It is important to constantly review company taxes. If you are looking after the finances of an SME, here are 6 actions you can take to reduce the tax bill. Jonathan Amponsah CTA FCCA, The Tax Guys advises
Claim these 7 overlooked expenses
Where you’ve incurred expenses wholly and exclusively for the purpose of your trade or business and you have some evidence to back this up, these should be claimed first. Then review and claim the following 7 areas which are often overlooked in practice:
- Provision for directors’ remuneration to be paid up to nine months your accounting year
- Bad debt provision (make sure you have taken steps to recover the money)
- Interest paid, including on loans you have made to the business
- Use of home as office (reasonable amounts only to avoid more tax later)
- Lease premiums
- Warranty provisions
- Stock provisions, especially in cases where items of costs are worth less than they cost
Claim R &D tax relief
Normally when you incur a legitimate business expense wholly and exclusively for the purpose of your trade, you get to claim 100% of these expenses against your business income to reduce your tax bill. But what if the tax rules allow you to claim a lot more than 100%? Say you get to claim £230 even though you’ve only physically spent £100?
That’s what the Research and Development (R&D) tax relief allows you to do. So if you have a company in the creative, engineering, software or any innovative industry where you’re solving difficult problems for customers and raising the bar in your industry, please speak to your accountant or a specialist tax adviser about R&D tax relief before 31 March.
Review your pensions
Pension contributions currently receive up to 45% tax relief. For example, a £1,000 investment into a self-invested personal pension (SIPP) benefits from 20% basic rate tax relief (£250) added automatically. Higher-rate taxpayers can claim up to a further £250 in tax relief, while 45% rate taxpayers can claim back up to £312.50.
Contributions in excess of the annual allowance (currently £40,000 for most people) will be subject to a tax charge. Remember you can’t normally take money out of a pension until you’re 55 (57 from 2028).
But if you’re a director of your own company, it is possible for the company to pay into your pension pot (say SIPP or SSAS) for you as part of your remuneration. Then instead of merely leaving the funds in there until you’re say 55, you can leverage the funds and get a second bite of the tax cherry. How? These pension schemes (say a SIPP) subject to certain rules can be used to buy, say, a commercial property and the rental income gets additional tax benefits. No bad is it? But as with all the guidance and tips given in this article, please do speak with a qualified professional before proceeding with any tax or investment decisions.
Review your income recognition policy
If you normally receive money before carrying out work, the income should be shown in your accounts when you’ve performed the work. And this should be matched with the costs and expenses of doing the work. By not reviewing this, you could be paying more tax earlier than you should do. let’s say you’ve received £5,000 in March for training courses or website development work to be delivered in say April, make sure this is not shown as income (hence profits) in your March accounts to avoid overpaying your taxes early.
Explore Enterprise Investment Scheme (EIS)/Seed Enterprise Investment Scheme (SEIS)
The above schemes offer some really generous tax breaks in the form of income tax refunds, free capital gains tax and free inheritance tax for investors. Essentially if you invest in an SEIS registered business, you get to claim 50% of the investment back against any tax income tax you’ve already paid at source. Plus, you don’t pay any capital gains tax if you sell the investment at a profit after three years. There are conditions to meet so please speak with a qualified adviser before proceeding.
Make Your Tax Digital
If you’re a VAT registered business, you’re probably aware that from 1 April 2019 you will have to keep your records digitally and provide your VAT return information to HMRC through a Making Tax Digital (MTD) compatible software. If your system is not compatible you may not be able to submit your VAT returns and risk incurring VAT surcharges. To reduce the impact of MTD on your business and avoid unnecessary costs, start planning now and delegate this task to your accountant, bookkeeper or relevant in house personal.
By planning ahead, you can significantly reduce your tax bill – so it’s worth spending the time with your accountant to action some of the above options. It many cases you’ll save much more than the cost of your accountant/advisor.