I’ve noticed a big difference between the businesses that start off with a tax strategy and those that try to develop one once the business is up and running.
Those that prepare early and are proactive in their tax planning tend to last longer and grow more quickly.
That’s not to say that you shouldn’t bother planning your taxes if you do become an established business – to butcher the old phrase: “The best time to plan your taxes was yesterday. The second-best time is right now!”
As a start-up or small business, you will primarily deal with Corporation Tax (if you’re a limited company), VAT (if your profits are above the £90,000 threshold), and Income Tax which is paid on earnings from employment and profits from self-employment.
Corporation Tax is levied on your profits once you become a limited company – unincorporated businesses like sole traders must pay Income Tax instead.
The current rates are set at 19 per cent for businesses with taxable profits of £50,000 or less and 25 per cent for those making £250,000 or more, with an effective rate of 26.5% applying to profits between those levels.
VAT (Value Added Tax) applies if your taxable turnover exceeds £90,000, and you will need to register with HM Revenue & Customs (HMRC) to pay it.
We know that you probably already understand your tax rates and responsibilities, but what can you do to mitigate them?
Essential tax mitigation strategies for start-ups
At Scholes CA, we believe that effectively managing your tax liabilities starts with utilising available tax reliefs and allowances to reduce the amount of tax you pay.
Once you’ve implemented this you can move on to more advanced tax strategies, which we’ll discuss later.
As many of our clients are Scottish, they can often use specific incentives like the Business Growth Accelerator relief that are provided by the Scottish Government.
Specifically, this relief allows businesses to delay any increase in property rates that would normally arise from making improvements to their property or from moving into previously unoccupied properties.
Under this scheme, there is no increase in rates due for 12 months following the completion of improvements or from the start of occupation of new properties.
In effect, the Scottish Government is trying to encourage investment and growth by easing the immediate financial burden of higher rates, thus supporting your business’s early expansion and economic development within the community.
This can be particularly advantageous for our Scottish clients who are considering substantial property developments or are moving into new premises, as it provides a financial cushion that can help facilitate these changes when margins are tight.
The Government in Westminster offers different forms of regional relief that may affect your tax situation depending on your business location so, for our English readers, please reach out and we’d be happy to discuss this with you.
On a more general note, the Annual Investment Allowance (AIA) (which applies to all businesses in the UK) permits any business to deduct the full value of expenditure on qualifying plant & machinery from your profits before tax.
This can be incredibly beneficial when you’re just setting up your operation, allowing for up to £1 million in deductions.
Companies can also now claim relief for qualifying capital expenditure under the ‘full expensing’ regime which provides a 100 percent deduction for main rate expenditure.
Similarly, Enhanced Capital Allowances allow you to invest in environmentally friendly equipment and machinery for your business and to write off 100 percent of the cost of the investment against the taxable profits of the period in which the investment is made.
The immediate benefit of which is improving the cash flow of your business in the early stages of growth.
Employment Allowance is another strategic relief, reducing up to £5,000 from your business’s yearly National Insurance liability if your Class 1 NICs were less than £100,000 in the previous tax year.
This is a direct saving that can support hiring or investment back into your business if you have a smaller team.
A note on R&D opportunities
If your company is engaged in innovative projects, Research & Development (R&D) Tax Credits offer a way to reduce your Corporation Tax.
Your company may be able to claim enhanced relief for expenditure on research & development projects which meet specific criteria. This is not limited to 'high-tech' companies but is available to any company undertaking relevant innovations.
(We’re happy to talk you through which kinds of projects are eligible for R&D relief).
Other key considerations
Choosing the correct business structure can be a difficult choice. Operating as a sole trader, partnership, or limited company affects your tax obligations and potential liabilities.
Limited companies typically offer greater tax efficiency through options like salary and dividend payments to directors/shareholders, but this comes with additional reporting and management responsibilities and a Corporation Tax liability.
Conversely, sole traders and partnerships must pay Income Tax as the profits generated by the business are considered as earnings for the proprietors, rather than for the business itself.
Understanding how Capital Gains Tax (CGT) works is also essential in the early stages of business development.
If you are considering selling business assets or shares, CGT is charged on the gain you realise upon the sale, with the rate depending on your overall taxable income.
Planning for CGT involves timing sales at the end of your financial year to defer tax payments or using reliefs such as Business Asset Disposal Relief (previously known as Entrepreneurs' Relief), which reduces the CGT rate to 10 per cent on qualifying assets.
Finally, and on a personal tax note, we often recommend looking into Inheritance Tax (IHT) and succession planning – to ensure your business passes to your heirs with minimal tax impact – early on in business development.
IHT can apply to business assets just like it would to any other part of your estate, and without proper planning, your heirs could face significant tax burdens should the worst happen.
Business Relief for IHT, however, allows for up to 100 per cent relief on some business assets, which can exempt certain assets from IHT entirely.
Talking to clients, estate planning is often a common concern, so please speak to our team for help structuring your assets if you are in the same position.
In short, effective tax planning is crucial for any business, but it’s particularly important during the dynamic early stages of start-ups and small businesses.
The best thing you can do if you are just starting out is to discuss the above strategies with a professional.
We can tailor these strategies to your specific circumstances and can provide substantial financial benefits as a result.
