How to Manage Tax Efficiently: 5 Simple Steps
Accountancy Partnership MD Lee Murphy explains how to keep your small business tax compliant - while maximising revenues
Small businesses face many challenges; however, finance can be one of the hardest to get to grips with. It can be a major distraction from the day-to-day ‘doing’, and many businesses simply don’t have time to keep abreast of ever-changing tax rules and regulations. This often results in a lack of confidence in how to manage the business in the most tax efficient way.
However, a sound financial footing is the bedrock for any successful business which is why it’s crucial to have a firm understanding on matters including taxation, storage of accurate business records and regulatory compliance – right from the start.
Communication with HMRC
Although dealing with the tax man may seem daunting, it is crucial that you remain in contact with HMRC, and especially HMRC advice when it comes to paying what you owe. Failure to comply with HMRC will result in penalty charges being issued, along with interest if due. This can come as a crippling bill to fledging businesses as well as established firms. If you are struggling to pay your tax bill, contact HMRC to sort out a payment schedule which is manageable.
HMRC uses a variety of different media in order to publicise and inform self -employed people about their tax obligations. These include television, radio, newspapers and direct mail. These campaigns emphasise the need for self-employed people to comply with the law and give deadlines for completing the forms. A hotline has also been set up for people to report anyone not registering as self-employed and evading paying tax.
During times of economic difficulty, it is especially important to maximise revenue. Make sure that you are claiming all expenses, allowances and tax reliefs which you may be eligible for. Claiming for expenditure or allowances will reduce the amount of profit which is taxable, legitimately reducing your tax bill. If your profit has dropped during the last year, you may want to contact HMRC and ask for payments on account to be reduced accordingly.
However, be aware that if you reduce payments on account but profits increase, you may be charged a penalty. A number of studies have shown that more than a third of the UK’s small and medium-sized enterprises are missing out on significant tax savings they are entitled to. Put simply, businesses that aren’t claiming back all the expenses they are entitled to are really putting themselves at a competitive disadvantage.
Due to the changing nature of tax many business owners are put off digging into the detail and fully understanding what can be refunded. For instance, basics like fuel, tea/coffee and biscuits in a business context are all reclaimable, and could save businesses hundreds of pounds each year.
You should register for VAT if your turnover reaches a specified annual amount. However, for some companies, it may be beneficial to register for VAT on a voluntary basis. This is a complex subject and you may wish to seek professional advice before making a decision. You may also wish to consider the VAT Cash Accounting Scheme which means you only pay VAT on the amount of cash which you collect from clients. This is useful for those companies which have more credit sales than cash-based.
Payment – Salaries, dividends and National Insurance
The payment structure is always good place to start when looking specifically at how small businesses can legitimately reduce company tax liabilities. A low level of salary is always required to ensure a certain level of National Insurance contribution to attract state benefits.
However, additional sums can then be paid out in dividends, which are often more tax efficient and do not attract National Insurance contributions either. It is also worth considering giving shares to your spouse or civil partner. This gifting of shares is usually tax free and your company will then be able to pay dividends to both of you, using two lots of basic rate tax; effectively this is around £40,000 tax free.
In conjunction with this another area to consider is the 10% entrepreneurs’ relief rate, applied to capital gains when selling the company. This is a benefit to your spouse or partner if they are a director or employee.
Paperwork – Outsourcing to a professional
Most small businesses will not hold formal board meetings, however HMRC still expects a certain standard of paperwork, especially concerning Director Loan Accounts and dividends. It is highly recommended to keep notes, or even an email, to support the planning which has been carried out. The reason it is imperative that business records are maintained accurately is that HMRC has the power to carry out random checks and issue penalties for any records which are not accurate or up to date.
It’s easy to fall behind and make errors when maintaining the books, which is why it is sometimes preferable to outsource to a professional. And also it is important to have good bookkeeping software as the government is introducing a new regime ‘Making Tax Digital’. The MTD scheme will require digital tax accounts from all taxpayers, individuals and businesses. Eventually, this will mean the end to the tax return. For businesses, the most significant change is the requirement for digital record keeping. This will involve the use of software or apps to record income and expenditure, which can submit information to HMRC once every three months.
At the Accountancy Partnership we have developed our own free software called Pandle to enable businesses to comply with this fundamental change. But keeping accurate records in a timely manner will also help you plan and forecast for your company in the long term. Don’t miss filing deadlines as you will incur charges which increase if your tax return remains outstanding.
Lee Murphy founder of The Accountancy Partnership and cloud accounting software Pandle.