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At Finnies we are often asked for advice on key tax planning strategies for business owners. Whether you’re a new or established business, we can help you.
Starting a business is an exciting and challenging experience and one which also carries a fair degree of risk. You will need to make decisions that could be critical to the long-term success of the enterprise, such things as the type of business and its attributes; your target market and competition; profit potential and how you will extract those profits; the rate of business growth; and the impact of running the business on your personal life. At some point, you’ll also need to consider how you will exit the business when the time comes.
You will pay tax on your taxable profits, so a crucial element of tax planning is to claim all deductible expenses, many of which will be included in your accounting records.
From 2024/25, most self-employed businesses and partnerships will need to calculate their taxable profits using the cash basis as a default (though a business may elect to use the accruals basis). The key features of the cash basis are that:
If you are self-employed and carry on your business from home, you can claim tax relief on part of your household expenses, including insurance, repairs and utilities. You may also be able to claim for the cost of travel and accommodation when you are working away from your main place of business, so you should keep adequate business records, such as a log of business journeys. In addition to ensuring that your accounts are accurate, these records may also be requested by HMRC.
As part of Making Tax Digital for VAT, most taxpayers are required to use an appropriate computer package to aid concise and effective record-keeping and to enable them to meet their Making Tax Digital and VAT obligations. We can advise you on suitable software to meet your business needs.
‘Capital allowances’ is the term used to describe the deduction we are able to claim on your behalf for capital expenditure, such as business equipment, in lieu of depreciation. Capital allowances are broadly available to unincorporated businesses accounting under the accruals basis and to companies.
The majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on a portion of expenditure on most types of plant and machinery (except cars). The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.
The AIA is currently £1 million and businesses are able to allocate their AIA in any way they wish, so it is quite acceptable for them to set their allowance against expenditure qualifying for a lower rate of allowances (such as integral features).
From 1 April 2023, companies investing in qualifying new plant and machinery benefit from first year capital allowances.
Under this measure a company is allowed to claim:
This relief is not available for unincorporated businesses.
Any expenditure not covered by the AIA generally enters either the main rate pool or the special rate pool, attracting WDA at 18% and 6% respectively for 2024/25.
The special rate pool applies to higher emission cars, long-life assets and integral features of buildings, specifically:
For most other plant and equipment, including some cars, the main rate applies.
A WDA of up to £1,000 may be claimed by businesses where the unrelieved expenditure in the main pool or the special rate pool is £1,000 or less.
The tax allowance on a car purchase depends on CO2 emissions. Under current rules, purchases of new unused cars with zero emissions attract a 100% first year allowance. For cars purchased with CO2 emissions not in excess of 50g/km, the main rate of 18% applies. Cars with CO2 emissions above 50g/km will be restricted to the special rate WDA of 6%.
For non-corporates, cars with a non-business use element are dealt with in single asset pools, so the correct private use adjustments can be made but the rate of WDA will be determined by the car’s CO2 emissions. Remember, cars do not qualify for the AIA or FYA.
When a building is purchased for business use, it may be possible to claim capital allowances on plant elements contained therein, e.g. air conditioning, subject to certain conditions. A joint election may need to be made with the vendor. Please contact us for further details and advice prior to any purchase.
The Structures and Buildings Allowance is available on new, or the renovation of old, non-residential structures and buildings. Relief is available on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 3% on a straight-line basis.
Companies with expenditure in qualifying R&D activities can receive tax relief. For accounting periods starting on or after 1 April 2024, the previous SME scheme and the R&D expenditure credit (RDEC) scheme will merge. The new scheme will broadly follow the rules of the RDEC:
R&D intensive companies will operate under a separate scheme, with enhanced relief where R&D expenditure accounts for 30% or more of total expenditure.
This is a complex area. Please get in touch if you would like to know more.
You can employ family members in your business as long as it can be justified commercially. Family members can be remunerated with a salary and possibly with benefits such as a company car or medical insurance. You can also make payments into a registered pension scheme. It is worth noting that HMRC may challenge excessive remuneration packages or profit shares for family members, so seek our advice first.
Numerous ‘fines’ are administered for those who fail to comply with the rules and regulations set by government departments. Income tax is detailed further below but other possible ‘traps’ to avoid are:
In order to help you to steer clear of these pitfalls, we must receive all of the details for your accounts and Tax Returns in good time and be kept informed of any changes in your business, financial and personal circumstances.
