It is perhaps unsurprising that a great many small businesses don’t have the knowledge or experience to meticulously manage their tax liabilities. From the straightforward to the complex, undeclared UK or overseas rental income to onshore offshore trading profits, navigating personal or commercial tax liabilities can be a minefield. Yet seeking sound small business tax advice is paramount to sustained success.
For any small business to be successful, it must be tax efficient. This will increase your liquidity, swell your profits, and bolster your business model. In simple terms, a successful small business is one that has optimised its tax liabilities.
Despite the cautiously optimistic economic outlook outlined by Chancellor Jeremy Hunt in his Spring 2024 Budget [link to blog on this], ONS data published in January 2024 stated that 859,000 companies were registered with Companies House in 2023, an increase of 75,000 in 2022. The entrepreneurial spirit is alive and well. But does every entrepreneur have comprehensive knowledge of their tax liabilities?
We’ve put together a comprehensive guide to business tax liabilities. Be sure to read each section. You may just uncover how to profoundly improve your business’ financial success in 2024.
What taxes does my small business pay?
It depends on the structure of your business. A sole trader’s tax liabilities are different from those of a limited company or partnership. Sole traders and partnerships pay income tax. The amount is calculated based on your annual income or the profit you’ve made if you’re self-employed.
A limited company is a separate legal entity from yourself with its own tax liabilities. Therefore, you must pay corporation tax on any profits you make. You’re also taxed on any income from the limited company.
Partnerships aren’t taxed on their income; they’re taxed on the share of profits they have been allocated. This is taxed at normal rates and in bands that correspond to self-employed income (at basic, higher, and additional rates).
Ward Goodman has the experience and acumen to provide SMB tax advice for businesses of all descriptions. We invite you to contact our business tax accountants to discuss your business needs.
Take advantage of tax relief and financial allowances
The simplest way to reduce your tax liability is to take advantage of the various tax reliefs and financial allowances offered by HMRC. Explore the range of reliefs and allowances available to small businesses below.
Tax-deductible business expenses
Businesses don’t run seamlessly without incurring costs. The good news for small business owners is that these can be deducted from your annual tax return, as long as HMRC categorises them as an allowable expense. This is essential to calculating your taxable profit.
Now, there’s quite a long list of taxable business expenses. But as a general overview, tax-deductible business expenses include office running costs, such as equipment and utility bills; travel, including petrol and public transport costs; work uniforms; financial outlays, such as bank charges and insurance premiums; advertising and marketing costs, such as cultivating your online presence; and even some stock and raw materials.
There are two forms of gifting: “chargeable lifetime transfers” and “potentially exempt transfers.” Remember: how you choose to structure your gift will determine how much Inheritance Tax is saved.
Research and Development Tax Credits
If you’re involved in innovative projects, such as scientific research or technology initiatives, you may be eligible to claim research and development (R&D) reliefs. These tax credits can be claimed by companies researching or developing advancements in their field, even if projects are unsuccessful.
Gift Aid and Business Rates
Companies and unincorporated associations can claim tax relief for all qualifying donations paid to all bodies, trusts, or charities. Also, some non-domestic properties, such as shops, offices, pubs, warehouses, factories, and holiday rental homes or guest houses in England and Wales, may qualify for discounts on the cost of their business rates.
Businesses with a rateable value below £12,000 qualify for 100% business rate relief. Businesses with a rateable value of £12,000 to £15,000 qualify for small business rate relief to reduce the cost.
Additional Reliefs
There are several additional reliefs that small business owners can claim. These include the Patent Box, which is designed to encourage companies to keep and commercialise their intellectual property. It also allows companies to apply for a 10% corporation tax rate.
Business owners who make a profit from theatre, film, television, animation, or video games can apply for CITR (Creative Industry Tax Relief). There’s also relief offered on goodwill and other relevant assets, such as customer relationships and unregistered trademarks, and even disincorporation relief for business owners who close their company and become sole traders, ordinary business partnerships, or limited partnerships.
