In the ever-changing and increasingly complex tax world, getting your tax position right can be difficult, and it could pay to have a specialist advise you; getting things right will literally pay you great dividends.
Tax should never be a driving factor when it comes to making the right commercial decisions for your business, however, as you grow from a simple start-up to a profitable business and towards an exit, it’s critical that the tax implication of the key decisions you make are considered – that is if you want to see the kind of results you want from your business.
Here is a look at Enterprise Tax’s top 10 tips on guaranteeing tax efficiency through the lifespan of your company.
Getting the Business Structure Right
How your business is set up will undoubtedly have significant implications on the amount of tax you’ll end up paying.
While most small businesses still operate as partnerships or sole traders, given declining corporation tax rates, a majority of business owners are likely to pay lesser tax and NI if they could incorporate their businesses – especially, in cases where the profits are reinvested into the business.
Conversely, where business owners expect to make losses during the initial days of their business, they might be able to offset their losses against their personal income for tax purposes, but that is if they operate as sole traders, a member of a limited liability company, or in a partnership. There’s no one-size-fits-all approach.
So, it is vital that your business structure be flexible even as your business changes and grows. For instance, there might come a time when small group structures will allow for tax-efficient movement of money between different enterprises.
It is clear to see that tax positions need to be reconciled with the regulatory, commercial and legal implication of particular structures.
Understanding Your VAT Position
If you own and run a business, there will come a time when you will have to consider if you should register your business for Value Added Tax, when you should consider registering the business for it, and how you should go about it.
In some circumstance, for instance, the flat rate scheme or cash accounting may give more favorable results. Furthermore, you should have a good understanding of the different types of supplies that you are making and the kind of VAT treatment these supplies enjoy, as well as the Value Added Tax position the inputs you acquire offer.
Most small businesses find themselves in value-added tax arrears, potentially leaving them open to facing winding up orders from HMRC simply because they failed to register for value added tax when they were supposed to or haven’t accounted for their value-added tax correctly.
Paying Yourself Tax-Efficiently
Paying yourself a low salary coupled with dividends is one of the most effective ways of rewarding yourself for years to come. However, with tax rules continually changing like the changes that were recently announced in regards to dividend tax allowance which will eventually reduce from 5,000 pounds per annum to 2,000 per annum starting 6th April 2018, reaching the optimum remuneration package won’t be easy.
As an entrepreneur, you shouldn’t consider your personal tax position only, but that of your children, spouse, and relatives too. This way, you will ensure that, where applicable, they’re also using their basic rate bands and personal allowances – provided that they play a useful role within your organization.
Making Sure That You Do Not Miss Out On Crucial Tax Reliefs
Valuable reliefs like patent box, capital allowances, and Research and Development tax credits are more readily and widely available than most small business owners realize.
For instance, research and development relief is available to incorporate businesses seeking to improve their processes – not just to businesses employing an army of scientists wearing white lab coats!
In fact, of the over 20,000 small and medium enterprises that made a research and development claim within the 2014/2015 financial year, 40% of the claims came from the finance and insurance (fintech) and scientific, technical and professional sectors.
Similarly, legislation governing capital allowances allows businesses to make tax deduction claims for spending on their business equipment, with some of these equipment qualifying for 100% first-year allowances. That means that you can offset entire costs against taxable profits for the year in question. Ensure that if you work with businesses elsewhere in the EU you know their VAT rates and other tax information – VATGlobal can help with this.
Raising Additional Finance Taxes Efficiently
In recent years, raising finances through more traditional methods has become more challenging than ever. However, the number of small and medium enterprises getting funds through Seed Enterprise Investment Schemes and Enterprise Investment schemes is gradually increasing from year to year. Both SEIS and EIS offer significant tax benefits to entrepreneurs investing in companies with smaller growth.
Similarly, PLF or Pension-Led Funding, though often misunderstood, represents a good tool for small business owners interested in obtaining finance for their businesses. This allows business owners to acquire and legitimately use the funds they want within registered pension schemes to invest within their companies.
Rewarding and Incentivising Staff
Good people aren’t always easy to hold on to or to come by. Looking out for key staff is vital. While traditional salary sacrifice plans ceased following the changes introduced by 1st April 2017, most have continued, and substantial tax savings can still be enjoyed on various services and products like childcare vouchers, computer equipment, cycle to work and workplace nurseries.
If you’d like, you could go a step further and consider setting up an employee sharing scheme, which, if properly structured, will benefit both you, the employer and your employees. This can be a very effective tool for attracting and holding on to the best talent, and in aligning employee interests with company interests. Proper planning is crucial though; that is if you want to meet HMRC’s stringent requirements and to navigate the different associated tax rules.
Providing Tax-Efficient Pension Provisions
A majority of business owners will find themselves considering executive pension schemes at some point. However, if given a choice between a SIPP or an SSAS or another type of scheme, most business owners will struggle to find a way to move forward.
The general rule is that pension contributions offered by employers for employees or directors are tax-efficient for both the director or employee and the employer. As such, this isn’t something that you can afford to overlook. The quid pro quo here is that the money is restricted when it comes to how it can be invested and when one can use it as a retirement benefit.
Keeping it Within the Family
Many Small and Medium Enterprises continue to be family-fun affairs. Nevertheless, it doesn’t matter if the family is directly involved in running the business, at some point, you will have to start thinking about how you can provide for your family in a more tax-efficient manner like how you can save more for school fees. Well-considered tax planning can help with this.
Planning for An Exit
If you are planning an exit plan, then make sure that it leaves you in the best tax position possible when the time to retire, leave or sell your business reaches.
A great exit plan should make it easy for you to exit when and how you choose while protecting you, your shareholders and employees from tax exposure, and guaranteeing your company’s continued success.
Most business owners today are aware of how significant entrepreneurs relief is considering that it permits some business owners to lower the capital gains that are tax payable when it comes to the sale of shares in the business from 20 percent to 10 percent for qualifying transactions. However, this presents so many pitfalls for the incautious, and professional advice should be sought if you want to meet all the qualifying conditions.
Furthermore, there are plenty more options available to entrepreneurs structuring an exit like a company purchasing its own shares or using an EOT or employee ownership trust – and each has its unique tax consequences.
Do Not Be Tempted to Do It All On Your Own
As an entrepreneur who has worked your way from nothing to something, it can be very tempting to try and address all these issues alone. However, we’d like to issue a word of caution considering that we’ve seen plenty of cases where non-specialist or DIY tax planning has resulted in some serious oversights and problems.
Our tax system is an evolving and highly complex beast – If you treat it with some respect and it could end up eating straight out of your hand. But if you stand on its tail, get ready to be bitten.
Disclaimer: This article is not a substitute for financial advice from a trained professional. By using this website, you agree that DesignFreeLogoOnline cannot and will not be held liable for any action taken as a result of using the information in this article.