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Croucher Needham CNM Advisory are an accountancy firm in Essex, Hertfordshire and Bedfordshire with a big difference. We are growing our business by being advisory focused first, recognising that the compliance and red tape burden of being in business still needs to be dealt with effectively (which we do!) but is of secondary importance to the owners of small and medium sized businesses.
By frequently talking to clients about how they can grow the profits of their business, reduce their tax cost by using our 10 Top Tax Tips and create more time to spend on the things that are important to them, we help them achieve their goals and ambitions.
There are many opportunities for the owners of small and medium sized businesses to mitigate their tax cost by implementing so that they only pay the amount they are legally required to. Here our 10 Top Tax Tips for business owners:
1. Get your profit extraction strategy right.
It still surprises us how many owner managed businesses we come across where little thought has been given to how to extract profits from the business tax effectively. With the reduction in corporate tax rates in recent years, this top tax tip of extracting profits by way of dividends has a lower tax cost when compared to salary and bonuses, not least because of the National Insurance savings but also because of the tax rates applied to dividends. Don’t forget to make sure you are paying a base level of salary to maintain your National Insurance contributions and to ensure you don’t fall foul of national minimum wage legislation. Get the balance right and you will see a significant saving in your tax cost for the same level of cash outflow from the business.
2. How about different dividend rates? Get some Alphabet shares.
Many of the businesses we work with are family owned and it is not uncommon to witness the challenges of a family member trying to drive the business forward and wanting to be remunerated accordingly but having to face up to a diverse group of shareholders who also want a share of the dividend pie. One way of addressing this is to introduce a different class of shares which can have the same rights as an existing class of share so as not to disadvantage anyone but with one crucial difference – the dividend rate can be varied. This doesn’t sidestep the issue of having to have the conversation with other family members about how levels of remuneration and reward should reflect each persons role in the business, that the business shouldn’t be a gravy train for the family, but once done it is an effective tool for achieving the differential rewards sought. If you are still into using dividend waivers on a regular basis for managing profit extraction, beware of recent HMRC case law that has largely addressed this process of manipulation.
3. Avoid the 62% tax rate. Yes, that rate does exist!
You don’t see this rate published widely which is a bit of a surprise depending on your point of view. For this top tax tip, you need to keep an eye out for when your gross income sits between £100k – £120k and don’t forget this will include salary plus the gross value of dividends and any benefits in kind you may have. In this band, your personal allowances are reduced by £100 for £200 you earn above the £100k. That together with the impact of National Insurance means you end up with an effective tax rate of 62% for your income between £100k – £120k. If you’re in that scenario, take a look at pension planning opportunities or options relating to how other family members in the business are remunerated.
4. Capital allowances on commercial property. Act now why you still can.
Since 2012, the tax legislation has changed in this area meaning greater care needs to be taken to identify the ‘integral features’ within a building at the time of a property transaction. However, it is still the case that opportunities exist for considerable tax savings where clients have or are thinking about acquiring commercial property. The top tax tip here is to identify the component parts of a building that are eligible for capital allowances and, if you think of typical property transaction process, usually this sort of issue isn’t addressed. Furthermore, this isn’t the sort of thing you can normally pick up by just reviewing invoices. You need the skills of someone who combines tax knowledge with the skills of a Chartered Surveyor and by knowing the right people, as we do, getting them involved on a timely basis can and does realise considerable reductions in tax costs. If you have acquired commercial property in the last 2 years or are thinking of buying, then talk to us. We know the right people and can help you find the right solutions to maximise your capital allowances.
5. Operating as a sole trader or partnership? Incorporation might be for you.
For many business owners, the set up route when they start in business is as a partnership or sole trader. As time goes by and the business grows, it’s brand, customer list, employee expertise, business knowhow and other IP grows in value is well. In this top tax tip, all of this ‘goodwill’ in the business is valued and recognised on a company balance sheet upon incorporation. This in turn provides a tax efficient means of drawing cash from the business as the flip side of bringing the goodwill onto the balance sheet is the creation of a directors loan account which can be drawn from rather than other forms of profit extraction.
