How to avoid over-paying tax as a small business

By Tony Mills, Director, Online Tax Rebates

Starting up in business is challenging. In the early stages, most business owners are preoccupied with survival – establishing relationships with suppliers and customers, managing cash flow and marketing their new product or service.

One of the major aspects of owning a business is routine tax compliance, yet if you’re just starting out this can be difficult if you don’t already have good taxation knowledge.

With this in mind, Tony Mills, tax expert and Director of Online Tax Rebates, gives his top tips to keeping compliant and avoiding over-paying tax as a small business.

Plan ahead

Most small business owners are too busy working for their business to spend time working on their business when starting out. But an important aspect of establishing your small business is creating a comprehensive financial plan and paying the correct amount of tax on your business tax id.

This is part of the overall business plan you will need if you want to secure investment or a loan from a bank.

Your financial plan should include your projected cash flow, projected profit and loss, a balance sheet and business ratios. Understanding your finances will help you minimise the chance of overpaying tax and allow you to take advantage of current tax relief benefits available.

Lean on technology as much as possible when it comes to your cash flow; cloud-based accounting software can give you a bird’s eye view of your finances and allow you to delve deeper with just a few clicks. There are also plenty of apps specifically designed to make accounting and expenses tracking simpler, like FreeAgent, QuickBooks or Xero.

Record keeping

Avoid the panic when tax deadlines roll around by ensuring you keep good tax records from the outset. Records in disarray can cost you in overpaid taxes and cause even bigger problems if you’re audited.

HMRC’s Making Tax Digital (MTD) programme means VAT-registered businesses with a taxable turnover of £85,000 now need to keep digital records using approved software and file their tax returns online. Businesses with a turnover under £85,000 will have to switch to digital record-keeping by April 2020.

Converting to digital accounting can have some tangible benefits for your business even if you don’t currently meet the threshold. You can scan receipts in, log on to the system remotely, as well as receive real-time data so you don’t have to wait until the end of the year to find out how much tax you must pay.

Know what you’re entitled to

Tax isn’t a one-way system only benefitting the government. As a small business there are many tax relief options available to you.

R&D tax credits

R&D tax credits were introduced by the Government in 2000 to reward UK companies who were developing innovative products and services. This can be in the form of a cash payment and/or a lower corporation tax bill.

More businesses are claiming research and development tax credits every year; however the Treasury still owes SMEs more than £84bn in unclaimed R&D tax relief due to low take up.

This tax credits scheme is purposefully broad, covering everything from a new piece of software to a boundary-pushing restaurant dish and can give your finances a boost.

The Seed Enterprise Investment Scheme (SEIS)

An indirect tax relief you also may be missing out on is The Seed Enterprise Investment Scheme (SEIS) which can fast-track your business to the next growth stage.

SEIS offers investors attractive tax relief on Income Tax, Inheritance Tax and Capital Gains Tax and can benefit small, growth-orientated business who may find access to finance difficult.

There are certain criteria which need to be met: you must have fewer than 25 employees, have less than £200,000 in gross assets and you can raise a maximum investment of £150,000 over three years.

Reward staff

Love them or loathe them, an annual staff event like a summer BBQ or Christmas party is a highly-valued office perk.

With Christmas parties alone costing UK businesses almost £1 billion a year, it’s worth noting if you’re a limited company you don’t need to pay tax or National Insurance on the associated costs.

If your event is annual, costs no more than £150 a head (including VAT) and all employees are invited, HMRC will provide you with a tax-free subsidy for food, drink, travel or accommodation.

Small businesses can also use approved share schemes and staff suggestion awards to reward staff. Encouragement awards (for special effort) are tax free up to £25. But financial benefit awards (for ideas that will save or make your business money) are exempt up to £5,000.

Business expenses

If you’re a small business owner, you likely own a host of equipment which keeps your operation running from stationary, PCs and tablets to office furniture, as well as travel. Make sure you claim these as allowable business expenses to offset against your company’s corporation tax liability.

However, it’s important to bear in mind you can’t claim for expenses that have a dual purpose for business and personal use. Expenses must be paid through your company’s bank account.

If a uniform is important for your brand image or helps to protect your staff on the job, both you and your employees could be due a tax deduction. As an employer, you must keep accounting records for all uniform purchases and make sure to let your team know they can make individual claims for a rebate on the cost of maintenance. This online calculator will provide an estimate and send out the relevant forms.

Charitable donations

If you wish to donate to a charity through your small business – be it money, equipment or employees on secondment – and you’re a limited company, the value can be deducted from your total business profits before you pay tax.

Showing your charitable values will also help your business build a good reputation amongst new and existing customers and partners, beyond the tax benefits.