‘Over the years, successive governments have eroded most of the tax breaks and credits available to business,’ laments Ian Young of the tax faculty at the Institute of Chartered Accountants in England and Wales. ‘It’s a bit of an alien concept for HM Revenue and Customs (HMRC) to give away money.’ Nevertheless, there are steps that business owners can take to reduce the tax burden.
Tax credits
One of the major breaks that companies should be aware of, according to Neil Pamplin, tax adviser to the g2i investment readiness programme, is the availability of research and development (R&D) tax relief. ‘It’s a low cost, low risk, easy method of reducing your tax bill,’ he says.
If you are a technology or software company, for example, HMRC could give you money back on R&D activity, allowing you to deduct up to 150 per cent of qualifying expenditure over £10,000 when calculating profit for tax purposes. As yet, there is no upper limit on the amount you can claim but that is set to change after March 2008. However, companies can still claim on revenues dated back to April 2000.
Pensions and partnerships
As pension contributions do not attract National Insurance charges, they can also be a way of saving on tax. Members of personal pension schemes can get tax relief on contributions up to 100 per cent of earnings up to £225000 annually for the tax year 2007-2008.
A basic-rate taxpayer putting 78p of their taxed income into a pension will qualify for the government to top it up to £1. Higher-rate taxpayers will get a further 18p.
With increasing red tape surrounding employment, there is a view that bringing on senior staff as partners rather than employees can be a benefit. It reduces not only the administrative responsibility but the need to deal with PAYE and the tax issues it raises.
‘As a limited liability partnership you move away from corporation tax and towards self-employed tax rates,’ says Bryan Wilsher, chief financial officer at creative agency Loewy.
Push and pull
Reducing tax is an area that is increasingly difficult to negotiate. However, if the need to reduce tax is to ease cash flow, there are measures that can ensure that a business at least holds onto its tax money for longer. Wilsher explains: ‘If a business is cyclical in its sales, say it makes most of its sales over Christmas, it might be worth doing something as simple as selecting an accounting date that falls before its peak profit period. It won’t lower the tax bill per se, but it will mean that you keep your tax for another year.’
