How to make your small business tax-efficient

First published 05 February 2019 • Updated 23 September 2019

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.

1. What taxes does my business pay?
2. Deductible expenses
3. Offsetting losses against profits
4. Boosting cash flow with VAT accounting
5. Making use of tax reliefs
6. Avoiding tax avoidance schemes!

What taxes does my business pay?

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 again.

Other taxes that your business may need to may 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.

Deductible expenses

The simplest way to reduce your tax liability is to claim for 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

Offset losses against your profits

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).

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

Boost cash flow with VAT accounting

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.

• 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 terms that give you as much time as possible to pay suppliers.
• When buying expensive things for your business, try and 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. This 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.

Make use of tax reliefs

A number of tax reliefs are available to encourage business growth. 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 owed to 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 £3,000 a year from this bill.

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 a lot of cases you can reduce the business rates bill to zero.

Avoid tax avoidance schemes!

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.