TAX PLANNING FOR SMALL BUSINESSES Tips for keeping your tax returns to a minimum AUGUST 2013
Tax Planning Efficient tax planning is key to maximising cash generation and growth of your business
When it comes to tax planning, the professional advice of a tax consultant proves to be invaluable for small businesses, entrepreneurs and startups. A tax consultant can help you: •stay up to date with the latest corporation tax reliefs and rates available for small businesses in the UK •make the most of the allowances, tax deductions and exemptions that apply to your specific activity and business structure •find the most tax-efficient solution for profit distribution, under the form of salary or dividends •optimise your tax returns bill by carefully considering other personal income and pension arrangements
Tax Planning What need to be considered when thinking about tax planning for Small Business Owners Dividends
SHAREHOLDER / OWNERTAXATION
Employee Salaries
Owner’s Salary
Personal Allowances
Company taxation
Corporate Allowances
CORPORATION TAX
Small Business owners need to balance personal taxation against company taxation
EMPLOYEE TAXATION
Employee Allowances
Corporation Tax The more tax deductible expense you identify the less tax you pay: But it’s not always obvious what is tax deductible and what is not
NOT TAX DEDUCTIBLE
Travel between home and office Entertaining clients Gifts for clients Purchasing property Company cars(1)
COMPLETELY TAX DEDUCTIBLE
Travel expenses (other than company cars) Mileage using your own vehicle (for work) Subsistence expenses e.g. lunch while out Hotel and meals (for work purposes) Telephone expenses (for work purposes) Use of home as office
Professional subscriptions, Training, Reference Books and Journals
The majority of small businesses don’t claim all of the tax deductions available to them Note: 1.Company cars are normally treated as a taxable benefit for employees. Although they are normally tax deductible for businesses, we have put them on this list because businesses can only reclaim 50% of the VAT paid unless the car is exclusively used for business purposes , so this ends up being pretty expensive. General: for the expenses listed as tax deductible, they still need to be incurred “wholly and exclusively in the course of business”
Corporation Tax Although individually relatively small using all available tax deductions can knock several percent off your tax bill
CASE STUDY: LONDON RECRUITMENT AGENT WITH £300k TURNOVER Profile: £300k turnover, 3 employees, several offsite client meeting per week, no company car but own sometimes used
Travel, Subsistence & PIEs(1)
Two offsite meetings and lunch / week
£300
Business Mileage
Two 5 mile round trips / week
£100
Telephone Expenses
Based on typical mobile and broadband rates
£100
Use of home as office
Based on conservative HMRC guidelines
£30
Equipment purchases
One laptop, printer and software / year
£200
Professional Subscriptions
Two trade magazine subscriptions
£60
TOTAL
£790
For more details on this worked example click here Note: 1.PIE = Personal Incidental Expense
= 9% decrease in corporation tax
Shareholder Taxation What need to be considered when thinking about shareholder taxation? Dividends
SHAREHOLDER / OWNERTAXATION
Employee Salaries
Owner’s Salary
Personal Allowances
Company taxation
Corporate Allowances
CORPORATION TAX
Striking the right balance between dividends and salary is the key to efficiently extracting cash from your business
EMPLOYEE TAXATION
Employee Allowances
Shareholder Taxation Significant net tax saving by using dividends rather than a large salary to extract cash from the business
CASE STUDY: WHAT’S THE COST OF DRAWING £50k NET FROM THE BUSINESS? Small salary + All salary
dividend
FUNDS TO OWNER Salary Dividend Total
74,201 74,201
9,440 44,748 54,188
COST TO EMPLOYEE Income tax NI ees
19,502 4,699
3,985 203
9,178 14,740
241 -
18,639 50,000
4,428 50,000
COST TO COMPANY NI ers Corporation tax saving Net deductions Net cash out
20%
-
INCOME TAX ON DIVIDEND Basic rate Higher rate Additional rate Dividend tax
32,010.00 17,709.63 -
Tax rate 10% 32.50% 37.50%
Dividend tax 3,985 3,985
Salary: net cost = £68k Dividend: net cost = £54k
Reducing salary to tax free allowance of £9,440 and drawing the rest as dividends would save approximately £14k in tax
Shareholder Taxation Is it always the case that drawing dividends is more tax effective than salaries? Net cost (£)
Salary
Dividend
Cash extracted (£k)
Yes – even though you dividend tax increases in bands, it is always cheaper to draw a small salary and the balance as dividends
Employee Taxation What need to be considered when thinking about tax planning for Small Business Owners Dividends
SHAREHOLDER / OWNERTAXATION
Employee Salaries
Owner’s Salary
Personal Allowances
Company taxation
Corporate Allowances
CORPORATION TAX
Small Business owners need to balance personal taxation against company taxation
EMPLOYEE TAXATION
Employee Allowances
Employee Taxation Offering tax free benefits to employees instead of increasing salaries on a yearly basis is both tax efficient and motivational
NOT TAX DEDUCTIBLE
Health insurance Gym membership Overseas incentive trips for employees Excessive corporate hospitality
COMPLETELY TAX DEDUCTIBLE
Mobile phones Travel expenses Pension contributions Interest free loans Eye tests
For more details on this worked example click here Note: for the expenses listed as tax deductible, they still need to be incurred “wholly and exclusively in the course of business”
Tax Planning Summary
Corporation tax • Make use of all deductions and exemptions available for small businesses in the UK Shareholder tax • A ‘low salary high dividends’ scheme proves to be the most tax-efficient payment solution for most small business owners Employee taxation • Consider offering tax free benefits to your employees rather than pay increases
And last but not least, use the assistance and guidance of a tax consultant
Tax Planning Thanks
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Thank you for reading! Need further help with figuring out what are the best suited tax planning solutions for your small business? Our tax consultants are happy to answer any of your questions. Contact Us
CONFIDENTIAL
This research has been collated by Accounts and Legal Consultants Ltd (the “Accountant�), solely for informational purposes which provides indicative and general guidance. The information provided is general and will not be applicable in all cases, and specific guidance should be sought before completing tax returns. It does not purport to offer legal, investment or commercial advice and may not be relied upon as such. The report may not be copied or distributed by recipients to third parties without the prior written consent of the Accountant. The Accountant does not make any representation or warranty (express or implied) as to the accuracy or completeness of this research or any of the information contained or referred to herein, and shall not have any liability resulting from the use of, or any omissions from it. All requests for additional information should be made to: Accounts and Legal Consultants Ltd 0207 043 4000 20 Kentish Town Road London NW1 9NX