There is no statutory definition of ‘employment’ or ‘self-employment’, so determining whether someone is employed or self-employed is not straightforward.
Instead, HMRC applies a series of ‘tests’ in order to ascertain whether someone is classified correctly. As large amounts of both tax and NICs can be at stake, HMRC often takes quite an aggressive line with regard to this issue and errors can be costly, so seeking advice that is tailored to your situation is essential. Please contact us for assistance in this matter.
Forming a limited company may be a consideration if the limitation of liability is important, but it should be noted that banks and other creditors often require personal guarantees from directors for company borrowings.
The main rate of corporation tax is 25% where profits are over £250,000. A small companies rate of 19% is available to companies with profits not exceeding £50,000. Companies with profits between these limits are taxed at 25% but are eligible for marginal relief to reduce tax payable. Income tax will then be due on the extraction of profits from the company whether in the form of salaries, bonuses or dividends.
Funds retained by the company can be used to buy equipment or to provide for pensions – both of which can be eligible for tax relief.
As an example, consider how much you might pay if, as an owner-director, you wanted to extract £10,000 profit from your company in 2024/25 by way of a dividend rather than a bonus. We have assumed in this scenario that the director has already taken salary in excess of the upper earnings limit for NICs, is a 40% taxpayer, and the £500 dividend tax allowance has already been utilised.
As you can see in this case study, the net receipt by the individual is increased by 14% by opting to declare a dividend but this costs the company up to 17% more. Be sure to discuss this with us, as this is a complex area of tax law.
For Scottish taxpayers paying the Scottish Higher Rate of 42%, the net amount extracted on the bonus would be reduced to £5,600 (£10,000 less tax @ 42% and NICs of £200). The tax payable on dividends is the same wherever you are in the UK so the net income would be increased by 18%.
Remember that dividends are usually payable to all shareholders and are not earnings for pension contributions and certain other purposes. Finally, you need to consider with us the effect of regular dividend payments on the valuation of shares in your company.
Leaving profits in the company may be tax-efficient, but you will of course need money to live on, so you should consider the best ways to extract profits from your business.
A salary will meet most of your needs, but you should not overlook the use of benefits, which could save income tax and could also result in a lower NIC liability.
Four key NIC points to consider:
Tax and financial planning should be undertaken before the end of your business year, rather than left until the end of the tax or financial year. Some of the issues to consider include:
It is important to keep your personal tax affairs in order so that you avoid incurring any Tax Return late filing penalties.
The timetable for making tax payments is relatively straightforward for the self-employed:
A system of interest and penalties applies. For example, if any balance of tax or NICs due for 2023/24 is not paid within 30 days after 31 January 2025, further penalties may apply as HMRC will seek to charge a 5% late payment penalty as well as the interest that will be charged from 1 February 2025, with further 5% penalties chargeable on 31 July 2025 and 31 January 2026, plus interest on any outstanding liabilities.
If your business is incorporated, it will be liable to corporation tax. Corporation tax is usually payable nine months and one day after the end of the company’s accounting period.
If there are cash flow issues, HMRC might be persuaded to accept a spreading of your next business tax payment – you will have to pay interest at the HMRC rate, but keep to the agreed schedule and late payment penalties will be waived. Arrangements need to be put in place before the due date for paying the tax, so talk to us in good time if you wish to apply.
Payments on account are normally equal to 50% of the previous year’s net liability and are due on 31 January in the tax year and 31 July following the tax year.
A claim can be made to reduce your payments on account, if appropriate, although interest will be charged if your actual liability is more than the reduced amount paid on account. There is no equivalent mechanism to make increased payments on account when the year’s tax will be higher, so you should ensure that you build a reserve of money to pay the balance of tax due.
Don’t wait until it’s too late if you have difficulties! Please tell us in good time about any issues facing your business, as we may be able to offer solutions.
Payments on account are not due where the relevant amount is less than £1,000 or if more than 80% of the total tax liability is met by income tax deducted at source. In these cases, the balance of tax due for the year, including capital gains tax, is payable on the 31 January following the end of the tax year.
Peter is self-employed. His accounts are made up to 31 March each year. When we prepare the 2024/25 return we will be including his profit for the year ended 31 March 2025.
Peter’s payments on account for 2024/25 will automatically be based on the 2023/24 liability.
If you would like advice on tax planning strategies for your business, please contact Finnies.
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