Don't pay too much tax!

You work hard as a business owner, so why does the tax man have to take so much of your hard-earned profits? There are many ways to legitimately reduce your tax bill and keep hold of your money, says Paul Pritchard. Here are just a few of them: 1. Have the correct business structure Whether it be a sole trader, partnership, limited company or LLP, the correct choice depends on your individual circumstances, so you will need to obtain advice from a good accountant. It’s possible to save thousands of pounds by switching from a sole trader to a limited company. Not everybody can save such a huge amount, but most businesses could benefit from a review at least once every year to ensure they are operating in the most tax-efficient way. 2. Accurate records Having proper bookkeeping systems in place is essential. How can you make important business decisions if you don’t know how the business is performing? Maintaining good records and understanding what they mean could potentially save you money in tax, as they will allow to you make tax-planning decisions before it’s too late. Good records can also show the different spending trends of your clients, as well as pre-warning you of any quieter periods that may lay ahead. This in turn means you can tailor your marketing and special offers to coincide with the demands of your client base. A good bookkeeping system will also free up your time, allowing you to focus on what you do best, such as serving the needs of your clients. 3. Business expenses If you’re running your own business, then don’t forget to claim all your tax-deductible expenses, including cash expenditure where eligible. You probably already claim for your materials, insurances, memberships, staff costs etc, but have you really claimed for everything? What about your mobile phone bill, advertising, stationery, and that occasional use of a room in your home where you wrote up your business records? All of these (and many more) are allowable expenses providing you can show they are used in the course of carrying out your business. 4. Vehicle expenses If you use a car for your work, then make sure you are claiming all the expenses you are entitled to. You basically have two options available to you: l You claim capital allowances whereby you have the car as an asset in your business and claim all the running costs such as fuel, insurance, repairs and interest on loans; or l You claim a flat rate for each business mile travelled. Currently this is 45p per mile for the first 10,000 miles and then 25p per mile thereafter. This can potentially be a minefield, so be careful and ensure you get advice from your accountant before choosing which route to go down. 5. Annual investment allowance Did you know that if you run your own business, you can take advantage of the annual investment allowance (AIA) to claim for capital expenditure on items such as tools, equipment, furniture and computers? From January 2013, you can claim relief on up to £250,000 a year! 6. Tax return deadlines It may sound obvious, but don’t miss HMRC’s deadlines! At the end of the 2011/2012 tax year, HMRC issued about half a million demands for £1,200 or more – a total of over £600m in penalties that could have been avoided by submitting returns on time. The main deadlines for the self-employed are 31 October (if you file your tax return on paper), or 31 January (if you file your tax return electronically). 7. Setting your accounting date If you’re setting up as self-employed, you may be able to improve your cashflow by choosing an accounting year that ends early in the tax year. This maximises the delay between earning your profits and your final tax demand. So, while it won’t actually reduce the amount of tax you pay, it will allow you longer to find the money thus helping your finances during those critical early months of business. 8. Utilising losses Many new businesses make a loss in their first year of trading. If you are self-employed, you can carry forward these losses from one year and offset them against profits from the next year. You may also be able to offset these losses against tax you have paid under PAYE during the year if applicable. 9. Payments on account Self-employed persons have to make ‘payments on account’ to HMRC – basically paying some tax in advance for the following year. If, for whatever reason, you expect your profits to go down, then you can reduce these payments accordingly. You can even reduce these payments to nothing, although be aware that you could face interest and penalties if you reduce them but subsequently find that they should have been paid. Once again, this is something your accountant will be able to advise you on, and while it may not save you from paying any extra tax, it can certainly help you with your cashflow. 10. Have a great accountant A good accountant will understand your business and help you to grow and become more successful. They will become a virtual member of your team, and save you many times their fee in tax planning and advice. And it doesn’t matter where in the UK they are based – most accountants can offer an online solution that saves you both time and a considerable amount of money. Benjamin Franklin once famously said: “Certainty? In this world nothing is certain but death and taxes.” While this may be true, there is much we can do to reduce the amount of tax we pay – and keep hold of more of those hard-earned profits! Paul Pritchard is the owner of Abacus Accountancy (GB), prior to which he was a professional hairdresser. www.abacus-accountancy.com Email: [email protected]