Lastly, small business owners liable for Corporation Tax and who have made a loss from trading, the sale or disposal of a capital asset, or on property income can claim relief from Corporation Tax by offsetting the loss against other gains or business profits in the same accounting period.
The Profit-Loss Balance
It’s not uncommon for successful businesses to make a loss in a financial year. YouTube lost money hand over fist for years and only started raking in cash when it leveraged advertising revenue and a subscription-based model.
However, SMEs don’t have a user base (customers) as vast as YouTube. Nor do they have the ability to receive substantial investments from venture capitalists. What business owners can do is claim relief from corporation tax by offsetting losses against profits when completing their company or self-assessment tax returns.
Now sure, business owners can complete their own profit and loss balance sheet, compiling revenue and operational costs (such as the cost of product shipping, interest expenses, and taxes), but small business tax advisors can meticulously craft a P&L balance sheet for businesses and sole traders with ease.
Business owners can carry over yearly losses to offset future years’ profits. This can reduce your tax liability in the years to come. Moreover, provided that previous years’ profits were made in the same trade, business owners can even carry losses to previous year’s profits.
Increase cash flow with VAT accounting
Business finances aren’t just about profit and loss. They’re also paramount to smooth operations and an ability to grow at a sustainable pace. And the key to this is your cash flow. The amount of money you have coming in and out of your business.
Even revolutionary commercial ideas fall flat because there isn’t enough money to keep them afloat. Optimise the movement of cash in and out of your business, the revenue, turnover, loans, investments, and, of course, the money you receive from customers, and you’ll have a buoyant business.
VAT accounting may sound like a chore, but it has its benefits. For one, business owners who are shrewd enough to seek advice from small business tax advisors, like Ward Goodman, will discover that they can strengthen their financial position by earning VAT income and retaining it for a short period of time.
Below are a handful of best practices that can help your business improve its cash flow with VAT accounting at times when you really need it.
Set up an invoicing matrix to get paid quickly, then try to make sure that you don’t have to pay VAT until the next quarter.
- Agree terms that offer as long as possible to pay suppliers
- If you’re making expensive business purchases, try to do so at the end of the quarter or just after the VAT return period. This will reduce your VAT bill.
- If your business has a turnover of any amount up to £150,000, make use of the “flat rate” scheme. This allows you to pay a percentage rate each quarter, saving you time and money.
Don’t fall victim to tax avoidance schemes
Tax avoidance schemes are typically complicated, convoluted ways for businesses and individuals to reduce or avoid paying tax. Although technically legal, if the sole aim of these schemes is to avoid paying tax, they can fall foul of HMRC.
For instance, loan schemes are tax avoidance schemes that claim to help people avoid paying the correct amount of income tax and NICs. They often involve converting income into a loan (or other payments from a third party) that are unlikely to ever be repaid. They are somewhat prevalent in local authorities and specifically target agency workers.
Promoters of the scheme tell workers that the payment is non-taxable because it’s a loan. However, this is untrue and could end up costing more than what the worker would have saved upfront, not to mention that promoters often charge an upfront fee.
Despite schemes such as this being marketed as legitimate tax planning, wealth management, or investment opportunities, any sound small business tax advice will steer businesses away from them.
Having a Tax-Efficient Small Business Is Paramount in 2024
A successful small business is a tax-efficient one. As we’ve previously alluded to, small business owners should be looking to take advantage of tax advice to bolster their revenue, turnover, loans, and profit in 2024.
Without the help of the business tax services offered by Ward Goodman, businesses risk paying too much tax or being penalised by HMRC.
Every business should aim to be as tax-efficient as possible. Leveraging the services of a reputable business tax advisor, like Ward Goodman, will expand your margins, increase your cash flow, and strengthen your business, while also educating you on the tax you need to pay and saving you money.
There’s just one question left: in today’s challenging economic and competitive commercial environment, can your small business afford not to be 100% tax efficient?
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