Financial fitness workout – Did you know that tax can actually help you? Find out how!

by Jake Martin, Title Text

2 min read

You can also get more tax tips by watching my free webinar – Tax for entrepreneurs
Tax is one of those perennial bugbears for small businesses but in this workout we are going to look at how some taxes can actually help you in setting up and running your business.

Before starting, a quick health warning – this article is just an overview and not a substitute for tax advice.  However, often I find you need to know the right questions to ask to get the advice you need.

Also, if you are getting tax advice that seems unnecessarily complicated then it probably is.  Don’t let tax schemes make you lose sight of the basics of running a profitable business.

Here are my top things to be aware of:

Business structure

Your tax position is determined by your legal trading structure, i.e. whether you are a sole trader or limited company. Depending on your circumstances, one business structure could be more beneficial for you than another. For example:

Sole trader – you can use losses from your business to reduce your income tax bill and you also avoid the extra accountancy/tax fees you would incur if you were producing a tax return for a limited company.

Limited company – if you are looking to raise equity finance (when someone puts money into the business in exchange for shares – as in Dragons’ Den), then you will need a limited company in order to issue shares.  As profits increase, a limited company can save you tax, for example by paying yourself dividends rather than a salary – dividends don’t attract National Insurance.

Investor tax incentives

If you are looking to raise equity finance then there are some excellent tax breaks to attract investors.  Known as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), these schemes offer investors the following benefits:

  • Tax relief when making the investment
  • Generous Capital Gains Tax and Inheritance Tax breaks when selling the shares

These only apply to eligible businesses and there are caps on the amount to be raised.  If you are writing a business plan, it would be worth getting pre-clearance from HMRC that the business qualifies for these investor tax breaks.  This is quite easy to do.

R&D Tax Credits

If your accountant hasn’t told you about R&D Tax Credits then it’s time to shop around for a new accountant!  If you are liable for Corporation Tax for any expenditure “in the advancement of knowledge” (and this is pretty widely defined), you can claim 2.25x the expense against tax or get a potential repayment of tax subject to certain limits.

Share Option Plans

One way of motivating staff is to consider giving them share options so they feel part of the business.  A share option is a right to acquire a share in the future at a price set now.   If you grant these options using a Share Option Plan then potentially there is no tax when they are granted and a very low level of tax on any capital gains.

And finally, when you come to sell your business – provided you own at least 5% – then you should be aware of Entrepreneurs’ Relief, which will significantly reduce tax due! Most good accountants have a free newsletter – it’s worth signing up to these to keep abreast of developments in tax.
You can also get more tax tips by watching my free webinar – Tax for entrepreneurs

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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