Tax and your business

41 Plan carefully how you should start your business – as sole trader, partnership or limited company. Companies still have tax advantages (see tip 42) but generally only once the business has started to make a profit. With a new venture, you might expect to make losses in the very early years. As a sole trader or partnership, your losses in the initial years can be set against your other income, or carried back to set against your income in the three years before you started the business.

42 Incorporation is still worthwhile. Although the zero rate of corporation tax has been abolished, a business with profits of around £50,000 can still save tax and NI of over £4,300 if you take the dividends and trade through a company rather than as a sole trader.

43 Do not delay telling HMRC about your new business. Sometimes it is difficult to know exactly when a business starts or a hobby turns into a business. Selling stuff through online auctions can be fun, but as soon as you start buying items specifically to sell, you are trading and you should register your business with HMRC on the form in leaflet SE1.

44 Don’t forget to register for VAT in time! As a fast-growing business, you may be too busy to notice that your turnover is creeping up. Track your total sales in the 12 months up to the end of each month. If this total tops £61,000, you must register for VAT within 30 days. If you delay, the penalties can be very painful indeed.

45 Check the VAT you are reclaiming is for business expenses. While you are adding up the expenses paid in the tax year for the P11D and P9D forms, take a look at your VAT records. If the goods or services provided to an employee have not been used for business purposes, you may not be able to recover the VAT.

46 Switch to the flat rate VAT scheme for small businesses if your business has few costs and overheads, and your turnover is less than £150,000 a year. The VAT you pay is calculated by multiplying your gross sales by a flat rate determined by the business sector you work in. Purchases are ignored, so there are no complicated VAT set-off calculations. If you start to use this flat rate VAT scheme in your first year of VAT registration, the flat rate you use is reduced by a further 1%, so the savings are even greater.

47 Pay your PAYE quarterly rather than every month. If the total monthly PAYE and NIC bill for your business is less than £1,500,you can ask the Revenue on form P31 if you can make quarterly instead of monthly PAYE payments. This could improve your cash flow as well as saving you time.

48 Choose the right company car and reduce your tax. You can set the full cost of buying a new company car against your company’s profits this year, if you choose one from over 70 models with an official CO2 emissions rating of 120 g/km or less. And as the car driver, you will also benefit from a lower income tax charge.

49 Drive a company van rather than a car to save tax. Some vans are very comfortable. Income tax on the benefit of a van or pick-up truck is about one tenth of that for a similar sized car. But beware; some light pick-ups are now taxed as if they are cars. The income tax charge on vans will rise in 2007/08, but it will still be less than for many cars.

50 This could be a good year to invest in new plant or machinery. In 2006/07, small businesses can claim a 50% capital allowance in the first year of ownership. The deadline for purchases is 31 March 2007 for companies, and 5 April 2007 for other small businesses.

51 Buy green equipment and save tax. Choose an energy-efficient or water-efficient item, and even basic fittings such as lighting, heat pumps or toilets could qualify for an enhanced capital allowance. You could then set the full cost of the new equipment against your taxable profits in the year you bought it. Check which items qualify on www.eca.gov.u

52 Claim extra tax relief for innovation. If you spend at least £10,000 on a research and development project in one year, you can claim an extra 50% tax relief for the value of consumable stores, staff and software used on that project. Your company may still be able to benefit, even if it makes a loss. It is important to identify the costs separately in your accounting system and be prepared to justify the expenditure.

53 Claim interest relief when you borrow to invest in ‘close’ companies. A close company is one that is controlled by its directors or by five or fewer shareholders. The conditions for getting relief are sometimes complicated, so it is important to check the details.

54 Remember to reclaim the statutory pay when your employees become parents. When employees have children, as an employer you may have to pay them Statutory Maternity Pay, Paternity Pay or Adoption Pay, depending on how long they have worked for you. As a small business with an annual national insurance contribution bill of less than £45,000, you can reclaim the statutory pay plus 4.5% compensation for the employers’ national insurance contributions that were payable on that pay. Larger businesses can claim back 92% of the statutory pay.

55 Claim back employees’ sick pay. As a small business you can be hit hard when key staff are ill and off work. You are obliged to pay them statutory sick pay (SSP) at £70.05 a week, but you can claim the SSP back from the Revenue if the total SSP paid out in one month is more than 13% of the total NIC due on your whole payroll for that month.

56 Get your company to pay interest on any money it owes you. Like many owner-directors, you may have lent your company money or delayed drawing bonuses and dividends to provide extra finance. In either case, the company can pay you a commercial rate of interest on the outstanding balance until the loan is repaid. This interest payment is not subject to national insurance contributions and is therefore a tax efficient way to extract profits.

57 Pay yourself £2 a week tax free for using your own home as an office if you run your company from home. Alternatively, the company could pay you rent under a formal licence to occupy. You need to declare the rent received on your personal tax return, but you can offset a proportion of your household costs, including heat, light and insurance, against the rent you receive. But there can be capital gains tax complications.