Jennifer Adams offers an overview of strategies for tax-efficient planning for a growing business.
All businesses need a plan, whatever the initial reasons for setting up; only a few last without one. An organisational master plan produced by the owner or management of the business sets out what steps need to be taken to achieve the business's strategic aims. Such aims might be to reach a particular level of turnover or number of clients, expand to take over other businesses or produce enough income to pay personal bills and enough to retire on. Different businesses will have different aims and, therefore, different strategies.
Whatever the type of business, the one constant is to consider the tax situation for not only the business but the business owners, their families and employees.
Tax planning strategies need to be proactive in the decision-making to minimise tax by using tax exemptions, deductions, credits, and other available claims, responding to changing tax laws to increase profit, and using that money to grow the business. Reducing the tax bill means more money for other financial goals (e.g., advertising campaigns, capital investments, employee bonuses, or personal income goals). At every stage, planning for tax payments and submission of returns is necessary, enabling the strategy to keep on course and not be affected by an unexpected tax bill.
Headings for a tax planning strategy might include:
1. Beginning the journey
Setting up a business is the first step towards a tax planning strategy. Such a strategy should be produced before the business commences, as virtually all businesses need money to get off the ground, whether for some basic office equipment or more elaborate machinery and business premises. Tax relief can be claimed on many start-up costs, being tax deductible against the first income payment received.
Once the business is up and running, the strategy should ensure all allowable expenses are claimed and other available tax claims made (e.g., for capital items). Planning for tax payment dates depends on the type of business. For a sole trader estimating how much to set aside in the first year will be difficult as the first tax bill could appear up to 21 months after the first income payment and after the financially heavy time of Christmas.
2. Growing the business
As a business grows, so will the tax bill and administration (e.g., VAT returns are usually required quarterly should the VAT taxable turnover exceed £83,000).
Again, maximising deductions and planning when to buy or replace equipment (and how to fund tax efficiently) will reduce any tax payable, as will taking advantage of available tax breaks.
3. Incorporation
As the business grows, a different legal structure may be more suitable. Incorporation may be the better strategy if the business started as a sole trader.
However, as each business is different, the calculations may show that incorporation does not reduce the tax bill overall.
4. Taking on staff
Taking on staff needs to be included in any tax planning strategy as a sizeable amount of profit will be used (although tax relief is claimable on the gross amount paid plus employer’s NICs and pension payments).
5. Employing family
Such a strategy can be the first stage towards the business owner withdrawing from the business.
Family members could be employed or become shareholders, moving unearned income from someone in a higher tax bracket to (for example) a retired parent or child.
6. Retirement planning
Strategic planning for retirement needs to be undertaken years before the final date.
Whether the intention is to wind up the business or sell, the strategy should include planning to withdraw monies possibly built up over the years to be taken tax efficiently.
Practical tip
Formulating a tax planning strategy should be reviewed regularly, thereby identifying any changes that affect the tax position.
