Is your business looking to grow, invest or trade abroad? What are the tax implications? We find out.
Is your business looking to grow, invest or trade abroad? What are the tax implications? We find out.
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 you do not need to pay more tax than you need to, says Andrew Scott, Corporate Tax manager at Ensors Chartered Accountants. There is a range of tax reliefs out there and it is important that businesses who meet the relevant conditions claim them.
It is vital that your tax affairs are conducted properly, not only to avoid being penalised but 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?
Yes, because you can claim Research & Development (R&D) tax credits and operate tax efficient employee share schemes, more on these below, but also as 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.
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.
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.
A mobile phone contract in the company's name is also a tax-free benefit and Corporation Tax relief can be claimed.
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. A full analysis needs to be undertaken.
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).
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) 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. You can earn up to £17,850 interest tax free and the company can get tax relief on this.
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.
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. Proper documentation needs to be drawn up and certain qualification criteria 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, says Andrew Scott, Corporate Tax manager at Ensors Chartered Accountants.
This relief enables the capital gain to be deferred by using the proceeds to invest in a qualifying company via a subscription for new shares. 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 the equity.
What tax breaks are there if my company is innovative?
If your company is an SME 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.
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.
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.
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.
Thanks to Andrew Scott of award winning accounting firm Ensors Chartered Accountants – with offices in Bury, Cambridge, Ipswich, Huntingdon, London and Saxmundham for help with this article. Email Andrew.scott@ensors.co.uk 01473 220074.
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