Top Ten Year-End Tax Planning Tips for Small Businesses

*Please note the information in this article may be out of date

Tax planning for small businesses is not always straightforward, in fact it can be a serious minefield for the unwary. The chances are however that you and your business could almost certainly pay less in tax, with help from your tax advisor. Here are some tips to get you started.

Mon, 25 Mar 2019

Your business year-end is the day your financial period ends and also the deadline for some serious tax planning. For business owners, there are effectively two types of year-end planning.

Firstly, there’s personal year-end planning – making sure that you are making tax efficient pension contributions, using up your ISA allowance or, for sophisticated investors, investing in EIS/SEIS. The key date for this type of personal financial planning is 5 April.

For the purposes of this article, I am going concentrate on business year-end planning, based on your own accounting date. For most sole traders, this will be 31 March; for limited company owners, it will be the company’s financial year-end date.

Tax planning for small businesses is not always straightforward, in fact it can be a serious minefield for the unwary. The chances are however that you and your business could almost certainly pay less in tax, with help from your tax advisor. Here’s ten top tax saving ideas to get the ball rolling.

1. Invest your profit

It almost goes without saying that the easiest way to reduce your tax bill is to spend all your business profit. Many small businesses make major purchase of items like vans, computers, office equipment, machinery, etc. toward the end of their financial year. These qualify for an immediate 100% tax deduction under the annual investment allowance

Be careful that that business year-end tax planning should generally only be about accelerating expenditure that you need to make in the next 6 months or so, it’s not worth spending your hard-earned profit just to save tax.

2. Defer Business Income

If your business supplies goods, you could consider delaying the completion of sales until after your accounting year-end date, in order that that the profit falls into the following period, as commercial pressures allow of course.

For businesses supplying services, it’s tempting to attempt to defer income by delaying the issuing of an invoice.  However if you supply a single service for a single payment, the tax point reverts to the date the service was complete so all of the income which has effectively been earned by the accounting date counts as sales, whether invoiced or not. VAT Registered businesses must also, by law, invoice within 30 days of completion of work.

Nevertheless, where commercial pressure allows, you could consider putting off a modest amount of work until after your year end, whereby the income earned by that date is reduced.

One interesting anomaly here would be if you expect your profit, and tax rate, to rise next year. In this case, you may wish to consider doing the opposite and accelerating income and/or deferring expenses in order to bring more taxable income into the current year. This would, for sole traders, enable you to pay tax on your expected profit at 20% rather than 40% by using up your basic rate band in the current year. For limited company directors, the same tactic would be used to maximise the 7.5% dividend tax at the basic rate and avoid the 32.5% higher rate charge.

3. Change Your Accounting Date

One rather more radical year-end tax planning strategy you could consider would be to change your accounting year-end itself. Not all businesses owners are aware that they can change their financial year-end at least once every six years. Why would you choose to so do?

Company owners may be able to save tax by extending their accounting period if the company’s profits are falling or, conversely, by shortening their accounting period when profits are rising.

Sole traders and partnerships may also benefit from changes to their accounting date in a limited number of cases.

4. Perform a VAT Healthcheck

Here at TaxKings, we are constantly surprised at the amount of business owners losing out by being unaware of VAT considerations. If you think it’s just inputs and outputs, you may wish to seek a VAT Review with your accountant. There are a great many considerations that should be taken into account in relation to VAT. By way of example:

-    Could you benefit from voluntary registration?

-    Would cash accounting would be beneficial for your business?

-    Would the flat rate scheme work for you?

If your clients are mainly VAT Registered businesses and you are not registered for VAT then there is no real downside to voluntary registration as you will be able to reclaim VAT on everything from your fuel to your accountancy fee, at no cost to your customers.

Cash accounting allows you to pay VAT only when you have been paid for an invoice rather than at the point of sale. This can greatly improve cashflow - you never again pay VAT on an unpaid invoice.

Many businesses are unaware of the Flat Rate VAT scheme which, for some, can be an unexpected source of profit. Under the scheme, you pay a single, flat rate of VAT on your turnover. You choose the rate most applicable for your business, apply the percentage to your gross turnover and pay this to HMRC. We have a client who saves £8,000 annually on this scheme. Do note that it does not generally apply to limited cost traders, such as freelancers and consultants.

5. Pay yourself tax efficiently

Consider how you extract funds from the business. If you trade through a limited company, paying a small salary up to your personal allowance and the rest as dividends will save some tax and national insurance but needs monitoring on a regular basis.

It may also be beneficial to pay your spouse or family member for the work they undertake, dependent upon their other income.

