Business tax planning
Written by Ray Coman
Tax is often the largest single outgoing a business owner faces. Planning can significantly reduce exposure to tax. As tax advisers, we can help reduce corporation tax for companies and income tax and national insurance for other businesses. Often the best time to make decisions to have optimal tax impact will be around the year end. A careful business plan usually includes a strategy to minimise tax. This report provides tax planning ideas that we can advise on.
Expenditure and investment to reduce tax
Business organisation to improve tax efficiency
Employee and personnel planning
Expenditure and investment to reduce tax
An amount equal to 230% of expenditure related to research and development can be deducted from tax adjusted profits.
Investment in equipment, IT infrastructure and commercial property are methods of reinvesting profits for future growth and thereby at least postponing tax.
Pension contributions are a highly tax efficient method of investing. Contributions made as an employer are not restricted to ‘net relevant earnings’ and therefore tend to be preferred by business owners.
Tax relief can be obtained for the cost of purchasing another business. Goodwill is the difference between the value of what a business owns and the price which is paid for it. Tax relief can be obtained on the value of goodwill.
Use of home as office, the cost of food and accommodation while away from home on business travel, and other business overheads are tax deductible.
A voluntary VAT registration can enable traders to recover VAT on expenses. Provided services are provided to other VAT registered businesses (rather than to private individuals) the charging of VAT will not increase the cost of services.
Business organisation to improve tax efficiency
The choice of a legal structure for the business has significant impact on tax liability with sole trader/ partnership. LLP and limited company being the main options.
The inclusion of a spouse can reduce tax paid as a couple. Business profits can be apportioned to the spouse taxed at the lower margin rate. For companies, an alphabet share structure removes the requirement to pay each shareholder the same dividend.
A family owned business can be structured to enable succession planning. Key employees can be rewarded with Enterprise Management Incentive shares to encourage loyalty.
Cash flow can be critical to accelerating the growth of a small business, but investors are averse to the risk of a small business as compared to larger businesses. The tax system provides an incentive for investors to risk their capital in small business via the Enterprise Investment Scheme.
Employee and personnel planning
Small businesses can benefit from employer’s national insurance, especially when hiring junior or apprentice staff.
Redundancy, provided not written in contract at the outset can be paid tax free to the laver, up to £30,000. Up to £5,000 can be paid to a staff member who makes a suggestion, as part of a properly implement scheme, and that award is not subject to tax or national insurance.
Year end planning
A year end can be lengthened, up to eighteen months, once every 5 years. Therefore, if profits are falling, some tax benefit can be obtained by lengthening the year end. Conversely, where profits are rising tax, a cash flow benefit can be obtained by shortening the year end.
To the extent possible, income can be delayed and expense advance shortly prior to the year end. A change in tax regime creates an opportunity to advantage from realisation of profits in a tax year in which the rates are more favourable.
Exit planning
It is possible to accumulate funds in the business to be extracted as capital on liquidation of the business. For a business owner nearing retirement this can be preferable to income tax on dividends. This applies where business asset disposal relief is available.
Business tax planning
We can assist with:
- Making use of available allowances and reliefs.
- Taking profits out the business to avoid tax.
- Employing staff and contractors
- Forecast of tax liabilities to improve decision making.
- Identifying opportunities to save tax
- An explanation for any tax that has arisen, to provide an understanding for future reference.
- Reviewing year end accounts and comparing to the prior year or to expectations, to uncover missed opportunities.
- Understanding how the different taxes interact, to cover all bases and reduce overall exposure.
- Advise on opportunities to delay tax payments and thereby improve cash flow.
We focus on understanding every business we deal with to provide advice which fits client objectives. Tax rules can and do change frequently. The changes can be complex, confusing and time consuming to adjust the business to. As business tax consultants, we provide relevant and practical advice.
