Small businesses need to set their sights on growing their business in the full realisation that prudent financial administration lies at the heart of the growth strategy and that means ensuring all matters related to appropriate tax planning and keeping the taxman ‘onside’ are vital. Moreover, what are the financial incentives available to enhance your business growth?
Tricia Halliday, tax director at chartered accountants, Martin Aitken & Co takes a look.
There are numerous allowances and incentives to help businesses become more competitive. The following ideas and planning suggestions will help to make you aware of the main opportunities for minimising tax and maximising the cash you have in the business to put to a better use.
Preparing for year-end
To ensure you don’t miss out on valuable allowances and exemptions that you are entitled to, you should plan and take advice during the year rather than leaving until the end of the tax or your financial year. Those that leave it too late in the year often miss out on what they are entitled to and end up with larger tax bills.
The impact of bringing expenditure into this financial year, or deferring to the next, can have a significant impact on your tax position and financial results.
Taking profits from the business in the most tax efficient way which minimises your tax bill – and do consider the timing of paying dividends and bonuses as this can also reduce or defer tax. See Dividends comments below.
Maximising use of all allowances, credits and exemptions you are entitled to.
Making improvements to how you manage the business’s finances and record keeping can improve profitability and cash flow.
Employee remuneration and total reward planning. There are a range of tax incentives available for businesses looking to recruit, retain and incentivise talent.
The ten per cent dividend tax credit was abolished in April 2016, so that the dividend you now receive will be the taxable amount with no ‘grossing up’ adjustment necessary. Any dividends you currently take in excess of the £5,000 dividend allowance will attract an income tax liability.
Many owner managed businesses (OMBs) are likely to find themselves disadvantaged by this change. If you haven’t already considered changing the way in which you balance your income and dividend payments, you should consider the following:
Married couples and civil partners should make sure they spread their taxable portfolios between them, where possible, to ensure they fully utilise each of their dividend allowances, personal allowances and basic rate bands.
Taxpayers will see a tax increase of 7.5 per cent on dividend income received above £5,000 a year. This makes sheltering taxable investments in an ISA all the more important as unlimited dividends can be withdrawn from an ISA tax-free and there is no CGT to pay in an ISA. The personal ISA allowance increased to £20,000 this year.
Directors loan accounts
These are a popular form of remuneration for owner-managers. However, they can give rise to a benefit in kind in the hands of the director and tax liabilities for the company. If proceeds are to be extracted in this manner, it is worth considering repaying the loan within nine months of the end of the accounting period in which funds were withdrawn as this will ensure the company has no tax liability on the loan (currently 32.5 per cent).
Entrepreneur’s relief (ER)
When considering the possible sale of your business, entrepreneur’s relief (ER) should be at the forefront of your mind. ER allows the seller to access a ten per cent rate on the entire qualifying proceeds, thus preserving up to 90 per cent of the sale proceeds.
Shareholders should also consider the advantage of transferring shares to a spouse/civil partner. Each person has a £10 million lifetime limit for ER – spreading shares between spouses can double the lifetime limit to £20 million. As with many reliefs, there are a number of conditions to be satisfied.
Plan and invest
Capital Allowances (CAs) represent a valuable tax deduction for your business. They can be claimed on a wide variety of capital assets including plant, machinery, equipment, fixtures & fittings and vehicles.
There are a range of allowances available, including the Annual Investment Allowance (AIA), which offers a reduction in taxable profits of 100 per cent of the allowable expenditure. The current AIA limit is £200,000. Investment above this limit will attract the usual 18 per cent or eight per cent writing down allowances.
Research and development = reward
If your company has been engaged in research or process improvements, you should speak to your tax accountant to check if the associated expenditure qualifies for research and development (R&D) relief. Broadly speaking, your company can claim an additional 130 per cent on qualifying (the definition is wider than you would probably think) R&D costs. The rewards available are an enhanced tax deduction or a cash payment from HMRC.
If you are thinking about selling a business asset and a gain is likely to accrue – before you do, make sure you tax advantage the sale. For instance, tax due on an asset sale can be delayed by reinvesting the proceeds in another qualifying asset. If you sell your business you could, by reinvesting the proceeds in a qualifying trading venture, further reduce your tax bill on the sale.
Do you hold a patent? If so, you could reduce your tax bill. Profits from qualifying patent interests can be taxed at rates as low as ten per cent thus providing effective tax rate benefits. New measures were introduced this year to cover R&D undertaken by two or more companies under a cost sharing arrangement.
Enterprise investment scheme (EIS) & Seed EIS
EIS offers 30 per cent income tax relief on investments up to £1 million and no CGT is due when the shares are sold. EIS also offers CGT deferral relief. Seed EIS is targeted at companies looking to raise funds in their first two years of trading. Fifty per cent income tax relief is available on investments of up to £100,000 and again no CGT is payable when the shares are sold. Conditions apply.
Investment in venture capital trusts (VCTs)
An indirect investment in small companies enables the taxpayer investor to benefit from 30 per cent income tax relief on investments of up to £200,000 with a CGT exemption on the sale of VCT units. Conditions do apply so it is worth a conversation with your tax accountant or financial adviser to explore further.
Salary sacrifice schemes
The tax and NIC advantage of these schemes was removed from April 2017, except for arrangements relating to pensions, childcare, cycle to work and ultra-low emission cars. If your existing scheme offered benefits beyond those listed they will be protected until April 2018 and arrangements for cars, accommodation and school fees will be protected until 2021.
Save tax by doing good
Tax breaks for social investment expanded fivefold from April 2017. A social enterprise can now raise up to £1.5 million over its lifetime from individual investors (there are a few qualification rules). The tax relief for the investor is 30 per cent of the value of a qualifying investment. So, if you are thinking about lending a social enterprise £15,000 this year you may well qualify for a £4,500 reduction in your tax bill this year, as well as a potential capital gains tax deferral.
Business grants and incentives
Although not specifically a tax planning issue, there are a range of private and public sector grants available to businesses at all stages: pre-start, start-up, early stage and those looking to scale up to achieve their full potential. If you are creating jobs, safeguarding jobs, developing new products, services or processes or undertaking R&D then it is worth a conversation with us to find out if your project will qualify for any grants or incentives.
Tricia Halliday is tax director at chartered accountants, Martin Aitken & Co