It’s true what they say, two things in life are certain: death and taxes. However, no one ever said how much tax you had to pay.
With more economic uncertainty on the horizon, it’s essential you make sure you aren’t overpaying tax for your business. In this blog, we will show you how to keep on top of your finances and slim down your outgoings to the HMRC.
Take Advantage of Your Expenses
All businesses cost money to run. To keep Tax IQ running smoothly, we have to pay for staff, computers, software licenses, premises, on-going training and marketing — and that’s just a drop in the ocean.
Thankfully, some of that money is recoupable by deducting it from our tax bill.
Travel, work vehicles, subsistence, equipment and communications are all tax deductible to varying degrees. If you stay on top of your work expenses, you can easily cut a couple hundred pounds off your tax bill.
Alison Edward heads up Waterlooville-based bookkeeping firm Simply Balanced Solutions. She agrees that even the smallest expenses can add up over the year.
Keep a record of everything you can claim. It is surprising how the small expenses can add up and if you don’t claim them you will pay tax on that extra profit.
For example short trips to the post office or to meet clients can be forgotten but they add up over the year. If you regularly make 2 trips a week to the post office at 5 miles each way that’s £9 each week (£468 per year) you can claim – and therefore don’t pay tax on. As long as it an allowable expense claimed wholly and necessarily for your business you can claim it.
For a full list of allowable business expenses, check out HMRC’s expenses cheat sheet.
Top 10 Tax Deductions for SMEs
- Your home — if you use it for work
- Communications, including telephone and internet
- Irrecoverable debts
- Depreciation of assets
- Wages and salaries
- Office costs
Keep on Top of Your Industry
As the government’s attention flits from industry to industry, new incentives are introduced to court new business.
Over the past couple of years, the government has introduced huge tax incentives for the British film industry and myriad of tax saving schemes in the brewing industry, including a 50 percent duty relief for microbreweries.
With schemes, incentives and relief measures dropping in and out of existence, you’ve got to stay on top of your industry, watching for new schemes and taking advantage of them before they disappear.
Make Friends with VAT
A lot of businesses are wary of VAT, preferring to pay way over the odds because they either want to stay on the right side of the law or simply don’t understand how it works.
In fact, many businesses are actually unaware of the choices available to them with VAT.
If you don’t want to dig into the minutiae of VAT, you can take advantage of the Flat Rate VAT scheme. The Flat Rate scheme allows businesses to pay a single, flat rate of VAT based on your turnover and industry.
While the Flat Rate VAT scheme isn’t for everyone, several of our clients have found it tremendously effective, allowing them to save thousands of pounds every single year.
Pay Yourself Carefully
If you’re the owner of an SME, how much you pay yourself will obviously have an impact on the amount of tax you pay.
But did you know that how you pay yourself can also have a huge impact on how much tax you’re liable for. Drawing a large salary will see you hit with a radically different tax bill than if you spread your income across, for example, a salary, dividends, a company car and other benefits in kind.
Spreading your income across multiple channels usually results in a lower tax bill. However, you should assess every decision on a case by case basis
Emma Saldanha heads up marketing at London-based Cogent Accountants and knows just what a difference the structure of a company can make.
If the business is unincorporated then the sole trader will pay tax and NI on his profits calculated after deducting allowable business expenses, via his annual self-assessment tax return. This method is simple but often result in more tax and NI than working through an incorporated limited company.
As a limited company the business owner as director can take a tax efficient salary, as the salary is tax deductible expense reducing the company’s Corporation Tax and also take dividends which are taxable but overall can achieve less tax and greater take home pay. The director will also need to file a self-assessment tax return to report on his salary and dividends from his company as well as income from other sources.
If you choose to split your income into several chunks, make sure you stay within the law. For example, company cars must be reported to HMRC and dividends must comply with Company Law.
There’s no point saving money now if it’s going to come back to haunt you during an investigation.
Records, Records, Records
Accurate record keeping isn’t the most entertaining part of running a small business, but it’s certainly one of the most valuable.
It’s all too easy to record purchases and expenses then throw away the receipts. However, the most common reason for HMRC to disallow expense claims is simply the failure to produce adequate supporting records.
This advice is the same wherever you go and Alison Edwards tells her clients the exact same thing.
Record everything as you go, set aside time each week/month for your bookkeeping. It’s much easier to do as you go than try and remember what things were for months after a transaction took place. That saves you time and money!
Having thousands of pounds of expenses wiped out because you didn’t think to hang onto the receipts could be incredibly costly. So buy a filing cabinet and get your paperwork organised.
Get Professional Advice
We understand that businesses want to do as much as possible internally, only outsourcing work when it’s necessary. However, when it comes to your finances, trying to do it all yourself can end up costing you more than just finding an expert.
At Tax IQ, we help small businesses in the east get their finances in order, taking care of everything from personal tax returns to payroll and business accounts to tax. To see how we can help, check out our packages or get in touch for a bespoke quote.