HMRC has tightened compliance. In practice that means:

• Some first-time claimants must notify HMRC in advance, within a set period after the accounting period ends, or lose the right to claim.
• Claims need supporting technical and cost information.
• Advisers who promise large claims for ordinary development are a risk to you, not just to them.
• Never put an expected R&D credit into your cash forecast as certain until it is received.

Worked example

Lumenpath is a fictional Cardiff tech startup building computer vision software for crop monitoring. In its first year it sold mainly to large agricultural businesses and registered for VAT voluntarily so it could reclaim VAT on its hardware purchases; its customers could reclaim the VAT it charged, so prices were unaffected. It registered as an employer before its first developer’s start date, set up auto-enrolment from day one and kept development timesheets and technical notes during its model training project, which made its R&D claim straightforward to prepare with its accountant. It kept the expected credit out of the base cash forecast until HMRC paid.

Common mistakes

• Missing the VAT threshold because nobody watched rolling 12-month turnover.
• Spending VAT and PAYE money that belongs to HMRC.
• Not providing for Corporation Tax once the company becomes profitable.
• Paying directors without setting up PAYE properly.
• Treating an R&D claim as guaranteed income.

What to measure

• Rolling 12-month VAT-taxable turnover against the threshold.
• Tax liabilities owed at each month end, ring-fenced in cash.
• A tax calendar with every filing and payment date, and whether each was met.

If you cannot pay a tax bill on time, contact HMRC early; see if you cannot pay your tax bill on time.