How to make your small business tax-efficient

Small businesses in the UK can reduce their tax bill legitimately through allowable expenses, capital allowances, tax reliefs, and efficient VAT accounting.

Finding ways to reduce your small business tax bill can expand your margins, improve your cash flow and strengthen your business model overall.

Make sure you understand the taxes you need to pay and you won’t end up paying too much.

What taxes does a small business pay in the UK?

The tax you pay depends on your business structure.

If you are a sole trader or a partnership, then you’ll mainly pay income tax, with which you should be familiar if you’ve ever been employed.

However, if your business is a limited company then the arrangement is a little more complicated.

The company itself (which is a separate legal entity from you) pays corporation tax on any profits it makes.

You then need to decide how to take an income from the company, on which you may be taxed on again.

Other taxes that your business may need to pay include:

• Business rates

• VAT

• Employer’s NI contributions

Find out more about business tax.

Without expert help from an accountant in managing your tax, there is a risk that you may pay too much (because you really don’t want to risk paying too little and being penalised by HMRC).

There are, however plenty of acceptable ways you can reduce your tax bill – provided you know what you’re doing.

What expenses can a small business claim to reduce its tax bill?

The simplest way to reduce your tax liability is to claim legitimate deductible business expenses.

Here is a sample list:

• Office costs: From basic stationery to your phone bills

• Travel: This includes fuel, train and bus fairs and parking

• Clothing: Uniforms or anything you wear specifically for work

• Staff costs: Salaries and subcontractor costs all count

• Stock and raw materials: Anything you buy to sell on may qualify

• Financial outlay: This can include bank charges and insurance premiums

• Running your premises: Things like heating, lighting and business rates are legitimate expenses

• Marketing: Your advertising and marketing costs, such as money spent on maintaining your website

What is the Annual Investment Allowance (AIA and how much can businesses claim?

Don’t forget that you can claim up to £1 million in capital allowances for certain asset purchases, such as laptops, commercial vehicles, office equipment, and integrated building systems for your business, through your tax return.

You can find out more about what to claim and over which period on HMRC’s website.

You can only claim AIA during the period in which you bought the item, and there are strict rules about what you can claim for and when. 

How can a business use losses to reduce its tax bill?

If your business makes a loss in any given tax year, such as from trading, through selling assets or on property income, you can usually claim relief from corporation tax by offsetting the losses against profits.

Business owners offset losses via their company tax return, or via self-assessment if operating as a sole trader or partner.

If you wish, you can carry over losses to offset against future years’ profits, thus reducing the tax you need to pay next year (for example).

You can even carry losses back to previous years’ profits, provided they were made in the same trade.

How can VAT accounting improve small business cash flow?

VAT accounting can improve small business cash flow by allowing businesses to retain VAT income temporarily before the payment deadline.

For instance, you can take in VAT income and retain it for a short time before you have to pay it back out.

This can provide you with access to ready cash at times when you need it most.

Here are some simple tips to help you hold on to your money for longer.

• Set up your invoice to get paid quickly, then try to ensure you don’t have to pay the VAT until the next quarter.

• Agree on terms that give you as much time as possible to pay suppliers.

• When buying expensive things for your business, try to do it at the end of the quarter or just after the VAT return period. This will reduce your VAT bill.

• Remember the ‘flat rate’ scheme for businesses with a turnover up to £150,000. The flat rate VAT scheme allows you to pay a percentage rate each quarter that’s relevant to your business sector and does away with complicated preparations. It can save you both time and money.

What tax reliefs are available to small businesses in the UK?

Small businesses in the UK can claim several tax reliefs to encourage business growth, including R&D credits, patent relief, employment allowance, and business rates relief.

See which of the following you may be eligible for:

Research and development (R&D)

The UK government allows your business to claim tax credits for R&D work.

Many small businesses still haven’t taken advantage of this scheme, designed to reward innovation, and it’s estimated that there is £84 billion in unclaimed tax relief available to small and medium-sized enterprises (SMEs) across the UK.

Patent tax relief

Another way to reap the rewards of innovating is to claim tax relief on profits generated by patented inventions.

You’ll probably need the help of an accountant, but this is well worth investigating if your business holds any patents.

Employment allowance

If you currently pay Class 1 National Insurance, you could save up to £10,500 a year on this bill by claiming the employment allowance.

Employment allowance is a government tax relief designed to support growing businesses by giving them a credit to offset their payroll tax costs.

It allows eligible employers to reduce their annual Employer Class 1 National Insurance contributions (NICs) bill by up to £10,500. With the employer NI rate sitting at 15%, this relief is one of the most effective ways to lower your staffing overheads. 

Most businesses with at least one employee can claim it but you cannot claim if you are a single-director company and the only empoyee. Following recent rule changes, the previous £100,000 eligibility cap has been removed, meaning larger small businesses are no longer locked out of claiming it.

Business rates

There’s tax relief for your business if you own a property that has a rateable value of up to £15,000.

In many cases you can reduce the business rates bill to zero.

Why should small businesses avoid tax avoidance schemes?

Tax avoidance schemes carry significant financial risk and should be avoided, even when marketed as legitimate tax planning.

Although the mechanisms used may in themselves be legal, such schemes as a whole may fall foul of HMRC if their only purpose is to avoid paying tax.

Schemes like these are often marketed as legitimate tax planning, wealth management or investment opportunities.

Tax avoidance schemes should however be treated with extreme caution, and can end up costing you far more in the long run.

Ask your accountant to help you find the best legitimate ways of improving your business’s tax efficiency.

Get help from a business tax expert

Making your business tax-efficient can require some work, as you may need to claim for any tax relief, schemes or allowances, but an accountant can make this easier.

Unbiased can quickly match you with a qualified financial adviser or accountant.