Russell Cockburn, author of Small Business Tax Planning has provided us with eight useful tips for small business owners, covering everything from how pay yourself and your employees, to the expenses you can legitimately claim.
Business structure
When you start in business, the choice of business structure you operate under can make important differences to the amount of tax and national insurance contributions (NICs) you will pay. Many businesses just get started without any thought being given to the most appropriate structure to use. This is a mistake!
You should carefully consider whether you should operate via a limited company, sole-tradership, or partnership. Your choice will have a big impact on how much tax and national insurance you pay. The tax rules which apply to the different business structures differ significantly so seek advice early on the most appropriate method of operation for your venture.
Expenses that can be claimed
It is important to ensure that you claim relief for all the right tax deductible expenses and also that you deal with these claims in the correct manner. Not all costs that a business incurs are tax deductible in the UK. For example, business entertaining is not a deductible expense, although for some businesses it is regarded as an absolutely fundamental part of gaining new customers!
A business will often incur expenses that are of a ?mixed? purpose. UK tax law also denies tax relief for such costs but in practice HM Revenue & Customs (HMRC) will accept a fair apportionment between the business and personal element of some expenses provide that the main purpose of the expenses was always a business purposes. Travel expenses are a good example of this. You may go on a business journey but call in to see a relative on the way. This does not normally stop the expense being tax allowable.
Paying yourself
The type of business you operate will affect how you can take your own earnings out to pay our personal bills. You should always keep business and private expenses separate and to have separate records for your business and private finances.
The way you take money from your business for these costs will have a big impact on how much tax and NICs you pay. If you run the business with a limited company then any money extracted from it comes at a tax price and there are a number of choices to be made. You can either pay your self a salary or dividends or a combination of the two. You have to make profits to pay dividends so careful advice will be needed on the company law aspects here. Paying dividends from a small company can have very significant savings for small businesses but it will be essential to get expert assistance from a decent accountant on these matters to make sure you get the best out of the system but remain fully compliant with all the legal aspects of such a remuneration strategy.
Paying your employees
If you have other people working for you they will expect to be paid! How you pay them can affect their tax bills. There are some tax free benefits that can be made available and these can make up a useful part of any pay and benefits package for employees. For example, an employee paying basic rate income tax can currently receive £55 per week in nursery care vouchers free of tax and NICs provided you get the arrangements right.
Choosing a business car?
Recent tax law changes have seen the introduction of special tax reliefs and allowances for businesses using ?qualifying Low Emissions Cars?. Lower Co2 emissions means more tax relief and lower benefits charges for employees. Some cars, those that produce no Co2 emissions, can even be 100% tax deductible for the business and produce no taxable benefits charges for the employee using the car. Some vans can be tax free for employees as well provided they only use them for work and going to and from work.
A company car can be a valuable benefit for the employee, especially if you can provide them with one tax free!
Owning business property?
If your business runs from a factory, office block or other business property the way you own this asset can have important tax implications which will need to be considered. When business assets like this are owned inside the business they will usually qualify for 100% relief from inheritance tax on your death or if gifted to a relative during your lifetime. But there can be circumstances in which it is better to own the assets outside a business balance sheet. Expert advice will be needed here to ensure valuable reliefs are not put at risk from the start of your business
Claiming tax relief on equipment
The UK tax regime provides ?Capital Allowances? for the purchase of business equipment, plant and machinery. These allowances come in all shapes and sizes ranging from special reliefs for ?energy saving? through to extra ?tax credits? for companies carrying out qualifying "Research and Development? projects. If you business will be investing in equipment, office furnishings, or machinery, it is essential to have a good understanding of the allowances which are available and how much tax relief you might get. Sometimes a simple change in purchasing decisions from one type of machine to another can make a huge difference to the tax relief you get.
Getting the compliance right
And finally don?t overlook the taxman! Dealing with the tax authorities and setting aside funds for tax liabilities is crucial from the outset, and a good business plan will factor in all the taxes that you will have to pay. Establishing a good line of communications with your tax office will help things runs smoothly and avoid potential problems later on
Russell Cockburn is the author of Small Business Tax Planning, published in February 2011 by Harriman House.
