Businesses have to pay a number of different taxes, from Corporation Tax and Income Tax to VAT. Without careful accounting, these tax liabilities can negatively impact your bottom line.
The tax your business will need to pay depends on several factors, including how it is set up and whether or not you have employees. However, many small businesses can benefit from tax relief, depending on their business activities and circumstances.
For example, you may pay less tax or can claim rebates against activities such as money spent on research and development if your business specialises in innovation.
Other tax relief schemes, such as accounting for 100% of the cost of purchasing a new electric against company profits, can reduce the corporation tax your business needs to pay. Reducing your tax liability can be a helpful way to ease financial pressure, help cashflow and you can use the money saved to invest in growing your business.
It's best to seek professional advice from an expert qualified accountant to identify what tax breaks are available for your business.
However, to get you started - here's some tips to help your business be as tax efficient as possible. This list is not exhaustive as each business is unique, but gives you some ideas:
What taxes does my business pay?
Offsetting losses against profits
Boosting cash flow with VAT accounting
Making use of tax reliefs
Avoiding tax avoidance schemes!
1) What taxes does my business pay?
The tax you pay depends on your business structure. If you are a sole trader or a partnership, then you’ll mainly pay income tax, with which you should be familiar if you’ve ever been employed.
However, if your business is a limited company then the arrangement is a little more complex. The company itself (which is a separate legal entity from you) pays corporation tax on any profits it makes. You then need to decide how to take income from the company – on which you may be taxed again.
Other taxes that your business may need to may include:
Employer’s NI contributions
Without expert help from an accountant in managing your tax, there is a risk that you may pay too much (you really don’t want to risk paying too little and being penalised by HMRC). There are however plenty of acceptable and ligitimate ways you can reduce your tax bill – provided you know what you’re doing.
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Your accountant should be able to proactively advise on the correct structure for your business. This is different for all businesses and you should not rely on 'so and so said down the pub'. This is only something a qualified expert can really help with. They can also implement it for you, to save you the time and hassle.
2) Deductible expenses
The simplest way to reduce your tax liability is to claim for legitimate deductible business expenses. Here is a sample list:
Running your premises – things like heating, lighting and business rates
Staff costs – salaries and subcontractor costs all count
Office costs – from stationery to your phone bills
Travel – this includes fuel, train and bus fairs and parking
Clothing – uniforms or anything you wear specifically for work
Stock and raw materials – anything you buy to sell on may qualify
Financial outlay – this can include bank charges and insurance premiums
Marketing – your advertising and marketing costs, such as money spent on maintaining your website.
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It's essential to get an expert to do your books and ensure that you are claiming for everything you are entitled to - or you could end up paying too much tax! A fixed fee accountancy package will include everything you need, so you save time and money.
3) Offset losses against your profits
If your business makes a loss in any given tax year, such as from trading, through selling assets or on property income, you can usually claim relief from corporation tax by offsetting the losses against profits. This is done via your company tax return (or your self-assessment tax return if you are a sole trader or partner).
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If you wish, you can carry over losses to offset against future years’ profits, thus reducing the tax you need to pay next year (for example). You can even carry losses back to previous years’ profits, provided they were made in the same trade.
4) Boost cash flow with VAT accounting
VAT accounting can improve your cash flow if you know what to do.
For instance, you can take in VAT income and retain it for a short time before you have to pay it back out. This can give you access to ready cash at the times when you most need it. Here are some tips that can help you hang on to your cash for longer:
Agree terms that give you as much time as possible to pay suppliers
Set up your invoices to get paid quickly - or in advance, then try to ensure you don’t have to pay the VAT until the next quarter
When purchasing things for your business, try and do it at the end of the quarter or just after the VAT return period.
The ‘flat rate’ scheme for businesses with a turnover up to £150,000. This must be applied for with HMRC. This allows you to pay a percentage rate each quarter that’s relevant to your business sector and does away with complicated preparations. It can save you both time and money.
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Your accountant should alert you when you'll need to go VAT registered and also be able to advise on the best scheme for your business. This will depend on a number of factors, so be sure to get expert advice.
5) Make use of tax reliefs
A number of tax reliefs are available to encourage business growth.
Research and development (R&D)
The UK Government allows your business to claim tax credits for R&D work. Many small businesses still haven’t taken advantage of this scheme, designed to reward innovation, and it’s estimated that there is £84 billion in unclaimed tax relief owed to SMEs across the UK.
Patent tax relief
Another way to reap the rewards of innovating is to claim tax relief on profits generated by patented inventions. You’ll probably need the help of an accountant, but this is well worth investigating if your business holds any patents.
If you currently pay Class 1 National Insurance, you could save up to £3,000 a year from this bill.
There’s tax relief for your business if you own a property that has a rateable value of up to £15,000. In a lot of cases you can reduce the business rates bill to zero.
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There may be other reliefs available to you too, so be sure to get advice from an accountant. They should also be able to advise on business funding too, so you maximise all available opportunities to grow your business.
6) Avoid tax avoidance schemes!
Tax avoidance schemes are typically complex arrangements that allow businesses and individuals to reduce or avoid their tax obligations. Although the mechanisms used may in themselves be legal, such schemes as a whole may fall foul of HMRC if their only purpose is to avoid paying tax.
Such schemes are often marketed as legitimate tax planning, wealth management or investment opportunities. They should however be treated with extreme caution and can end up costing you in the long run.
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We do not recommend tax avoidance schemes in any circumstances. Ask your accountant to help you with the best legitimate ways of improving your business’s tax efficiency.
You can contact David at Purple Accounts on 01925 979500 or email firstname.lastname@example.org for expert help and advice.