The Top 5 Tax Mistakes Start-Ups Make (and How to Avoid Them)

Starting a business (whether a Start-up or small business) is exciting, but it's easy to make mistakes that can cause unnecessary stress, unexpected Tax burdens, extra costs, or even legal trouble. The good news? Most of these mistakes are avoidable. Here are five of the most common mistakes new business owners make, why they’re a problem, and how to steer clear of them.

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1. Using the Business Bank Account for Personal Spending 🏦

Why It’s a Mistake: Mixing personal and business finances might not seem like a big deal at first, but it can quickly become a nightmare. If business and personal transactions are tangled together, tracking expenses, preparing Tax returns (Start-up compliance), and even applying for funding becomes far more complicated. It can also raise red flags with HMRC, especially during an investigation.

How It Affects You:

• Difficulty in keeping track of business expenses and profits.
• Higher accounting fees due to extra time spent sorting personal vs. business transactions.
• Potential Tax errors that could result in fines or missed deductions.
• Risk of losing the legal protection of a limited company if personal transactions blur the lines.

How to Avoid It:

• Open a separate business bank account from day one.
• Use the business account exclusively for business transactions.
• If you need to take money from the business for personal use, transfer it to your personal account first.
• Set up a system (such as a salary or dividends if you're a limited company) to ensure you’re paying yourself properly rather than dipping into business funds.

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2. Doing Their Own Bookkeeping Without Understanding It 📖

Why It’s a Mistake: Trying to handle bookkeeping without knowing how to categorise transactions properly can lead to errors that cause bigger problems down the line. Many business owners, for example, put everything into "Cost of Goods Sold," "Purchases," or misclassify expenses, leading to incorrect financial reports and Tax filings. Imagine tying your shoelaces into a big knot—it might not seem like a problem at first, but when you need to untangle it later, it takes far longer than if you'd done it right from the start. The same goes for bookkeeping—sorting out misclassified transactions later is much harder than getting them right initially.

How It Affects You:

• Misclassified expenses can result in overpaying or underpaying Tax.
• Increased time and cost for an accountant to fix mistakes later.
• Lack of accurate financial data, making it harder to make informed decisions about your business.
• Risk of fines or penalties if incorrect filings are made to HMRC.

How to Avoid It:

• Get professional training on bookkeeping software.
• Hire an accountant who can do bookkeeping to ensure everything is properly categorised from the start.

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3. Not Knowing Their Key Tax Dates and Deadlines ⏰️

Why It’s a Mistake: Every business has important filing and payment deadlines that must be met. Missing these can result in penalties, interest charges, and even legal trouble. As businesses grow, more Tax responsibilities come into play, meaning more deadlines to track.

How It Affects You:

• Late filing penalties and interest charges from HMRC.
• Stress from scrambling to meet deadlines at the last minute.
• Potential disruption to business operations if you’re hit with unexpected costs.

How to Avoid It:

• Keep a calendar with all key Tax deadlines.
• Understand which deadlines apply to your business, including:
  • Self-Assessment Tax Returns
    • Covers 6th April to 5th April with filing and payment deadlines on 31st January.
  • Self-Assessment Payment on Account
    • First due on 31st January, second on 31st July.
  • VAT Returns
    • Usually quarterly, with deadlines based on your registration date.
  • Payroll Submissions and Payments
    • Monthly or quarterly, depending on setup.
  • Corporation Tax
    • For limited companies, usually due nine months after year-end.
  • Annual Accounts and Confirmation Statements
    • For limited companies.
  • Pension Submissions
    • If you have employees.
• Work with an accountant who will remind you of deadlines and ensure filings are done correctly.

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4. Not Keeping Receipts and Invoices 🧾

Why It’s a Mistake: HMRC has the right to investigate any business at any time. If that happens, they can ask for proof of transactions from the last seven years (or longer if they suspect fraud). If you can’t provide evidence of your purchases and sales, you may be forced to pay extra Tax and penalties.

How It Affects You:

• Possible fines and extra Tax if you can’t prove expenses.
• Higher stress levels during an HMRC investigation.
• Increased bookkeeping and accounting costs if records need to be recreated.
• Bookkeeping accuracy suffers when you can't recall what was purchased from retailers like Amazon or B&Q without receipts, leading to misclassified expenses or missed Tax deductions.

How to Avoid It:

• Keep all receipts and invoices, either physically or digitally.
• Use cloud-based accounting software that allows you to scan and store receipts securely.
• Regularly check that all transactions are properly recorded and matched with supporting documents.
• Don’t assume bank statements alone will be enough—HMRC requires full records.
• If you keep physical copies, make sure to have photocopies in case of fire or flood disasters.

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5.  Not Knowing Their VAT Threshold 🤔

Why It’s a Mistake: Many small businesses don’t realise they need to register for VAT until it’s too late. The VAT registration threshold is currently £90,000 in Taxable turnover over a 12-month rolling period. If you exceed this and don’t register, you could face backdated VAT charges, penalties, and interest.

How It Affects You:

• You may owe VAT on past sales if you exceed the threshold without realising.
• HMRC can charge penalties for late registration.
• VAT compliance adds complexity to your bookkeeping and pricing strategy.

How to Avoid It:

• Regularly check your rolling 12-month turnover to see if you’re approaching the VAT threshold.
• Speak to an accountant about the best time to register (sometimes voluntary registration makes sense before reaching the threshold).
• Use accounting software to help track your turnover.
• Understand whether your products or services are VATable, zero-rated, or exempt to ensure accurate VAT registration and compliance.

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Final Thoughts

Running a business is challenging, but you don’t have to do it alone. Start-Up Ready gives you the tools to launch and grow with confidence. For just £29.99, gain lifetime access to 20+ expert-led videos, downloadable resources, and practical business advice to help you avoid costly mistakes and stay compliant.

Why Choose Start-Up Ready?

• Expert Video Library: Learn from experienced professionals on key business topics.
• Save Time & Money: Avoid common pitfalls and streamline your operations.
• Support Network: Access expert guidance and real-world solutions for your business journey.
• Stay Compliant: Understand your Tax and accounting responsibilities with clear, easy-to-follow explanations.

Success isn’t just about making money—it’s about managing it effectively. Join Start-Up Ready today and take control of your business future! Keeping personal and business finances separate, maintaining accurate bookkeeping, staying ahead of deadlines, keeping full records, and understanding VAT rules can save time, money, and stress.

If you’re unsure about any of these areas, a proactive accountant can help you stay compliant and financially secure. Success in business isn’t just about making money—it’s about managing it effectively. Avoid these pitfalls, and you’ll be on the right path to growing a sustainable, successful business!

Take control of your business with Start-Up Ready! Get expert-led videos, downloadable resources, and practical advice—all for just £29.99. Learn at your own pace, avoid costly mistakes, and stay compliant with ease. Start today!

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