6. Tax reliefs for being innovative? That’s R&D Tax credits.
One of the biggest opportunities here is dispelling the myth in the minds of business owners that tax relief for Research and Development activity is only available for those businesses that have staff working in laboratories coming up with new ideas. The key to this is to think about how you build and maintain your competitive advantage. How does your business innovate? Where does the creativity come from? Usually, a discussion with us about these sort of activities your business undertakes allows us to give you an indication of the possibilities that exist for claiming this very valuable tax relief, a relief that allows small and medium sized business to claim a tax deduction based on 225% of the eligible costs. And don’t just rely on what your existing accountant has told you. You shouldn’t expect accountants to know all the in’s and out’s of tax legislation – it’s too vast and complex, which is why you should always talk with someone who has a great track record in securing R&D tax claims for clients.
7. What’s in the Box? How the Patent Box regime benefits innovative businesses.
What if your business is well established, generating profits and your innovations of the past have been patented? Then Patent Box could be a very valuable tax relief for you. Introduced from 2014 with full implementation by 2017, this will see profits arising from the sale of eligible products or services being taxed at 10%. That is a considerable tax advantage! At the same time, why not take another look at your patent process? When you understand the detail of tax legislation as we do, you realise that to be eligible for this tax relief, the patent doesn’t need exist in the same way as you might create one for protecting your commercial interests worldwide or within Europe and therefore a UK patent can be a cost effective route to securing a reduction in tax costs in the future.
8. How about bringing family members into the business?
For many owner managed businesses, bringing family members into the business can provide opportunities to extract profits tax effectively. Just be sure to deal with all of the usual steps you would normally in employing somebody including employment contracts. HMRC will also look to ensure that the amount they are being remunerated is commensurate with the role they are performing. The use of different classes of shares can also help in creating different dividend streams. Beware the use of dividend waivers – see Top Tax Tip No. 2.
9. Company car tax can cost a small fortune.
It won’t come as a surprise to know that running a car through a company can result in a hefty tax bill if the vehicle has high CO2 emissions. In a recent example we reviewed, a company director was able to increase his net take home pay by a near 5 figure sum by switching from his Range Rover to a hybrid Porsche Panamera. The differences won’t always be this big but by reviewing the situation across the business and having an awareness of how the tax rules will change in next few years, strategies can be developed to realise considerable tax savings either by changing the vehicle to something more energy efficient or even taking the vehicle out of the business.
10. Exit plans for the future, retaining and motivating key people in your team.
You will have no doubt heard it time and time again that the most successful business owners have a pretty clear idea of what they want to achieve with their business. If you are one of those that doesn’t know what the end game looks like, then we should have another discussion! If you do have an idea of where you are heading, this is likely to include the development and retention of key employees in the business to help you achieve your goals. There are a variety of share option routes available to business owners for use in rewarding key staff, which when implemented effectively can provide a very tax efficient way of rewarding their performance. The aim here is to big the size of the ‘sale value’ cake so much bigger such that the amount you are left with is bigger than would have been the case if those key staff weren’t motivated in the same way.
All of these top tax tips are intended to give a brief guide of tax planning opportunities that exist for business owners. They are not sufficiently detailed to be the basis of robust tax planning. If you are thinking of implementing any of the above solutions or want to explore your options, call us.
Croucher Needham CNM is an accountancy practice with a twist. We help the owners of small and medium sized companies to increase their profits, mitigate their tax costs and create more time to spend on the things that are important to them. We take ideas to our clients that help them achieve their goals and we agree fees up front with them for implementation, with not a timesheet in sight. How refreshing is that! And while we are it, how about a 100% money back guarantee? Take a look at our customer promise. After all, we are a little bit different!