Posted on 19 April 2018
Entrepreneurs face numerous challenges when setting up and growing their businesses, and naturally the commercial issues come first. But tax should never be far behind and, if placed at the heart of business planning, can reap financial and operational benefits.
Simon Littlejohns, Partner and Head of Tax at Friend Partnership Limited, sets out four of the most important tax matters that entrepreneurs should discuss with their advisers.
1. Have we got the set-up right from the start?
Try to get the share ownership right at the outset. Talk to your tax adviser about your end game – having this in sight will help with future tax planning. And, it sounds dull, but take advice on how to set up robust tax compliance procedures to deal with corporation tax, VAT, PAYE and National Insurance so that this should never be a concern in the future.
2. Are we using every tax relief available to maximise our profits?
Your tax adviser should be aware of the full range of tax reliefs and allowances that can boost your post-tax profits and help to incentivise key people within the business. Talk to your adviser to make sure you are maximising your usage of the following tax breaks:
There is an annual investment allowance of £200,000 giving a 100% deduction for qualifying capital expenditure. Greater allowances are available for energy efficient technology, heat pumps, solar thermal systems etc. and there are allowances on integral features in buildings – for example heating and ventilation systems and electrical systems.
It can be surprising how many businesses qualify for R&D tax relief – your adviser should be able to assess if your activities qualify as R & D. And, if they do, there is a 130% uplift in the tax deduction for qualifying expenditure. For early stage or loss-making innovators, there is a tax credit of 14.5% for surrendered losses. The regime is slightly different for the largest companies.
The best known of these is an EMI share option scheme, which is a highly flexible way of incentivising key members of staff and very tax efficient for both the company and the individuals. Take advice on tax-free benefits in kind and available salary sacrifice arrangements.
There are also many different industry-specific tax reliefs available, such as theatre tax relief and other creative industry reliefs, relief under the Patent Box regime, reliefs for companies with charitable activities or corporate venturing.
3. Are our external investments tax efficient?
SEIS and EIS reliefs are available for new external investors. These can be very valuable but care with the fine detail is needed by both company and investor as HMRC applies the rules with vigour!
4. What can I do to improve my personal tax position?
As a business owner you will want to ensure your own personal tax position is well managed. This ranges from managing your own personal tax liabilities (paying the right amount at the right time!) through to effective tax planning.
Talk to your adviser about personal reliefs, such as SEIS, EIS, pension contributions and charitable giving. Are you extracting profits from the business in the most tax efficient manner? Despite the tax hike, dividends remain the ‘best’ option in total tax terms but there are additional options to consider such as the use of personally held property.
Looking to the future, tax efficient investments and inheritance tax planning are essential. The value of the business should be covered by 100% Business Property Relief but check the rules.
Entrepreneurs face many challenges with their business – it can be tempting to put tax to one side. However, tax is an unavoidable cost of doing business that, with the right advice, can be managed effectively and used as a key tool to drive profitability.