What are the tax implications of growing your business?
1st June 2018 by Ann Minson
Is paying tax a good thing?
If your business pays tax, then usually this means you have made a profit, which is a good thing, but we don’t want you to pay more tax than you need to. Our partner-led tax team at Ensors gives expert guidance backed by our thorough knowledge of the latest rules. We have extensive experience of helping clients to claim the main tax reliefs out there – and there are more than you may think. We believe it is important that your business claims everything it is entitled to.
It is vital that your tax affairs are conducted properly - not only to avoid being penalised but we at Ensors look ahead for you and if you plan to sell your business, it will be worth more to any potential buyers without the prospect of any legal claims for negligence.
Is it more tax efficient to run my business through a company?
There are two answers here, depending on your business circumstances.
Yes, because you can claim Research and Development (R&D) tax credits and operate tax efficient employee share schemes, more on these below. Also, if you run your business through a company, you can extract the profits as dividends which carry a lower effective rate of tax up to a certain point.
No, if a business owner is generating profits over £150,000 which he or she is looking to extract in full by themselves, as the sole trader method of taxation can work out better, circumstances permitting.
We can explain which will be the most tax efficient way for you to run your business.
What tax-free benefits can I have?
Generally, if your business pays for a personal expense, it is taxable but there are still a few tax perks to be taken advantage of.
We advise our clients that if you own a company, the business can pay up to £40,000 per year into your pension pot tax free but this allowance is tapered if you earn more than £150,000. The company also obtains tax relief. You can use any unused allowances of the previous three years, if you were a member of a pension scheme.
The Ensors tax team are not only experts in tax-free benefits, but our affiliated investment advisers can find the most appropriate pension scheme for you and your business, and our award-winning pensions’ team can offer a range of services, such as accounts preparation, audit, bank account management, pensioner payroll and employer covenant reviews, should your business have or is looking to set up its own scheme.
A mobile phone contract in the company’s name is also a tax-free benefit and the company can claim Corporation Tax relief.
Is it tax efficient to have a company car?
It has become less tax efficient to have a company car, due to increases in car benefit tax rates. Generally, in cases where the car’s CO2 emissions are very low, or the vehicle is a van or pick-up with a lower benefit charge, it can work out better to put the vehicle through the company.
In most cases, it is better tax-wise to be paid a cash allowance by the business to fund a personal car and claim mileage (proper records need to be kept – and we can help with those).
We can undertake a full analysis for you and advise you whether a company car, company van or a cash allowance is the way for your business.
With the increase in dividend tax rates, is there a more tax efficient way of extracting profits from my company?
Most company owners pay themselves by drawing a low salary (£8,424 for the current tax year) with the remainder in dividends, as these carry no National Insurance liabilities.
The tax-free dividend allowance has been cut from £5,000 to £2,000 from 6 April 2018. If your company is looking for funds to grow and you have spare cash, you could loan money to the business and charge a commercial rate of interest. We can set this up for you and you can earn up to £17,850 interest tax free - and the company can get tax relief on these payments.
How I can retain and reward highly-skilled, key employees who will grow my company?
One way to incentivise key staff is to offer them shares in the company, as they will then have a stake in the business. If the shares are offered below market value, there will be tax implications and we can guide you through these.
By setting up a tax-advantaged scheme, certain employees can have the option of buying shares at a later date (with a potentially higher value) at a lower price with beneficial tax treatment. We can help in arranging for the proper documentation to be drawn up and ensure certain qualification criteria are met.
How can I invest tax efficiently in scaling up my company?
If your business has progressed from seed stage and you’re looking to fund a scale-up without giving away further equity, then if you have sold another asset which has resulted in a capital gain, you could look to claim EIS reinvestment relief.
This relief enables the capital gain to be deferred by using the proceeds to invest via a subscription for new shares in your company, providing it qualifies.
The Ensors tax team can guide you through this as there are several conditions and the capital gain must have arisen at a certain time. Reinvestment relief is unique, as other forms of EIS relief are not available to shareholders who own more than 30% of a company.
What tax breaks are there if my company is innovative?
You want to grow, and we want to help. If your company is an SME (Small to Medium Enterprise) carrying on projects exploring advances in science or technology, say by developing a new product or process, the costs may qualify for R&D tax breaks equivalent to 33.35p for every £1 of qualifying expenditure for loss-making companies and 43.7p for every £1 if profit making.
In addition, the Patent Box enables companies exploiting patented inventions to benefit from an effective 10% Corporation Tax rate on these profits. The company must own or exclusively license-in the patents and must have undertaken qualifying development on them. We can advise if your business meets these criteria.
What tax incentives are there if my business is investing in new premises?
Although buildings themselves do not generally qualify for initial tax reliefs (except where used for qualifying R&D purposes), certain fixtures including fixed plant and machinery, water, electrical and lighting systems qualify for capital allowances. Each business is entitled to a 100% Annual Investment Allowance (AIA) of up to £200,000 of qualifying capital expenditure, with reduced rates in excess of this limit.
We can ensure all the relevant tax relief is claimed for you.
In addition to the AIA, businesses can also claim 100% Enhanced Capital Allowances on energy-saving and water-efficient items on the Government’s Energy and Water Technology Lists. It is always worth checking the suppliers listed on these when planning to develop a business property, again, we can advise here.
What are the main tax implications of trading abroad to take advantage of Brexit?
As the UK moves closer to leaving the European Union, some businesses are looking to sell their goods and services to customers around the world. Whilst the VAT rules can be complicated, another issue is the prospect of customers deducting Withholding Tax (WHT) when paying your invoices.
The UK operates Double Tax Treaties with many countries and these could allow payments to be made without the deduction of WHT. Double tax relief may potentially be claimed by UK businesses to relieve WHT against their UK tax bill but the qualification conditions are complex.
At Ensors, we can advise you if your business can claim double tax relief. We are also well-connected internationally and are part of an overseas network of accountants who can help your business set up abroad.
We keep up to date with the latest tax legislation and compliance changes, ensuring that if you qualify for a tax relief, we can claim it for you.
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