One of the most common questions we are asked is about a company car. Each case needs to be considered on a case by case basis, but generally it’s more tax efficient to own your own vehicle personally and claim mileage using HMRC authorised mileage rates. If you have a limited company, in most cases this will also avoid higher rate tax on company cars.

If you are a sole trader, consider incorporating your business. Although recent changes have made this less attractive than previously, the lower rate of corporation tax still often makes it worthwhile to become a limited company. Small companies do not make payments of tax on account, so this can also improve your business’s cashflow.

6. Keep it in the Family

Transferring part of your business - creating a partnership or the gifting of shares in your company - to other members of the family who work in the business is a useful option, making use of any unused allowances they may have. Care should be taken not to create problems in regard to control or capital gains tax so always seek advice first from your tax adviser.

For connected businesses e.g. wife has business, husband also has his own business, see points 1 & 2 and consider making extra sales to connected businesses in advance of your year-end.

If you’re married or in a civil partnership, it might be sensible to transfer income-producing assets (such as rental income) to a spouse to take advantage of their lower tax rates.

7. Treat your staff

It always surprises us at TaxKings how few businesses take advantage of tax-free benefits, either for themselves of their staff, such as a mobile phone in the name of the business where all phone costs are tax deductible.

Companies making pension contributions on behalf of their employees and directors will also save Corporation Tax at 19%.

Directly-contracted childcare is where your company sets up an arrangement with a childcare provider on your behalf and pays the costs directly. Directly-contracted childcare can be paid on top of your normal pay and there is no income tax or National Insurance to pay on the benefit, if its value is within a set limit and certain other conditions are met. You also save the National Insurance that you would normally pay on provision of a benefit

Annual Christmas parties, or alternative yearly functions - which are open to all staff and cost no more than £150 a head in total - offer a tax-free benefit, even to sole director companies (you can include a partner!). While the estimated benefit is not huge, the application is universal.

For those with staff, a tax free financial benefit of up to £5,000 can be paid where an employee makes a cost saving suggestion and the suggestion is implemented. Certain conditions must be met however it is astonishing how many business owners are unaware of this scheme.

The above suggestions are non-exhaustive. See point 9.

8. Be organised and make plans in good time

Tax planning should always be done in advance of your year-end so that you can decide if you need to take any further action to reduce your tax bill before it’s too late. However to assess how your business is performing and review its tax position, it is absolutely crucial that you have a bookkeeping system in place that allows you to access business information in real time. A cloud based system like QuickBooks is not only massively beneficial but will keep you compliant with HMRC’s Making Tax Digital strategy.

Combining this with a receipt managing tool, such as ReceiptBank, also saves you tax by ensuring that you are claiming for everything you are entitled to by never again losing a receipt.

Using bookkeeping solutions that give great functionality - think bank feeds, expense/mileage trackers, phone apps etc. - also allows you to spend more time on your business, for which it will surely benefit.

9. Speak to your accountant

Business owners are often heard to complain about lack of advice from their accountant and how they only ever hear from them when they have a tax bill to pay. Other small business owners may not even have an accountant and believe that it is an unnecessary overhead and that a business banking app will do much the same job. 

The truth is that the business owners who are paying as little tax as possible are those who regard their accountant as a trusted business adviser. If you don’t talk to your accountant, change accountant. Cheap accounting services, focusing on compliance only, may seem attractive on the surface. However bad advice or no advice ultimately costs you time and money. On the other hand, a pro-active tax adviser will ensure that you have fully considered your options, allowing you to minimise tax and protect your future wealth.

Not all accountants the same. It is rarely beneficial to compare services like you would with, say, a new mobile phone contract.

10. Surround yourself with a good team

Financial advice is often confused with the tax advice that an accountant should give, however the two are not usually the same. Moreover, having the right advice about possible investments and savings thresholds can also save tax.

While an approachable and knowledgeable tax adviser will undoubtedly save you tax, a financial adviser looks at different circumstances to an accountant, being less involved in the immediate tax implications and more concerned with the big picture and the longer term outlook, specifically with regard to how your business integrates with your life and your financial goals.

Naturally there will be an overlap with taxation rules and regulations and it’s therefore essential that your tax adviser and financial adviser should be working with your best interests in mind. Indeed, it is never a bad idea to have them working together or in constant communication. We at TaxKings work closely with our partner, Independent Financial Advice World Ltd, and clients are able to access joint meetings at our office.

Summary

Hopefully something you’ve read here will save you some tax before the end of your next accounting year. Naturally all businesses are different and we can’t cover everything here so, if you are a small business owner, why not contact us for a FREE consultation to see how we can help you save tax and, at the same time, free you to manage and grow your business?