Updated 31 May 2022
Every business should aim to be as tax-efficient as possible. Finding legitimate 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.
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 again.
Other taxes that your business may need to may include
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.
The simplest way to reduce your tax liability is to claim for legitimate deductible business expenses. Here is a sample list:
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. You do this via your company tax return (or your self-assessment tax return if you are 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).
Although you may think of VAT accounting as simply a chore, it can in fact improve your cash flow if you know what to do.
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 give you access to ready cash at the times when you most need it. Here are some simply tips that can help you hang on to your cash for longer.
A number of tax reliefs are available to encourage business growth. See which of the following you may be eligible for.
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 owed to SMEs across the UK.
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.
If you currently pay Class 1 National Insurance, you could save up to £3,000 a year from this bill.
Tax avoidance schemes are typically complex and convoluted arrangements that allow businesses and individuals to reduce or avoid their tax obligations. 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.
Such schemes are often marketed as legitimate tax planning, wealth management or investment opportunities. They 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.