As per the Companies Act 2006, the United Kingdom legislation classifies a business as a small business if it satisfies two below mentioned conditions:
- If the number of employees in a business is between 50-250, and
- If the annual turnover of a business is not more than £6.5 million.
Government of the United Kingdom has always been encouraging for the start-ups but off-lately it has started to focus on the small-sized businesses, also known and referred as SMEs, mainly because they have become quite a vital part of the UK economy and although there is no specified or concrete definition of small businesses, UK government refers to above mentioned criteria.
Small Business and Tax Planning
As it is quite clear from the definition that the small business owners are a little seasoned in the business world but are still struggling to find their ground. They are somewhere between the start-ups and medium sized businesses and thus need to be very careful with your methodology of running your business, especially cutting costs wherever applicable and saving money should be on your priority list.
One of the main reasons why you need to be smart with money is because if only you are smart, you will be able to deal with taxes smartly and thus can save a considerable amount of money and that’s one of the major differences between steady profitable businesses to one that’s just barely surviving. However, unfortunately many small business owners end up paying extra taxes just because they are ignorant about certain deductions which they can claim or by dealing with their businesses and retirement savings in an inefficient manner.
Tax Saving Tips for Small Business
In order to manage your operations efficiently and to save on taxes, you as a small business owner can try and inculcate following practices in their business operations to gain maximum tax benefit:
- Know your industry: To ensure that you don’t end up overpaying on taxes, it is very important to know and understand your industry you are dealing with/in and in order to do, you must have a improvise a well-thought method to have continuous engagement with your trade body or association. You must also try to attend all the events and programs organized by the association. The best way to keep you updated about all the recent happenings of your trade body is to subscribe to its newsletter. Allowances like uniform allowance and several other dispensations are approved by HMRC which you can use depending on the industry you are in. And last but not the least, your trade body is on your side so must make most out of it to understand your industry better.
- Use your allowances: This is second step after you have attained a thorough knowledge of your industry because if only you have understood your industry well enough, you can utilize the applicable allowances. The size, type and structure of your business will decide which parts of tax legislation you need to consider. Lot many small business owners are clueless about allowances like annual investment allowance, personal allowance, dividend allowance, marriage allowance etc and thus miss out on taking their benefit. For example. HMRC has approved marriage allowance for married couples and civil partners and if eligible, you can save tax upto £230. Also the personal allowance i.e. the tax free limit for each individual before income tax is deducted is £11,500. UK government also allows the basic taxpayers to earn upto £1,000 as interest and pay no tax whereas the amount is half for those who fall in the higher rate tax slab. The annual investment allowance and dividend allowance is £23,000 and £5,000 annually. The full value of your expenses on qualifying plant and machinery upto the annual investment allowance limit is deducted from your profit and you pay tax only on the balance amount and thus can save considerable amount of money, because the balance amount might qualify for the capital allowance upto a certain extent. However, before you start to claim the annual investment allowance, it is important to know the applicable rates because every asset has got its own and different rate from other assets.
- Spend more time on your business: A small business owner has a lot on his plate and thus he needs to be very prudent regarding his time allocation. Spending more than required time on tasks such as bookkeeping and accounting will not only take the fair share of your productive time but also make you jack of all trades and master of none, which for sure is not a desired characteristic for success. Your business will benefit from you if you are spending time working on it while hiring competent professionals for tasks such as bookkeeping and accounting. Also you must try and not get into the feeling of “ I know it all” because chances are high that in situations where you may thing that you are saving on money, you are actually losing out by not claiming allowances and deductions you are eligible and entitled for.
- Make sure you are dealing with VAT correctly: For most of the small business owners, dealing with VAT in the right manner has been a sore area for years because while majority of them have no idea if they are paying the right amount or not, lot of small business owners don’t even know if a scheme called as Flat Rate Scheme even exists on the planet earth, which could otherwise be an unexpected source of profit. As the name hints, under Flat Rate Scheme, you have to pay a single, flat rate of VAT on your annual turnover and HMRC has its own list of flat VAT rate for different industries. Thus, you can choose the flat rate as per your industry and pay accordingly. Also, where HMRC refrain you from claiming any VAT on the purchases made, you can keep the difference between the VAT you charge to your customers, which is usually 20%. Thus, having a regular VAT health check could prove quite beneficial for your business.
- Choosing your work location: HMRC has allowed generous tax savings for those who are self-employed and work from home and if you are a small business owner, you are a self-employed in the eyes of HMRC, so you must be aware of tax-saving schemes. Being a self-employed, you can claim either all or a certain percentage of following expenses:
- Mortgage interest
- Health insurance premiums
- Heat and light
- Landline and phone costs
- Council tax
- General household repairs and maintenance
- Publications and subscriptions
- Meet your deadlines: In order to avail tax benefits, you as a small business owner must ensure that you are paying your subscriptions with the HMRC and Companies House well within the deadline. Meeting all deadlines become a lot trickier when things are not going as smooth as you would like them to be, but even then you have to make sure that you deal with the situation as soon as possible because doing so will give you and your advisor, if any, buffer time to liaise and reduce the penalties or late payment interest.
- Meet your accountant: You have hired and paying your accountant to keep the company’s or business’s account in order but it doesn’t mean that your task gets over. At the end of the day it is your business so it is your duty to have a periodical meeting with your accountant to see if things are as they should be and address areas of concern, if any. Doing so, will also keep your accountant under check and prevent him from going haywire and if you don’t talk to your accountant or if he is very busy to give you the time, change the accountant.
- Transfer assets: In order to save on tax, HMRC allows you to transfer some of your assets, savings and investments to your spouse or civil partner or to someone from your family who works in your business. Although you must be careful here so that you end up creating problem for those involved with regard to control or capital gains tax.
- Make plans in advance: HMRC encourages everyone to save on their taxes by doing an advanced planning and as a small business owner; you need to assess your profits in advance in order to claim any deductions well within time before it is too late to do so. For example, if you have calculated your profits, you can see if buying any qualifying plant or machinery or adding to pension contributions has any positive effect to reduce your taxable profits.
- Plan your exit: As a small business owner, you must have a well-planned exit strategy in place because having so will not only increase your chances of realizing the best value from your business but will also allow you to have a tax efficient exit and thus reduces the burden of income, capital and inheritance tax, if applicable.