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The tax world is increasingly complex and fluid. However, getting your tax position right can quite literally pay dividends.
Whisper it, but tax is not the most important thing in the world.
Tax should never be the sole driving factor in making any commercial decision. However, once you have decided what you are doing from a commercial and personal standpoint you should always check out the tax position.
A great investment can be reduced to an average one if the tax position is not optimised.
The way you set up your business will have significant implications on the amount of tax you pay.
Whilst many small businesses still trade as sole traders or partnerships, given falling corporation tax rates, the majority of business owners would likely pay less tax and NI if they incorporated.
This is especially true where profits are reinvested back in to the business.
On the other hand, where a business owner expects to make trading losses in the early days, he might be in a position to offset those losses against his or her personal income for tax purposes. This might be the case where he or she operates as a sole trader, partnership or member of an LLP.
There is no one size fits all approach.
Equally your business structure should have the ability to flex as your business grows and changes.
For example, there may come a time when a small group structure will facilitate the redeployment of funds between different entities in a tax efficient manner.
Again, the tax position will need to be squared with the legal, commercial and regulatory ramifications of a particular structure.
As a business owner you are likely to have to consider whether the business needs to register for VAT or whether a voluntary registration is appropriate.
In certain circumstances, you might also consider whether special regimes apply such as the cash accounting or flat rate scheme.
You should also have a clear understanding of the types of supplies you are making and the VAT treatment of those supplies. In addition, you should also understand the ‘input’ VAT you on business purchases.
Many small businesses’ find themselves in VAT arrears and possibly facing a winding up order from HMRC merely because they have failed to register for VAT when they were required to do so, or have not accounted for their VAT correctly.
Be prepared and make sure you don’t end up in the same position.
Paying a low salary topped up with dividends has been an effective method of remuneration for many years.
However, the tax rules change frequently, and an old strategy is probably the wrong one.
As a business owner, you should not only consider your own personal tax position, but also that of your spouse, children and other relative. By doing so, you can ensure that they are also using their own personal allowances and basic rate bands (provided of course that they perform a useful role within the business).
There are plenty of freely available, valuable reliefs squirrelled away in the legislation.
For example, Research & Development (“R&D”) tax credits, patent box and capital allowances are much more widely available than many small business owners realise.
R&D relief is available to any incorporated business, which seeks to improve a process. It is not merely the preserve of businesses employing armies of scientists in white coats!
Capital allowances are available to businesses who incur expenditure on business equipment. Some equipment will qualify for 100% first year allowances. This means that you can offset the entire cost of the asset(s) against your taxable profits for that year.
Over recent years raising finance through some of the traditional methods has been a challenge
However, the number of SMEs getting funding through both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) has increased year on year. Both EIS and SEIS offer significant tax advantages to individuals investing in smaller growth companies.
In addition, Pension Led Funding (PLF) may also represent an additional method of raising finance. Essentially this allows a business owner to legitimately use the funds within their registered pension scheme to fund their business.
Good people are not always easy to come by or to hold on to.
Looking after your key staff is crucial. Whilst some traditional salary sacrifice arrangements ceased following changes introduced on 1 April 2017, many have continued and significant tax savings can still be achieved on products and services such as childcare vouchers, workplace nursery, cycle to work and computer equipment.
Going one step further, you may also wish to consider an employee share scheme, which if structured correctly will benefit both the employer and employee.
Share schemes can be highly effective tools for attracting and retaining the best talent and in aligning employee and company interests.
Careful planning is essential however to meet the stringent HMRC requirements which apply, and to navigate the associated tax rules.
Generally speaking, a pension contributions made by an employer for an employee / director is efficient for both the employee/director and the employer. As such, one should carefully consider the role of the pension scheme in providing reward and incentive packages.
Certainly, pensions should be considered in greater detail than merely meeting auto enrolment obligations.
However, the quid pro quo of any pension is that the use of the funds is restricted in terms of how the monies might be invested and when benefits can be taken.
Many SMEs continue to be family run affairs.
However, whether or not your family are currently directly involved in the business, at some point thoughts might turn to how to the business might be passed on to the next generation. This might be a sensitive matter and family dynamics will significantly impact here.
Once these issues are settled, it should then be possible to make sure the objectives are achieved in the most tax efficient manner.
An exit plan should put you in the best possible tax position when you come to leave, sell or retire from your business.
A good exit plan will ensure you can exit how and when you choose, whilst protecting yourself, your employees and your shareholders from tax exposure, and ensuring the continued success of the company.
Even after over a decade, many business owners are not fully aware of Entrepreneur’s Relief (“ER”). This permits certain business owners to reduce the capital gains tax payable on a disposal of shares in their business from 20% to just 10%.
However, there are many pitfalls for the unwary, added to by recent changes, and specialist advice should be sought to ensure this valuable relief is obtained.
Further, there are suggestions that Entrepreneurs’ Relief could undergo significant changes or even be scrapped in the not too distant future.
In addition, there are many other options available to business owners for structuring an exit, such as a company purchase of own shares or the use of an employee ownership trust (EOT); each with its own tax consequences.
As a business owner who may have worked your way up from nothing it can be tempting to try to address all of these issues yourself. You know best, right?
However, our advice is to seek out a specialist. We have seen many examples of do-it-yourself tax planning gone wrong.
But we would say that wouldn’t we?
If you have any queries about Tax saving tips for small businesses then please get in touch
Tax savings tips for small business – A top 10 was last updated on 6 January 2020