Every year UK nationals overpay billions of pounds in taxes due to unused tax reliefs, allowances and tax breaks. Business owners are particularly susceptible due to a lack of knowledge about how to navigate the UK’s complicated tax system.
If you are a small business owner (or looking to start your own business) then you will benefit from this short guide on tax planning for businesses.
Not only will it likely result in less money going to the taxman, it will also bring reduced stress and greater protection knowing your affairs are compliant and in order with the rules.
Here are just some of the areas you need to consider as a business owner when looking at tax:
#1 Business structure
There are three main types of business structure in the UK: sole trader, joint partnership and limited company. Your business structure can have a big impact on the tax you pay.
For instance, sole traders need to subject all of their profits to Income Tax and National Insurance deductions. Limited companies, on the other hand, submit their company profits to Corporation Tax instead.
The tax rate for Corporation Tax (19% in 2018-19) is lower than the Income Tax (20% Basic Rate) + National Insurance Contributions (NICs) made by sole traders. A lot of people start a business without giving this a thought, but it is very important!
Of course, a limited company will need to pay Income Tax and NICs on any salaries in the company. However, in some cases these can be reduced by reducing certain salaries and replacing them with dividends.
Your expenses refer to anything you need to spend on your business in order to run it. This might include the office rent, equipment, stationery and business travel.
This is an area where it is easy to make mistakes or miss out on tax efficiencies. Sometimes businesses try and claim for things which are not really an expense (e.g. entertainment), and so land themselves into trouble.
Others simply fail to receive tax relief due to poor expense records and a lack of receipts to provide evidence to the taxman.
Remember, your business expenses are offset against your revenue to determine your profits, which are subject to tax. Naturally, that means the more organised you are with planning and recording down your expenses the more tax relief you are likely to receive.
Having a good accountant can make a big difference here. However, ultimately your expense efficiency will be determined by the company director(s) and actions of other key staff.
Value Added Tax (VAT) is collected when value is added to a product or service. As a business, you will need to pay this tax to HMRC when your goods/services are sold – regardless of who the customer is.
If you are VAT registered, however, then you can get the VAT back on any expenses paid by your business – assuming it is registered for VAT. You will need to register your business once its revenue passes the government threshold, which you can read more about here.
Of course, you do not need to register for VAT if your business is under this threshold. Yet it is still often a good idea to register anyway. Not only can you claim the VAT back on expenses but it also adds a more prestigious, established and professional look to your brand.
You will have to choose a VAT scheme if you register, which will be the system you use to communicate with HMRC about the VAT you have paid and charged. It is usually a good idea to consult the advice of a professional accountant to determine which scheme is best for you.
Sooner rather than later, business owners need to consider pensions scheme arrangements – particularly for board members.
Quite often the choice will be between a SIPP (Self-Invested Personal Pension) or SSAS (Small Self-Administered Scheme), yet the choice can often be unclear as to which type of scheme is most appropriate.
Working with an independent financial adviser can help you look through the different options and make an informed decision in this respect. Regardless, pensions are not an area to overlook when thinking about making your business more tax-efficient. Pension contributions made by the business can offer some great ways to reduce tax liability both for your business and your employees.
Start planning early
If there is one piece of advice we would like all UK business owners to heed, it would be to start tax planning as soon as possible. As seen above, even the business structure you choose can greatly affect the amount you need to pay to HMRC.
Leaving everything until later not only costs you more in time and money as you try and sort everything out. It creates enormous stress as you try to put everything in order at the last minute before the end of the tax year.
Do yourself a favour and start planning now. Your future self will thank you for it!
Don’t try it all yourself
Whilst we recommend that you get started as soon as possible, we suggest that you do not try to do everything yourself. Navigating the UK’s tax infrastructure is very difficult as a business owner. You are busy and your time is already very limited.
Absolutely, it is important to understand as much as you reasonably can for yourself about business tax planning. Yet usually, there comes a point where you need help and need expert guidance. Working with an experienced, professional accountant and business tax planner can be of huge help here.