question about tax for small businesses

Hi,

I have what is probably a very easy (read: stupid!) question about tax for small businesses.
A friend of mine is currently in this situation and has no experience of dealing with such issues. And clearly, neither do I!

He runs a small startup business, and his accountant recently sent on the tax due for 2008 to be paid now.
Is it possible that the tax owed is in fact a higher amount than the profits made by the business for that year?

The tax figure he was quoted was calculated as 20% of total income (minus a couple of business expenditures), which is fair enough.
This does not include his wages, and he is the only employee.

Once you take his wages out of it, the business actually made no profits, yes the tax figure is quite high. (and he was not paying himself very much anyway, works out at less than min wage in fact)

[FONT=&quot]Is the tax supposed to just be on profits, or only income?[/FONT]
[FONT=&quot]The way it is working out for him now is that he basically paying the company tax bill out of the (already low) wages he is getting.[/FONT]
[FONT=&quot]
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[FONT=&quot]Is this correct? Any advice appreciated, and if this is not clear then let me know and I will try and explain further![/FONT]
[FONT=&quot]Thanks.[/FONT]

Re: question

As a sole trader tax is on profit before owner wages. It is therefore quite possible for tax to be greater than what is left from the profit after the owner wages.

Re: question

thanks for your response.

would this be the same for other types of business other than sole traders?

For companies the worker directors/owners are taxed as employees first like any other PAYE person. The Corporation Tax is calculated on the profit after the wages. However ultimately the director/owners pay tax on their income taken and the company pays tax on the profits remaining.

If he is unsure or unhappy about the calculation I suggest he ask the accountant to explain it. That might make it all a lot clearer.