Last reviewed 22 December 2021
As the UK has one of the most complex tax systems in the world, making sure your business is claiming all the tax reliefs it can should be a priority. Here we discover that many small business owners are unaware of many tax reliefs they could be claiming to reduce their tax bills.
Reducing the amount of tax your enterprise pays each year can be achieved if you understand which tax reliefs your business is entitled to claim.
Some tax reliefs, such as deductions made for expenses, are often not exploited to their full extent. Here, the expertise of an accountant more than pays for their fees. In addition, each year, the tax rules change. Therefore, understanding what can legally be claimed and the threshold for those claims needs to be clearly understood and then applied to your business’s accounts.
“One deduction that is often misunderstood by entrepreneurs is the concept of Capital Allowances,” says Asif Ahmed. He advises the Government on tax issues related to small business and is the author of The Finance Playbook for Entrepreneurs.
“This is the process by which tax relief is provided for purchasing capital items or assets for the business. Whilst accountants and tax advisors will ensure SMEs benefit from whatever they might be eligible for, entrepreneurs often do not think to plan their procurement of assets in line with their financial year. For example, it is naturally inefficient to purchase an asset the week after the closing of your financial year if you could have bought it a week earlier and obtained a tax deduction and cash flow efficiency.”
The key to ensuring your business pays the least amount of tax is always to be aware of how your business is structured and how the cost of doing business can impact your tax liability.
And as Asif points out, look at the strategic plans you have for next year and whether new purchasing will be necessary. Capital Allowances is an excellent example of a tax relief that is often overlooked. And with the green agenda impacting all businesses, buying energy-efficient equipment may also qualify for tax relief. With the ability to make a tax reduction claim on these purchases, it literally pays your business always to be tax aware of every purchase you make.
What to claim
Speaking to Karen Whitehead, KEW Accountants and Tax Specialists, Croner-i asked whether there is a general lack of awareness of some tax reliefs business owners can legally claim?
Karen replied: “There is a lack of awareness as to how their tax liability can be legitimately reduced. Often small business will make claims for expenses that they would not be allowed if HMRC ever looked closely at their accounts, but they do not claim legitimate expenses that would help reduce their tax liability without causing any issues.”
Karen also explained: “R&D is still the main relief that is overlooked by small companies. Small companies tend to fear making a claim. However, they need to make sure that the claims are made properly and for legitimate costs.”
Is it very easy to push the pursuit of tax relief to the point where the action could be seen as tax evasion? Karen responded: “The short answer to this is no. Tax relief is either allowable or not allowable, and tax evasion is simply claiming tax relief that shouldn't be claimed. A business owner will know if they are evading tax. However, our tax system is very complicated, and it is full of strange rules that make no sense in the normal sense.
“I have many disagreements with clients who believe they should be allowed a certain expense,” Karen continued. “And whilst I can agree with them that it should be allowable, the tax rules say something different. There used to be an advert on TV that said: ‘Tax does not have to be taxing.’ Well, I am afraid that tax is taxing! There are so many pages of legislation that make up our tax system and so many changes at least annually — sometimes more often — that unless you work in tax every day, it is impossible to understand precisely what you are allowed.
“The biggest mistake that small businesses make is not taking advice before they start. Turning up after the year end has passed, with their records, is too late to do any tax planning or ensure that they are set up correctly or advise them on record-keeping. We all must pay tax and whilst no one should be seeking to evade it, no one should be paying more than their fair share either.”
Also, look closely at all of the payments you are making. For instance, it may be possible to pay your pension contributions via your company. If your business needs to make large purchases, the Annual Investment Allowance can be used to reduce your Corporation Tax Bill effectively. And if you happen to have a cash surplus, you could pay your Corporation Tax early. If you did, HMRC would pay you interest of 0.5%. Don't forget, though, that the interest you earn is taxable.
It may seem trivial, but putting in place systems that capture every legitimate business expense is a critical component of the tax planning for your business. No matter how small the expense, get a receipt.
Today it’s very easy to scan these receipts with apps for your mobile phone. Expensify and NetReceipts are good examples. Many of these apps also seamlessly connect to the leading accounting applications, capturing and then entering expenses effortlessly. For instance, Dext connections with Xero and QuickBooks.
With the rise of remote mass working, running a business from home has massively expanded. As a result, many business owners are building garden offices to work from. When you come to sell your home, there may be tax implications to consider. It’s vital to take advice from your accountant regarding how these buildings are paid for.
If your business is innovating with new products, R&D Tax Relief is available, but so too is the Patent Box scheme. The patents your business may already have (qualifying inventions from 2013 can be claimed for) and future patents can attract a 10% reduction in your company’s Corporation Tax. And if your business is in the creative industries, you may be able to claim Creative Industries tax reliefs (CITRs). There is a range of specific reliefs within CITR, depending on which creative industry your business operates within.
New business start-ups may also claim under the Seed Investment Scheme, which offers generous tax advantages to anyone who invests in your business. An established company may also be able to use the Enhanced Capital Allowance (ECA) scheme. Always assess the eligibility criteria for these reliefs carefully.
As no two businesses are the same, the tax reliefs they could potentially claim will always be unique to them. The key is to educate yourself about your business process, your expenses, and what plans you have for your enterprise in the future. This information, along with a close working relationship with your accountant, will ensure your business is claiming every tax relief it is entitled to.