Six Tax Tips for Startups and Small Businesses
So you’re ready to start your own business. You’ve decided on a legal structure (limited company, sole trader etc.) and registered with Companies House. You’ve got the logo design, the staff and maybe, just maybe, your first few clients. You might have already had recourse to the advice of a specialist startup accountant like Alexander & Co. Nevertheless, we thought we’d share some tax advice that may give you the edge to help you through those first few years. If you need any more help, don’t hesitate to give us a call.
Record your pre-trading expenses
It might seem counter-intuitive but you can claim a tax deduction for expenses that you incur in relation to your business before you start trading, on the day you start trading, and you can go back as far as seven years, provided they’re wholly and exclusively for the purpose of the trade. Therefore, keep a record and evidence of everything you’ve spent on the business. Expenses include professional advice, research and development, travel and office supplies. Even if this only increases your tax loss for a period, these losses could be used against future profits.
Make your company investor friendly
You may need a boost of cash in the early stages of your business and the Government recognises this and has provided some very decent tax reliefs for certain companies. Trading companies with fewer than 25 employees and less than £200,000 of gross assets may qualify as Seed Enterprise Investment Scheme companies (SEIS). An individual can subscribe for £100,000 in shares in the company and obtain 50% income tax relief on the investment, permanently defer some capital gains and if they hold the shares for long enough, sell them free of tax. A company can raise up to £150,000 this way.
For larger trading companies the Enterprise Investment Scheme may be available. The company has to have less than 250 employees and less than £15m of gross assets and the investor can invest up to £1m per year and obtain 30% income tax relief. Again if they hold the shares for long enough and the conditions of the relief are met, the disposal is free from tax. A company can raise £5m a year this way.
Given the benefits the conditions for the reliefs are complex so it would be worthwhile taking advice.
Consider the Flat Rate Scheme for VAT
Labelled by some as confusing, the flat rate scheme can actually make VAT returns simpler for businesses whose turnover doesn’t exceed £150,000 and save you cash. It allows qualifying businesses to make a flat-rate calculation based on their turnover, as opposed to recording the VAT from every sale or purchase. You are under no obligation to join the scheme if your turnover is below £150,000 but the incentive of a decreased administrative burden is enough to convince many. When your next VAT return is due you will pay the flat-rate amount for your industry as a percentage of total turnover. For example, restaurants and takeaways pay 12.5% and for retailing pharmaceuticals and medical goods it’s 8%. The scheme tends to be more popular with businesses who have a low expense base and do not claim much input VAT (the VAT on goods/services a business purchases, rather than the VAT on goods/services it sells). And once you’ve joined the scheme you can remain in it until your turnover exceeds £230,000.
Are any Tax Relief’s available?
Have you come up with an innovative solution to a technical or scientific problem that will benefit your trade? This could be in your products, processes or the software you have utilised. If so you may benefit from the research and development tax relief. This gives qualifying companies a 225% tax deduction on qualifying costs and, if there is a tax loss, you might be able to surrender that loss for a cash payment from HMRC. If you have managed to patent any part of your product or process or have been granted an exclusive licence (and obtaining a patent can be more cost effective than you imagine) you may be able to reduce your corporation tax rate to 10% on an element of your company profits. There are also specific reliefs for certain industries. Creative Industry Tax Relief (CITR) allows qualifying companies to claim a larger tax deduction, or in some circumstances claim a payable tax credit when calculating their taxable profits”. But who qualifies? Companies producing certain films, ‘high-end’ TV programmes, animation programmes or video games. These creative projects need to pass a ‘cultural test’ that certifies them as a ‘British film’, ‘British programme’ or ‘British video game’. There are several other qualifying criteria that can be found on the HMRC website.
Be aware that every employer now has a right to the relief from the first £2,000 of employer’s national insurance that they might otherwise have to pay. This can be an important cost saving when hiring members of staff. However there are other cost effective ways of getting staff motivated. There are tax efficient option arrangements, such as the EMI, that allow staff to acquire shares, in circumstances that can be controlled by the employer, at a low cost. When they dispose of the shares they will be entitled to a 10% tax rate.
An owner should also consider their own remuneration and how this would work best for them. Assuming no other income a shareholder can receive approximately £44,000 in dividends without paying tax. This means a husband and wife team could receive slightly over £88,000. Pension contributions can be a tax deductible business expense and be of value to both owners and employees. This should be reviewed regularly as a businesses and an individual’s circumstances change.
Pick the right legal structure
This is a commercial and a tax decision. From a tax point of view, sole traders and partners are taxed on profits as they are made, but they generally don’t pay employers national insurance and each person has a £10,000 tax free personal allowance. Shareholders only pay tax when they extract funds from the company either as salary or dividend, which means they can better manage their tax position, but the company pays tax on all its profits, but all of it at a rate of 20%. If circumstance change it is also possible to change your structure from a sole trader or partnership to a company. There are tax issues with this but you can obtain a significant tax advantage by selling the goodwill of your trading business as p[art of a transfer of your business to a company. After paying a 10% tax on the value of the goodwill, it becomes a loan to you as a shareholder which can be drawn out tax free and in some cases the write off of the goodwill is tax deductible. Timing is and valuing the business properly are critical here.