Legal, ethical tax savings – how difficult can that be for small businesses?
Comedian Jimmy Carr was mocked over it, Radio DJ Chris Moyles also failed spectacularly at it, Amazon, Google, Starbucks and Vodafone have all had a stab at it. So what chance have small business owners got to make legal, simple tax savings? Here’s our 3 step guide.
1. Find Your Most Tax Efficient Business Structure
This depends on your level of profits and whether you have any other income. Here is the comparison between a limited company and a sole trader with £10,000 profits and £40,000 profits. It assumes that:
you are a “one-man-band,”
you have no other income,
you extract your money from your business in the most tax efficient way
Total Tax Payable_______|_____454.45____|_______326.96
Net Personal Income_____|___9,545.55____|_____9,673.04
Total Tax Payable_______|_____460.80____|_______245.28
Net Personal Income_____|___9,539.20____|_____9,754.72
Total Tax Payable________|___9,154.45____|_____9,067.92
Net Personal Income______|__30,845.55____|____30,932.08
Total Tax Payable________|_____460.80____|_____6,245.28
Net Personal Income______|__33,539.20____|____33,754.72
2. Know Your Tax Deductible Expenses
An expense is allowable as a deduction for tax only if it is “wholly and exclusively” incurred for business purposes. This means the expense is needed for the business to make a profit. We have written separate guides home expenses you can claim if you are self employed and motor expenses you can claim if you are self employed.
3. Keep Track Of Your All Your Business Expenses
This sounds simple, but when you are busy running your business it is far from easy. This is why we recommend a cloud accounting product like Xero for keeping track of your business expenses. In addition to the automatic bank feed which always keeps your expenses records up to date:
The monthly subscription spreads the cost of the software.
All the upgrades are carried out by the supplier at no extra cost.
You can access your accounts any time, anywhere that has an internet connection.
All the data is stored securely in “the cloud”, continually backed up.
Your accountant can share your data in real time, so they can help you if you are stuck.
4. Bonus Tax Savings Tips
Keep records and receipts of all expenses claimed.
Make reasonable claims for business use so that you are happy you can justify to an Inland Revenue inspector if enquires are made.
Complete your expenses soon after the year-end so that this does not delay completion of your tax return.
Try not to use estimated expenses. These may be less than the actual amount spent and an inspector may disallow if these are not supported by evidence.
This post is designed to be used as a guide only. Your individual tax situation will depend on your specific circumstances. You should always seek the guidance of a suitably qualified accountant before making any tax planning decisions.
By Claire Georghiades FCA, Co-Founder of Accounts Resource.