If you are running your own business the complexity of our tax rules may feel something of a burden. However, you need to face the fear, get advice and avoid making some of the following mistakes.
1. Tax planning after the event
When you’re busy it’s easy to make decisions on the hoof. Then at the end of the year you try to piece some planning together even though all the events have already happened without much thought. Unless you prepare and plan for taxes, it’s likely that you will pay more tax. Alongside your business plan have a tax plan.
2. Poor record keeping
Collating all your receipts is a necessary chore. For VAT registered business owners, failing to get keep them is a common mistake and like throwing money away. Apps like Auto Entry, Expensify and Receipt Bank mean that you can keep proper tax records and easily snap the receipts on the go. The technology and your accountant can take care of the rest.
3. Over-claiming use of home expenses
It is fine to claim these expenses. However, by over claiming them, you potentially end up paying capital gains tax when you sell your property. Why? Because the value of your home will have increased and you lose generous tax relief on the part of your home you turn into business.
4. Not getting tax breaks
There are more tax breaks within the law that business owners miss out on but here are some common ones:
Bad debt provision (make sure you’ve taken steps to recover the money)
Capital allowances on equipment used for the business including fixtures which are part of the building you have bought
SEIS and EIS tax reliefs
A key reason why most of these reliefs get missed is that a claim must be made to get them.
5. Wasting tax allowances
If you add up the income tax allowance, capital gains tax allowance, savings allowance and dividends allowance, you get a whopping £26,000 plus allowances in the year. Many of these allowances are wasted. Consider how to make use of the allowances of your spouse and children. If you’ve dabbled in crypto currencies, make sure you make the most of the capital gains tax allowance.
6. Insufficient evidence for claims
The rules on what expenses can/cannot be claimed are not as straight. For example: a business owner rented accommodation to avoid expensive hotel bills during a long business trip. He was denied tax relief because the evidence he submitted was not sufficient to meet the “wholly and exclusively for the purpose of trade” test. When claiming or incurring expenses for business, ensure that the primary purpose is for the business and have all the supporting documents.
7. Not reviewing your business structure
Maybe, when you started, you were rightly advised to go for a sole trader, partnership or a limited company. But the rules keep changing. When was the last time you reviewed and compared different tax structures?
8. Getting self-employment status wrong
This is an area that keeps changing. Whilst you may safely get your own status right as a business owner, how confident are you that your freelance workers and associates are genuinely self-employed? HMRC is cracking down on the so called ‘gig economy’ and are putting the onus on business owners to get this right.
9. Accepting 30% more tax when selling your company
You’ve decided to sell up but you’re dealing with a well-informed tax buyer who wants to pay more for the company’s assets but he or she is not interested in the shares. If you agree to sell the assets you’ve potentially lost a 10% tax rate and are now face over 30% tax. This is because the company sells the assets and pays corporation tax at, say, 19%. You then need to extract the cash. Conservatively, if you pay 20% income tax. That’s 39% potential tax.
10. Not putting money aside for tax
Cashflow can be a huge problem but when it comes to VAT and PAYE, HMRC’S stance is straightforward; it’s not your money. For income and corporation taxes, many discover in January they have a huge tax bill but no funds to pay it. To avoid this plan for taxes and open a separate bank account to put cash away for taxes.
Tax can be a minefield so it’s always a good idea to have a tax plan in addition to your business plan. That way you can avoid expensive mistakes.
Written by Jonathan Amponsah, CTA FCCA, an award-winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.