Whatever stage your business is at, tax planning can provide significant reductions in your tax bill.
UK tax rules and reliefs are, however, complicated and it can be difficult – and time-consuming – for business owners to know where to start in trying to improve tax efficiency and ensuring all aspects of your company’s finance and accounting activities are geared to support tax savings.
In this article, we look at some of the key considerations when looking at business tax planning.
One of the first decisions you’ll need to make when going into business is what type of legal structure is best suited for your needs.
Self-employment as a sole trader or traditional partnership will mean you are liable for income tax on business profits.
Limited companies are subject to corporation tax on trading profits, while the business owners will need to consider their own personal income tax liability.
Whether a sole trader, limited company, joint venture, partnership or limited liability partnership, there will be different financial implications and tax planning solutions to be considered to maximise tax efficiency.
Most operating businesses are run to maximise trading profits for the financial benefit of its owners and shareholders.
Where the objective is to sell a business, the focus should be on maximising capital gain and minimising tax both on trading profits and on the sale of the whole or part of the business.
Areas of planning
In most cases, business tax planning will go hand in hand with personal tax planning. When looking at your tax exposure as a business owner, take account of income as well as business-related liabilities.
With the income tax top-band rate at 45%, a key concern for business owners will be how to extract cash tax efficiently from a limited company. This could mean effective use of the directors’ loan account, taking dividends instead of or as well as salary, making company contributions to a pension and receiving tax-efficient benefits. The timing of dividends will also be a consideration to allow tax cash flow advantages.
Even for unincorporated businesses, the timing of profits and business expenses can be adjusted to achieve maximum tax cash flow advantages.
Payroll & benefits
Another area of potential tax savings is employee payroll and benefits, and how your business pays pension contributions and schemes, share options, allowances and benefits in kind to result in tax efficiencies.
Company pension contributions can be made via a number of ways to obtain tax relief, such as Small Self-Administered Pension Schemes (SSAS) and Self Invested Personal Pensions (SIPP). These contributions benefit from corporation tax relief and in addition, will, up to specific thresholds, be free of income tax and national insurance for the employee.
VAT is a complicated area of tax, with considerable penalties for businesses that fail to comply with the rules. However, it may be possible to benefit from VAT savings by making use of available schemes, such as the flat rate scheme, which allows qualifying businesses to pay a fixed VAT rate and keep the difference between what you charge your customers and what you pay to HMRC.
Personal services companies
Private contractors operating as individuals through a limited company (personal services company) or partnership will need to understand whether proposed changes to HMRC’s IR35 and other regulations will apply and impact their tax position.
Business tax planning should also include making full use of allowable expenses. This could mean bringing forward expenses or deferring income and delaying tax payments.
Family-owned businesses can benefit from tax planning to ensure the structuring of the company is both commercially advantageous and allows for effective succession planning while maximising the use of available tax reliefs.
Capital allowances apply to a broad range of capital assets, from property, plant and machinery to fixtures and fittings, offering, in some cases, an immediate reduction in taxable profits of 100% of the allowable expenditure.
The timing of qualifying expenditure will be critical to maximising the capital allowance position, making planning important.
Business property relief (BPR)
BPR is a tax planning solution relating to inheritance tax. Where qualifying criteria are met, it removes the full value of business property – including certain business interests and assets used in a business – when transferred either in life or death.
Entrepreneurs’ relief may apply when selling shares or the whole or part of a business, providing substantial tax savings to individuals and certain trustees.
Under ER, where certain conditions are met, gains on qualifying business assets are caught by a significantly reduced tax rate of only 10%.
Research & development claims
If your business is involved in a qualifying R&D project, it may be eligible to claim an additional 125% on qualifying expenditure and costs.
R&D in this context is broad in scope, and for many companies it is worth exploring if any of their activities come under the scheme, allowing them to benefit from the enhanced tax deductions.
If your company is holding patents and using them in your business, you can claim for the profits from the qualifying patent interests to be taxed at rates as low as 10%.
Employee share options
Granting share options to employees as a way of incentivising and retaining key personnel should be approached with tax-efficiency in mind. Certain tax-approved options schemes, such as Enterprise Management Incentives (EMI), can be highly tax-efficient while remaining attractive to key employees.
The Enterprise Investment Scheme (EIS), and its counterpart the Seed Enterprise Investment Scheme (SEIS), offers smaller businesses options to raise funds by incentivising larger companies to invest and purchase shares by offering tax reliefs to the investors.
Where the criteria are met, the investors will enjoy reliefs on income tax and capital gains tax on their investments.
Losses from business activities and investments should also be reviewed for opportunities to maximise tax efficiency. This could mean offsetting losses against the previous year’s profits to claim a tax refund; offsetting sideways against other liabilities, or offsetting against future profits for relief.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.