You’ve had your big idea, honed your business plan and decided to take the plunge into being your own boss and start up. Tax might be the last thing on your mind as you’ve just started your business and work to build your customer-base, suppliers and administration. But don’t bury your head in the sand: a little time spent planning for tax issues now will reap benefits in the long-term as you’ll be set up for the long-term from the outset. Here are five top tax tips to ensure you’re properly set up as a start up from the word ‘go’:
Think about business structure and tax
While a sole trader setup is the most simple option, there comes a point where incorporating the business to operate as a limited company means you’ll pay less tax because you can draw out some profit as dividends which have a lower effective tax rate. The definitive position depends on how much cash you need to draw from the business as well as any other sources of income you may have. Sole traders can offset any losses against other income, whereas companies can use losses against other company income but not against the income of an individual shareholder. However, using a company allows you to plan the timing of withdrawal of profits if your tax rate is likely to decrease. There are also non tax related advantages to operating as a limited company such as increased perception of professionalism and limited liability in the event of business failure.
Plan who will be involved
It’s possible to use the tax allowances of a non-working spouse to minimise the tax you pay as a family. For 2012-2013 the tax-free allowance is £8,105: even above this level dividends paid to a basic rate tax payer attract an effective tax rate of 0% because of the tax credit applied. Everyone is entitled to receive annual income of £8,105 with no tax deducted so using a spouse’s allowance can double the household’s tax free income.
Think about whether you need an accountant
Do you know your AIA from your WDA? Your VAT from your FRS? An accountant may seem like an expense you can do without, but often they will save you money by making you aware of allowances and claims you would otherwise have missed. But beware: anyone can call themselves an accountant as the term is not protected so ensure they are a member of a professional body such as the Institute of Chartered Accountants in England and Wales (ICAEW) or the Association of Chartered Certified Accountants (ACCA). Many offer a free half hour consultation to small businesses.
Monitor your expenses
Most expenses can be claimed in your company or sole trader accounts as long as they are ‘wholly and exclusively for the purposes of the trade’. This includes premises costs, wages and salaries, utilities, administration costs and professional fees. If you run your business from home you can claim a reasonable proportion of domestic overheads. Keep receipts for all purchases, bills for all utilities and records of expenses such as hotel incurred when visiting clients. This will make your life a great deal easier when preparing end of year accounts and tax returns. Key expenses which are not allowable for tax purposes are company formation costs, depreciation and client entertaining so these must be added back to your accounting profit when calculating your tax liability.
Plan ahead for VAT
Broadly speaking, once your turnover of VAT taxable goods or services exceeds £77,000 (2012-2013 figure) you must register for VAT. You can register voluntarily if you feel this would be beneficial: this may be the case if you suffer VAT on purchases and wish to reclaim the tax you have paid. There are schemes available to small businesses which simplify the administrative and cash flow burden including the cash accounting scheme and the flat rate scheme. If you’re charging VAT remember that certain things must be included on your VAT invoice: see http://www.hmrc.gov.uk/vat/managing/charging/vat-invoices.htm for details.
Author: Sarah Gardner is a Chartered Accountant specialising in tax advice at TWP Accounting LLP. She specialises in helping small businesses with their start up tax planning and assisting growing businesses with their ongoing tax issues. TWP Accounting provides accounting, audit, corporate finance and tax services to businesses nationwide.
If you have any questions contact firstname.lastname@example.org, visit www.twpaccounting.co.uk or follow @SarahGardnerACA and @twpaccountants on Twitter.