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What are the tax implications of growing a business?

By
Andrew Scott of Ensors.
Is paying tax a good thing?
If your business pays tax, usually this means you have made a profit, which is great, but you don’t want to pay more tax than you need to.  Make sure you obtain expert guidance regarding the latest rules. 

It is vital that your tax affairs are conducted properly – if, in the future you plan to sell your business, a potential buyer will consider the proposition more seriously when there isn’t the prospect of any legal claims for negligence.   

Is it more tax efficient to run a business through a company?

It depends on your business circumstances as to the answer to this question. Yes, because you can claim Research and Development (R&D) tax credits and operate tax efficient employee share schemes. 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 your business is generating profits over £150,000 which you’re looking to extract in full, as the sole trader method of taxation can work out better, circumstances permitting.   Take professional advice from an accountant as to the most tax efficient way for you to run your business.  

What tax-free benefits can you have?

Generally, if your business pays for a personal expense, it is taxable but there are still a few tax perks to take 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 during that period. 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, where a car’s CO2 emissions are very low, or the vehicle is a van or pick-up with a lower benefit charge, it can be advisable to put the vehicle through the company.   Tax-wise it is better to be paid a cash allowance by the business to fund a personal car and claim mileage (proper records must be kept).  

What is the most tax efficient way of extracting profits from a 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.  You can earn up to £17,850 interest tax free - and the company can get tax relief on these payments.

How can an employer retain and reward highly-skilled, key employees who will grow the 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. 

How can a business owner invest tax efficiently in scaling up a 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. 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 a company is innovative?

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.  Certain other criteria need to be met.

 

What tax incentives are there if a 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, however the qualification conditions are complex.  For advice and support with any of the details featured in this blog, contact MENTA Patron, Ensors Chartered Accountants, who have offices across Suffolk and Cambridgeshire and have the expertise you need to grow your business. www.ensors.co.uk

 

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