Good planning is essential for all businesses, yet when it comes to tax planning, it can often seem overwhelming. There is a myriad of different schemes and relief options to reduce taxes out there in the UK, but digging around to find out which ones you are eligible for can be time-consuming and confusing.
To simplify things, here are 8 ready-made solutions to reduce your taxes as a small business owner in the UK.
1. Keep your accounts organised
Maintain a good record system so that you can make claims for everything you are entitled to. Good organisation is especially important when you start your business because it will pay off later.
As your company grows, your costs and expenditures will become much more complex, so it is vital to maintain a good tracking system right from the beginning. Staying organised is so important because a common reason why HMRC often doesn’t allow expense claims due to inadequate or incomplete records. Don’t let messy records stop you from saving money!
Don’t forget to keep records of your previous year’s taxes, too, just in case HMRC requests to see old copies of your accounts. Learn more about how long to keep your tax records and what to keep.
To keep yourself organised, you may also consider using financial planning tools so that you’re able to verify your company’s financial health.
2. Claim work from home benefits
If you’re self-employed and work from home, your business will have various running costs which overlap with your home expenses. Some of these expenses will include electricity, internet bills, heating, rent, stationery, water bills, and printing costs.
Since these expenses apply to both personal and business life, you may not think to include these as part of your business costs. However, many of these are in fact allowable business expenses and can be used to reduce your taxable profit.
If you have a particular room you use to work from (i.e. an office) in your home, you are also allowed to use the “Use of Home” claim as a business expense. This claim can be used when you work more than 25 hours per month from home and can be quite substantial. To claim this benefit, you can either work out your office space and related business expenses as a proportion of your total home expenses, or you can use a flat rate calculation. The flat rate depends on the number of hours you work from home a month, up to £26 per month.
For more information on the use of home expenses, read here.
3. Look into the flat rate VAT scheme
Are you aware of the UK’s Flat Rate VAT scheme? Under this scheme, you pay a flat rate of VAT based on which industry your business belongs to.
This option differs from the traditional method which is calculated manually on a quarterly basis from the difference between the VAT earned on your sales and the VAT spent on your costs.
By using the flat rate versus the manual calculation, you can’t claim VAT back on your business expenses, but you could save a significant amount on your VAT sales because the percentage is much lower. For example, the current flat rate for accountants and bookkeepers is 14.5% versus the traditional rate of 20%.
Not many businesses know about this scheme, but it can be a huge source of savings for some, depending on your industry. To calculate potential savings, check the flat rate for your industry.
Also, take a look at our guide on how to reclaim VAT when running a small business.
4. Use the R&D tax relief allowance
Research and development (R&D) tax relief is a government scheme which aims to reward UK companies for investing in innovation. The average claim made by SMEs in the UK was £61,514 (for the 2015-16 tax year), so the savings can be sizeable.
To be eligible, your company must be taking on risk by attempting to ‘resolve scientific or technological uncertainties’. These types of activities include creating new products, processes or services, or could even include modifying an existing product to make it better, so the conditions are quite broad.
Few businesses know about this opportunity to reduce taxes, but it doesn’t matter what size or sector your business is in, as long as you are liable for corporation tax. Sole Traders and LLPs are not currently eligible. It’s interesting to note that the R&D doesn’t have to be successful. You are still eligible to apply for tax relief whether your R&D is successful, whether you are doing it yourself, or hiring someone else to do it for you.
5. Hire an accountant
If you’ve been putting off hiring an accountant for financial reasons you could, in fact, be costing your company money rather than saving it. A knowledgeable accountant can make a huge difference by offering excellent tax support. They can help you take advantage of tax incentive schemes, or can provide guidance on which areas to claim tax relief on your filings, among other things.
If you already have an accountant and don’t feel they are currently offering this level of support, perhaps it is time to look for a new one!
Bear in mind that an accountant not just calculates your taxes, but they can also save you money.
6. Pay taxes on time
This may seem obvious, but a shocking number of self-employed people and small businesses still incur a late filing fee every single year. Just this year, 746,000 self-employed people in the UK failed to file their taxes on time.
For small businesses, not filing your taxes on time can have serious financial consequence. You can be fined up to £3,000 or more, depending on how late and often you fail to pay on time. These tax penalties are not tax-deductible.
7. Claim capital allowance on company assets
For a lot of businesses, large amounts of capital are often needed for big one-off purchases. Sometimes these big expenses are needed before your business even gets off the ground and can be a big hit to profit margins. These items might include machinery, equipment, or vehicles.
The good news is that some of the amount spent on business assets can be deducted from what the business owes in tax. By claiming capital allowance, HMRC allows you to deduct some or all of the value of the assets purchased from your profits and to reduce taxable income. You can also claim on the finance costs for buying the assets for your business too, making this worth looking into.
8. Claiming taxes back from patented inventions and intellectual property
The Patent Box was introduced by the UK government to provide incentives to grow the level of patenting of IP (Intellectual Property) in the UK and the associated high-value jobs created. The initiative enables companies to apply a lower tax rate to profits earned from their patented inventions and equivalent forms of intellectual property for any earnings after April 1, 2013.
To apply, you must make representations to HMRC. Eligible companies claiming under the Patent Box enjoy a Corporation Tax rate of 10% for those profits attributable to profits from patents. If your business has a patent or is thinking about pursuing one, the Patent Box may be a good scheme to research!