Small Business Advice & Corporate Tax Planning
All businesses need to deal with routine tax compliance matters, whether this is payroll taxes, VAT or corporation tax.
But what is also important for your financial and business success is to minimise your corporate and personal tax exposure. One way to do this is by correctly structuring your business to minimise your overall tax liability.
To determine the best structure, we evaluate all opportunities presented by your business, your income and you other family members. With the right advice, you can structure your business income, expenses and profit extraction in the most tax-efficient manner.
These are the questions that you need ask:
- Does your business have the most tax-effective structure available?
- What further opportunities and tax reliefs are available?
- Can capital or revenue tax treatments be optimised?
- When is the best time to purchase assets to maximise relief and reduce tax on disposals?
- Is the business meeting the rigorous demands of tax compliance and filing?
- Do you want to reduce your stress and anxiety in dealing with the tax authorities?
It’s important to plan ahead and create a business vehicle which is efficient in saving tax. This will result in a significant improvement to your overall income.
Does your business have the most tax-effective structure available?
When you start up in business you must operate through a trading structure or ‘vehicle’. There are three types of structure that are commonly used in the UK. These are sole trader, trading with others in a partnership, or incorporating a limited company.
At the start of your business, one trading structure may be the best choice. However, this can change over time as either the business grows or your personal circumstances change. Because your trading structure dictates how you are taxed, the best structure for your business is affected by many factors. These include the type of trade, the business assets you need and the level of profit you can expect.
However, the tax liability implications of your trading vehicle may not be your only major concern. The type of structure also affects the extent of your liability for the debts of the business. Where limited liability is an important issue, forming a limited company may be the best decision.
What further opportunities and tax reliefs are available?
The tax system is constantly evolving and there is a complicated structure of inter-related taxes. In order to take advantage of any tax-saving opportunities, it is necessary to get proactive advice from a tax professional.
Here are a few areas to consider:
The maximum contribution you can earn tax relief each year is called the annual allowance. This is currently set at £40,000. However, tax relief on personal pension contributions is only available on contributions up to 100% of your annual earnings. This can affect company directors who take a low salary. If you earn £12,500, that is your maximum personal contribution. If company profits allow, it is possible for the company to make up the difference to the full annual allowance. This, however, is not available to sole traders or conventional partnerships.
If you are paying back certain types of loans, the interest payments may qualify for tax relief. For example, loans to purchase rental property, or loans to buy assets for use in your trading or professional business.
It may also be possible to claim relief for interest on loans taken out to purchase shares in your company. Or to finance loans to the company, although this is not available if the company is an investment company.
Relief for employers
A business which has employees can get tax relief for certain types of staff entertainment and trivial benefits. Although, it is important to work within the strict rules and stick to the maximum allowances. These are concessionary items and would give rise to a taxable benefit on the employee or director if exceeded.
Can capital or revenue tax treatments be optimised?
The difference between whether something is a capital item (and hence subject to Capital Gains Tax – CGT) or revenue (and hence subject to Income Tax) will affect the amount of tax you pay and when you will get tax relief against the expenditure. Income Tax is generally charged when there is a commercial activity, whilst CGT arises when assets are disposed of.
There may be a timing advantage where an item is revenue. In this case, relief can be claimed against the profits of the commercial activity. Or it can be set against other revenue. However, if an item is capital, the relief can only be given when the asset is sold. Thus reducing the CGT charged on the sale.
This issue is particularly important to Residential and Commercial Landlords. Capital costs such as buying the property and improvement costs cannot be set against income. Therefore, any relief is postponed until you make a gain on the sale of the property. Where costs can be set against income usually means getting the tax relief much more quickly.
The rate of tax paid is also affected by whether it is treated as Revenue or used to reduce a Capital Gain. CGT rates are less than the corresponding Income Tax rates. Currently, if you pay Income Tax of 20%, then you’ll normally pay CGT of 18% on transactions relating to residential property. If you pay Income Tax at 40% or 50%, then CGT on property transactions is at 28%. Therefore, as CGT rates are lower than Income Tax, getting a deduction against income tax will likely save more tax. And additionally, it will get you quicker relief.
Other Capital Gains are currently charged at 10% for Basic Rate taxpayers and 20% for Higher Rate taxpayers. However, unfortunately these rates do not extend to residential property transactions.
