No one likes a surprise tax bill. Here are some practical suggestions for how the small business owner, working with their adviser, can anticipate, plan for, and in some circumstances defer, reduce or even avoid a tax bill.
Tax laws in the UK are reasonably stable; rarely change in a way that has retrospective effect; and for the most part, applied in a consistent way. It follows that the tax consequences of most transactions and events can be figured out in advance.
With appropriate planning carried out at the right time, and professional advice, the chances of a “surprise” bill can therefore be much reduced, if not removed altogether.
Having an appreciation of the kinds of transactions and events that can lead to a tax charge, and of the broad effects of such a charge, can be helpful; as can an understanding of available tax reliefs and exemptions. Good advice can help immeasurably.
In the UK, income and gains from most sources may have a tax effect of one kind or another. Sometimes, two or more tax regimes are involved. And money needn’t necessarily change hands for there to be a tax effect; many transactions that are, essentially, gifts may be taxable.
Although the UK tax system is very complex, equipping oneself with a basic knowledge of how taxes apply can still be helpful for the small business owner. Your professional tax adviser is well placed to advise on this matter.
Recording accurate and timely information about the taxpayer’s circumstances and about the transactions and events under review is crucial, because advice or decisions based on inaccurate information may not produce the desired result.
It is impossible to overstate the importance of maintaining accurate and up to date information about the taxpayer’s personal and business finances.
In a business context, income or corporation tax is usually charged based on the accounts for a twelve-month period. Businesses who are able to produce 10 or 11 month management accounts and “project forward” and estimate the tax liability for the full year, are at a significant advantage compared to those who cannot.
The point is that with six or eight weeks to go before the end of the business's financial year, a variety of options may be available to the small business owner to legitimately reduce the tax bill. After the end of the year, the tax management options are greatly reduced.
Modern accounting software tools like Quickbooks provide effective ways to help small businesses keep accurate and up to date records – and to collaborate with their advisers.
Advance planning, where possible, should be undertaken to consider the tax implications before the transaction or event takes place.
Of course, this can be tricky as certain transactions might be outwith the taxpayers’ control. Or perhaps the taxpayer is unaware that a transaction will have a tax effect until after it has taken place (see “Knowledge” above!). Perhaps the best advice I can offer the small business owner where planning is concerned is this: any time you expect to undertake any transaction (including a gift) or experience an event that is outside the scope of what you normally do, call your professional tax adviser first!
Here are some common transactions and events that will often, if not always, benefit from advance tax planning. The list is by no means comprehensive - it is just to illustrate some of the many and varied circumstances that might have serious tax consequences:
- Buying through a company assets that are used partly or wholly for personal purposes
- Experiencing a significant ‘windfall’ event such as winning a major business contract
- Transferring assets to a company on incorporation;
- Borrowing money from a company;
- Selling or giving away assets or selling them at undervalue;
- Starting a new trade, or ceasing to trade;
- Raising capital (debt or equity);
- Changing the ownership structure of the business;
- Changing the way in which an asset is used (eg: letting out your house; or leasing out an asset formerly used within your business);
- Employing family members;
- Moving into or out of the UK;
- Making pension contributions;
- Making or changing a will;
- Inheriting significant assets; and
- Marriage, divorce and separation.
As can be seen, the long arm of UK tax law extends into almost all areas of life so it is always helpful when the tax implications of potential or expected events can be figured out and planned for before those events take place.
It is always strongly advisable to seek professional advice where there is any doubt about the tax implications of the transaction or event, ideally before it occurs because once a transaction has taken place, the scope for tax planning is often much reduced.
Our role as professional tax advisers is to provide small business owners with unbiased, reliable tax advice, and to help you and your business comply with UK tax law.
When it comes to tax advice, the objective is to achieve the best outcomes at all times, taking into account all available planning opportunities. This means that wherever possible we like to advise you before the transaction or event takes place. We will always do what we can to help, but the point is that with early involvement we are often able to secure better outcomes.
You can contact us any time, we are all here to help.
Timely consideration of the tax aspects of any alternative courses of action can be invaluable.
Small businesses who are able to work together with their professional tax adviser to identify tax planning opportunities and pitfalls, can often identify legitimate alternative courses of action that might positively influence the outcome.
Timing, again, is key, as “acting after the event” can often shut down some planning opportunities that might otherwise have been available.
Finally, taking the correct action at the correct time, in response to any tax planning points identified by the individual or adviser, is just as important as the other points suggested in this article.
Where tax planning opportunities have been identified, it is crucial that any resulting actions are executed correctly, and at the right time. So much of UK tax law is geared to “dates, deadlines and documentation”. This principle extends into all sorts of areas, for example:
- entering into transactions at the right time;
- ensuring asset ownership is clear and correctly documented;
- making appropriate tax claims and elections within the statutory time limits; and
- retaining/ providing such additional information as may be required to evidence/ support the tax position.
Tax management activities for the small business owner will always benefit from an effective working partnership with a professional tax adviser.
I hope the points above also illustrate that the business owner and their tax adviser both have critically important roles to play; tax management can never be left entirely to one party, or the other; working together as a team will always deliver the best results.
If you have a question about your business or personal tax planning arrangements, contact us today for a confidential discussion.