There are many ways in which you can reduce or save tax when you start or grow a new business. This quick guide will get you started with six top tips to reduce your tax bills or increase profitability.
- Pick the right legal structure. In most cases when you set up in business there will be a huge upfront investment in marketing, equipment purchases, training costs, premises costs, and so on. A “tax loss” in the first few months is probable as this is really your investment in the business. Setting up initially as a sole trader or in partnership allows you to offset the loss against other personal income which could give rise to a valuable tax refund in the early months of trading. Losses in a limited company generally have to be carried forward and utilized against future profits.
- Think about VAT registration. As a startup you don’t usually need to register from day 1 as the VAT threshold is £85,000. However, if your customers are VAT registered businesses then there could be big tax savings to voluntarily register for VAT. Your VAT registered customers won’t be any worse off as they can recover the VAT you charge but you will now be able to reclaim all the VAT on your expenditure increasing your profits. And don’t forget to make your sure you are on the right VAT scheme- think cash accounting or look at the flat rate scheme.
- Make sure you draw your money from your business in the most tax-efficient manner. Whether you set up as a sole trader or a limited company you must think about what is the best way for you and your family to draw income from your business from day 1. Your partner is likely to be very active in your business so make sure they are remunerated correctly. If you have a limited company then you have numerous choices as to how best to extract the profits from your business whether it is a salary, dividends, loan repayments, interest on loans to your company, pension contributions, benefits in kind, or any of the many other ways. Also, keep an eye on how much you’re taking so that you don’t lose valuable allowances such as child benefit or move unnecessarily into higher rates of tax. You can plan how much tax to pay with your accountant particularly if you have a limited company but you must plan ahead. Don’t wait until the profits have been generated and your income is drawn from the business to discuss tax efficiency. By then it is usually too late!
- Keep an eye out for specialist tax schemes. There are a number to look out for so speak to your accountant.
One of the main ones is Research & Development Tax Relief. HMRC introduced a scheme way back in the year 2000 that can give companies about 33% of development costs back in tax refunds. The scheme is available to startup companies in a huge range of industries in the form of either a cash payment or a corporation tax reduction when they spend money on qualifying research and development. This relief is only available for companies and not sole traders or partnerships.
Most companies that claim this tax relief are in industries such as software development and engineering but it is available in all sectors. It aims to encourage novel technical research with commercial applications rather than academic (or university) research. You can claim against costs of staffing, materials, and software needed to conduct your research.
There are also numerous tax schemes to attract investors to small business startups or growing businesses such as SEIS (seed enterprise investment scheme) or EIS (enterprise investment scheme) which provides valuable tax relief for certain investors in qualifying companies. Again however take advice from your accountant. Not every company nor every investor or investment qualifies.
- Annual Investment Allowance (AIA). All businesses can claim Capital Allowances on plant and machinery, meaning that you can deduct the value of the item from your profits before you pay tax. AIA allows you to claim 100% of the cost of certain assets. Currently, the AIA limit is set at £1m. This will reduce to £200,000 from 1st January 2022.
Almost all capital expenditure qualifies for AIA including plant and machinery and commercial vehicles (vans and trucks – not cars). There are however strict rules on who can claim and how much, so it is important to speak to your accountant about AIA and what you are entitled to claim.
Also, don’t forget electric cars. From 6th April 2021 only electric cars will qualify for 100% first year allowances. If you buy a brand new Tesla the whole cost can be offset against your profits and for company car drivers the benefit in kind is just 1% of the list price for the tax year 2021/22.
- Engage with a tax specialist from the outset and throughout. Many startups and growing businesses try to ‘go it alone’ to save money. Unfortunately more often than not this is a false economy with huge tax savings frequently being missed. However, many accountancy firms and tax advisors have a fixed monthly fee and can not only save you money but save you a wealth of time!
A great accountancy firm or business advisor will often have a specialist that deals specifically with giving advice to startups and growing businesses. They will deal with raising finance, reducing tax and everything in between on a daily basis and will be perfectly placed to ensure that you build your business in the most tax-efficient and profitable way.
This has only scratched the surface of how you can begin or grow your business whilst saving tax and remaining compliant. For a more in-depth look at startups & growing businesses, download this comprehensive Business Startup Guide.
About the Author
Mark Friend
Mark Friend is a Chartered Accountant with over 30 years of experience. He set up the firm in 1992 and formed Friend & Grant in 2005. Mark has built strong working relationships with many business owners and enjoys helping business owners to save tax, save time and create wealth. Mark is also a director in a highly successful software company and holds a number of property investments with his wife, Jan.
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