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Whilst we have an Office of Tax Simplification advising the government on how we might reduce the tax compliance burden on small businesses and individual taxpayers, we still live in a world where the tax code is huge, complex and difficult to interpret.
With that in mind, here are a few simple tips for small business owners to consider …
The size, type and structure of your business will determine which parts of the tax legislation you need to consider in more detail, but everyone should be aware of the basics.
The annual investment allowance stands at £200,000 for a 12 month period. The full value of expenditure on qualifying plant and machinery up to this limit can be deducted from your profits before tax. Anything in excess will also qualify for capital allowances at the standard rates, but care needs to be taken as there are different rates for different types of assets.
The tax free limit for each individual before Income Tax is deducted, known as the personal allowance, now stands at £11,500. Basic rate tax payers can also earn up to £1,000 in interest and pay no tax, but higher rate tax payers are entitled to half this amount and additional rate tax payers have no allowance. A dividend allowance of £5,000 per annum was also introduced last year. Each person also has an annual exemption of £11,300 on capital gains before tax is paid. A marriage allowance also exists for married couples and civil partners, which could save you £230 in tax if eligible.
There isn’t a one size fits all policy for remunerating yourself. Those who operate as partnerships will need to take care with the allocation of taxable profits between each partner and those who operate a limited company will need to take care with the mix and timing of salary and dividends. The personal circumstances of each taxpayer need to be considered carefully in advance of the end of the tax year.
Tax planning needs to be done in advance of the business and the fiscal year end. For some, these are both the same date. For the business, make sure you have assessed your levels of profits in advance of year end so that you can decide if you’d like to take any further action to reduce your tax bill before it’s too late. For example, buying some more plant or machinery or making some pension contributions to reduce your taxable profits. Having a good book-keeping system, preferably a cloud based system like Xero, makes this exercise much easier.
Every time you make a pension contribution the Government boosts it with tax relief. To get £100 into a pension you only pay £80 and the Government will add £20. Higher and additional rate tax payers can claim extra relief (as they pay extra tax), which can be claimed via self assessment. You can pay as much as you like into a pension, but you’ll only get tax relief if you have earnings to support the payment being made (and it’s within the Annual Allowance limit of £40,000), but carry forward could be utilised if you’ve got unused relief from previous years.
Companies making contributions on behalf of their employees and directors will also save Corporation Tax at 19%.
There are many tax-deductible expenses which a business can claim for, but there are also some myths you might hear down the pub which can lead to people making decisions based on bad advice. Travel and subsistence and motoring costs are a common area of confusion and so you should consult your accountant in the first instance to make sure you are claiming as much as you can, on the right things and on the most appropriate basis.
The supposed ‘simple tax’ VAT impacts on many businesses, both big and small across the country and there are many considerations that should be made in relation to it. When to register, if you could benefit from voluntary registration, if the flat rate scheme would work for you, what VAT can be claimed back, if cash accounting would be beneficial for your business, how VAT impacts on your transactions with overseas customers and suppliers etc.. This is by no means an exhaustive list of considerations, so having a VAT health check could prove very beneficial.
Consider if any of your savings and investments could be transferred to your husband, wife or civil partner to make use of their lower rate of tax.
Transferring part of your business to other members of the family who work in the business is also a useful option for making use of their unused allowances too. Whether it involves someone joining a partnership or the gifting of some shares in your company, care is needed so as not to create other problems for all parties with regards to control or capital gains tax, for example.
Make sure your submissions with HM Revenue & Customs and Companies House are all submitted and paid for on time. This isn’t always easy when things aren’t going as well as you’d like them to be, but even when they aren’t, dealing with things as soon as possible allows you and your adviser time to liaise with them and mitigate or reduce any penalties and interest you might suffer.
Having a well thought out exit strategy will maximise your chances of realising the best value from your business which you have worked so hard on. Whether you’re selling, ceasing and winding up or passing on to the next generation, a good plan will allow for a tax efficient exit which reduces the burden of income, capital and possibly Inheritance taxes.
Do you know what you don’t know? Take a step back and talk to your accountant at the earliest opportunity. As your trusted business adviser, they will help ensure you have fully considered your options, allowing you to maximise and protect your wealth for the long term.
Get in touch with one of our tax team and find out how we can help you and your business save on taxContact us
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