What is the best timing for purchasing assets to maximise relief on purchases and reduce tax on disposals?
To claim capital allowances on the purchase of an asset, there needs to be a qualifying activity for capital allowances. The most relevant qualifying activities for small business owners are likely to be a trade, a property business, or a furnished holiday lettings business.
A person who is engaged in Qualifying activities can claim capital allowances on qualifying expenditure on plant and machinery. The allowance includes expenditure required on the alteration of land for the purpose of installing the asset. It also includes the costs related to installation, to a point where it is ready for use.
However, different rules apply where plant and machinery are for use in a dwelling. It is not a qualifying expenditure if the qualifying business activity is property letting.
To claim Capital Allowances, the asset purchased may qualify for a First Year Allowance as well as the Annual Investment Allowance. So, what if expenditure in any year exceeds the limits? That’s when it is important to know how to allocate each asset against the appropriate claim.
The allowances which can be claimed against Commercial Vehicles used in a business are favourable. These follow the rules for Plant and Machinery. However, the available claims for cars are much lower. They are affected by whether the business is a sole trade, partnership or limited company. Another factor is to consider is whether there is any personal use.
Since April 2009 cars purchased are put into separate pools depending on the level of their CO2 emissions. This Special Rate Pool only allows a 6% writing down allowance. And if car is pooled there is no balancing allowance or change on disposal unless the business stops trading. Taking this route is therefore best avoided as it can mean tax relief is postponed indefinitely.
Is your business meeting the rigorous demands of tax compliance and filing?
A recognised benefit of trading as a limited company, over a sole trader, is the potential in tax saving. However, setting up a limited company or Limited Liability Partnership results in the creation of a separate legal entity. The compliance and filing requirements for these are much more onerous than for a sole trader or conventional partnership.
Although some documentation may only be required to be kept internally by the company, it’s imperative to get this right. For example, the sole director/shareholder of a limited company should record the decision to pay dividends. And that decision must be based on available profit after tax. Therefore, it is necessary to document that decision and for the company to create dividend documents to support the transaction.
Failing to keep these records and just draw down funds from the company could result in tax liabilities. This in turn could cripple the company’s cashflow in the event of queries by HMRC. It could also have a massive impact on personal finances if the director/shareholder has taken more dividends than available profit. In this scenario the money may need to be repaid.
Without correct documentation, if funds have been drawn down without regard to available profit, it could mean that the protection of limited liability can be lost if the business fails. The courts are then able to hold a company’s directors personally liable for the organisation’s activities or debts.
As well as internal documents, company directors must ensure that accounts are filed on time with HMRC and Companies House. Directors are also required to keep Companies House records up to date in the event of any changes. They are also required to file an annual Confirmation Statement.
HM Revenue and Customs
Pay As Your Earn
Employers have to file regular returns when employing and paying their team. Real Time Reporting (RTI) was introduced in 2013 to combat HMRC’s loss of revenue due to businesses defaulting on PAYE and National Insurance liabilities. The previous system had relied on annual reporting. So if a company did not have the funds at the end of the year, it was too late. Now employers must report regularly, and online, before anyone is paid.
Businesses above the VAT threshold need to send in their VAT Returns via MTD compliant software. Therefore, it’s important to keep your records up to date to ensure the correct figures are submitted to HMRC. HMRC may choose to investigate businesses whose reported turnover does not agree with the sales reported on the VAT Return.
Tax Returns must be submitted for limited companies and the tax paid within nine months and one day of the company’s accounts year-end. Specialist integrated software is required to send the information to HMRC using iXBRL format which the tax office requires.
Whether you are a sole trader, partner, director or shareholder of a business you are likely to have to file a tax return and pay income tax.
How can Vital Statistics help?
We can evaluate your business and offer advice on how to run your business as tax efficiently as possible. Our goal is to ensure you make the right business decisions to minimise your tax and maximise your business results.
Further to this, we can offer accountancy packages to ensure your numbers are filed with HMRC correctly and on time. Our tiered levels of service, for all company sizes, are designed to relieve your stress, saving you time and money.
Based in Cranleigh, we offer business advice and accountancy services in West Sussex and Surrey. We offer a free initial consultation, so why not book an appointment to see how we can help your business.