For many small business owners, tax is it can be one of the most difficult areas of running a business. And with sensible reason, too – the tax system is complicated. Unfortunately, that may result in issues.
In 2016, it had been calculable that UK citizens overpaid around off £5 billion in tax by not taking advantage of tax breaks and relief. we tend to hear plenty regarding tax avoidance, however in reality several legitimate opportunities to avoid wasting cash on tax aren’t used, primarily all the way down to an absence of awareness.
Good planning will help small businesses establish areas where they’ll save on tax, money which may then be reinvested into the business. However there are alternative equally compelling reasons to take tax planning seriously, like guaranteeing you’re compliant with rules and laws.
The start of a brand new tax year is a perfect chance to turn over a new leaf and take a contemporary look into how you’ll be able to set up your taxes to the advantage of your business. Here are four tips to get you started.
1. Start on next year’s taxes, now
Putting off accounts and tax returns to the last minute not only creates stress and panic, it conjointly ends up in mistakes and lost opportunities to save lots of cash. Most cases wherever HMRC refuse an expenses claim is as a result of not been proved properly.
Keeping books up to date on a regular basis is additionally economical and secure. Nowadays, there are numerous low cost and promptly available accounting apps excellent for small businesses that make the task even easier.
2. Review your business classification
If you’re a sole trader or a partnership, it’s going to be value considering the potential tax benefits of setting up a limited company. As a sole trader, all business profits are subject to income tax and national insurance deductions. Limited company profits are subject to Corporation Tax, which is substantially less than income tax and NIC.
Of course, in a limited company, you may even have to pay income tax and NIC on something you are taking out as a wage, though this could be managed by withdrawing dividends instead.
3. Inspect flat rate VAT
In the traditional course of things, VAT liability is calculated as the difference between the VAT a business charges to customers and also the VAT it pays on its own purchases.
If you’ve got a turnover of over £150,000, however, you’ll be able to be part of the Flat Rate VAT scheme. The quantity of VAT paid to HMRC is pegged at a set share, reckoning on your industry. Regardless of the distinction is between that fixed rate and what you charge your customers, you keep, so some firms are ready to create a tidy benefit from it.
4. Maximise deductions
The system of allowable deductions from tax is complicated; however the varied reliefs and allowances are there to be used.
Tax deductions constitute two main camps, though this is often not exhaustive. Expenses cover all the items you may need to do to run a business, like pay for utilities, travel, equipment and general workplace purchases. As a rule of thumb, for each £1 you pay on expenses, you’ll be able to deduct 20p from your taxable profits. Working from home offers substantial expense deductions for sole traders.
The other main cluster is capital allowances, which permit firms to offset major expenditure on things like high price equipment and research and development against tax.