Ten Tops Tips for a Tax Efficient Business
In the increasingly complex and ever-changing tax world getting your tax position right can be hard and it can pay to take specialist advice, but getting things right can quite literally pay dividends.
Whilst tax should never be the driving factor in making commercial decisions which are right for you and your business, as you move from start-up, to growth, and towards a possible exit, it is critical that, in order to get the very best results for your business the tax implications of those key decisions should be considered.
Here are Enterprise Tax’s top ten tips to ensuring tax efficiency throughout the lifetime of your business.
- Getting your business structure right
Clearly, the way that your business is set up has significant implications for the amount of tax you will end up paying.
Whilst many small businesses still trade as sole traders or partnerships, given falling corporation tax rates, the majority of business owners would likely pay less tax and NI if they incorporated – especially where profits are reinvested back in to the business.
On the other hand, where a business owner expects to make trading losses in the early days, he might be in a position to offset those losses against personal income for tax purposes if operating as a sole trader, in partnership or as a member of an LLP. There is no one size fits all approach.
Equally your business structure should have the ability to flex as your business grows and changes. For example, there may come a time when a small group structure may allow for tax efficient movement of funds between different business enterprises.
Clearly the tax position needs to be reconciled with the legal, commercial and regulatory implications of a particular structure.
- Understanding your VAT position
As a business owner you will, no doubt, at some point have to consider whether you should or could register your business for VAT, when you should register the business for VAT and how you should do so. In certain circumstances, for example, the cash accounting or flat rate scheme may give a more favourable result. You should also have a clear understanding of the types of supplies you are making and the VAT treatment of those supplies, as well as the VAT position of the ‘inputs’ you acquire in the course of your business.
Many small businesses’ find themselves in VAT arrears and possibly facing a winding up order from HMRC merely because they have failed to register for VAT when they were required to do so, or have not accounted for their VAT correctly.
- Paying yourself tax efficiently
Paying a low salary topped up with dividends has been an effective method of remuneration for many years. However, with constantly changing tax rules, such as the changes announced recently to the dividend tax allowance (which will reduce from £5k per annum to £2k per annum from 6 April 2018) arriving at the optimum remuneration package is not always easy.
As a business owner, you should not only consider your own personal tax position, but also that of your spouse, children and other relatives – to ensure that, where possible, they are also using their personal allowances and basic rate bands (provided of course that they perform a useful role within the business).
- Ensuring you don’t miss out on key tax reliefs
Valuable reliefs, such as Research & Development tax credits, patent box and capital allowances are much more widely available than many small business owners realise.
For example, research and development relief is available to any incorporated business, which seeks to improve a process – not merely to businesses employing armies of scientists in white coats!
In fact, of the 20,830 SMEs which made R&D claims in 2014/15, 40% of those came from the fintech, finance and insurance and ‘professional, technical and scientific’ sectors.
Equally, the capital allowances legislation allows businesses to claim tax deductions for spending on business equipment, with some equipment qualifying for 100% first year allowances, meaning you can offset the entire cost against your taxable profits for that year.
- Raising additional finance tax efficiently
Over recent years raising finance through the more traditional methods has become increasingly challenging. However, the number of SMEs getting funding through both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) is continuing to increase year on year. Both EIS and SEIS offer significant tax advantages to individuals investing in smaller growth companies.
Equally, pension led funding (PLF), whilst often misunderstood, represents an excellent tool for small business owners looking to obtain finance for their businesses, allowing business owners to legitimately use funds within a registered pension scheme to invest in their trading company.
- Incentivising and rewarding staff
Good people are not always easy to come by or to hold on to. Looking after your key staff is crucial. Whilst some traditional salary sacrifice arrangements ceased following changes introduced on 1 April 2017, many have continued and significant tax savings can still be achieved on products and services such as childcare vouchers, workplace nursery, cycle to work and computer equipment.
Going one step further, you may also wish to consider an employee share scheme, which if structured correctly will benefit both the employer and employee, and can be a highly effective tool for attracting and retaining the best talent, and in aligning employee and company interests. Careful planning is essential however to meet the stringent HMRC requirements which apply, and to navigate the associated tax rules.
- Providing tax efficient pension provision
Most business owners will consider an executive pension scheme at some point. However, when faced with a choice between a SSAS or a SIPP or perhaps other schemes, many business owners struggle to understand how to move forward.
As a general rule, pension contributions made by an employer for an employee or director are tax efficient for both the employee/director and the employer, and so clearly this is not something you cannot afford to overlook. However, the quid pro quo is that this money is restricted in how it may be invested and when it can be taken as a retirement benefit.
- Keeping it in the family
Many SMEs continue to be family run affairs. However, whether or not your family are directly involved in the business, at some point your thoughts may no doubt turn to how to provide for your family in a tax efficient manner e.g saving for school fees. Well considered tax planning can assist with this.
- Planning for an exit
Your exit plan should put you in the best possible tax position when you come to leave, sell or retire from your business.
A good exit plan will ensure you can exit how and when you choose, whilst protecting yourself, your employees and your shareholders from tax exposure, and ensuring the continued success of the company.
Many business owners are now aware of the significance of entrepreneur’s relief (ER), which permits certain business owners to reduce the capital gains tax payable on the sale of their shares in their business from 20% to just 10% for qualifying transactions, but there are many pitfalls for the unwary, and specialist advice should be sought to ensure that the qualifying conditions are met.
In addition, there are many other options available to business owners for structuring an exit, such as a company purchase of own shares or the use of an employee ownership trust (EOT); each with its own tax consequences.
- Don’t be tempted to do it all yourself!
As a business owner who may have worked your way up from nothing it can be tempting to try to address all of these issues yourself. However, we would issue a word of caution (of course we would!) as we have seen many cases where do-it-yourself tax planning, or planning undertaken by non-specialists, has resulted in some significant problems and oversights.
The tax system is a highly complex and evolving beast – treat it with respect and it could be eating out of your hand. However, stand on its tail and it could well be sinking its teeth in to you!
Are you making the most of tax planning?
- Corporate tax
- Research and development tax
- Employee reward and remuneration
- Raising finance tax efficiently
- VAT advice
- Planning an exit strategy
COMPANY NAME: Enterprise Tax Consultants