Five-minute money masterclass: how to make tax less taxing

It’s safe to say that the business world has suffered a couple of setbacks in the last 12 months as the likes of Google and Starbucks have been criticised for their tax practices.

Five-minute money masterclass: how to make tax less taxing

However, regardless of how one feels about their behaviour, the episode has served to highlight the importance of staying on top of one’s tax responsibilities. After all, the last thing a start-up needs is a knock on the door from HMRC. Moreover, a recent survey from the Federation of Small Businesses (FSB) reveals that our small business owners are spending the equivalent of 12 days – and a collective £500m – on their tax admin every year. In that case, there has probably never been a better time to ask the experts how an entrepreneur can safely negotiate the tax minefield and avoid any unwanted headaches

 Maintain regular records

Taking on the services of an accountant or financial planner may not be an option for a business owner from the outset, so the burden of bookkeeping ultimately falls on their own head. And one hardly has to be a rocket scientist to know that – whilst time-consuming – doing this frequently and diligently should ensure you are operating above board but equally paying your fair share. “Once you have got the bookkeeping done, you can produce monthly management accounts, see how the business is performing and from there you can obviously estimate your tax liability as well,” says Jo Nockels, training and communications manager at TaxAssist Accountants. “Keeping up-to-date with your bookkeeping is also going to facilitate quite a quick turnaround of your tax return.” Keith Macdonald, certified financial planner at Broadway Financial Planning, adds: “Good record-keeping is essential because at the end of the day HMRC may wish to investigate and if your records are patchy, you have got considerable problems.”

 Set sufficient funds aside

A sure fire way to ensure that the taxman stays off your back is to have the necessary money in place when the time comes. This will often entail estimating the size of a tax bill in advance and leaving more than is required in a safe place. “Unless you keep that tax segmented, the temptation is to say ‘there’s loads of money in there – we can actually take more out as income or spend more’,” says Chris Daems, director of financial planners Principal Financial Solutions. “Keeping that buffer in our business has always been invaluable and we find it also works really well for the businesses we work with.” And Nockels offers a reasonable estimate of how much a business owner should be leaving behind. She adds: “As a ballpark, I would always say put aside at least 25% of your profits for your tax bill. That might not cover it all. It might be too much. But at least it means there shouldn’t be any nasty surprises.”

 Be aware of your rights

It goes without saying that a start-up would generally prefer to be paying as little tax as possible. Fortunately, there are many ways that small companies can enjoy a bit of welcome relief which are fully within the realms of the law. McDonald explains, “There are plenty of things out there to help small businesses. There are enhanced capital allowances and some companies will also be heavy on R&D so there are great allowances there for them to take advantage of.” He adds: “With a good team of professionals around the small business owner, they can really get a grip of their responsibilities but also minimise their tax liabilities legitimately and perfectly sanctioned by HMRC.”

 Outsource when affordable

Whilst attaining some assistance from an external party may be not a viable option in the first instance – as alluded to above – it can prove invaluable to the business owner who can afford it. “In an ideal world, a small business owner will want to be outsourcing the paperwork because there is an awful lot of it,” says McDonald. “It is easy to slip up on things and miss deadlines, so to spend their time in that area is going to draw them away from their core purpose. Obviously they could employ somebody to do it, but that is a fixed on-going cost and I think there are perfectly good solutions available to outsource it.” Daems helps put things in further perspective. He adds: “An accountant or bookkeeper is more likely to do accounting and bookkeeping better than you, but it can also be a lot more cost-efficient, both from a monetary and time perspective.”

 Monitor the cash situation

In addition to some of the allowances available to small business, there are also certain things that an entrepreneur can do themselves to help limit their tax liabilities. One of these is maintaining a decent handle on the company’s cash reserves. “I think for a start-up business, the key is probably not pulling the money out of the business very often,” says Alistair Cunningham, financial planning director at Wingate Financial Planning. “Cash in the business, so long as it is still a trading company, is only going to be liable to 10% capital gains tax if you also benefit from entrepreneur’s relief. It is probably just good planning to have loads of cash in the business anyway because then all you pay is corporation tax on the profit.”  

Adam Pescod
Adam Pescod

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