“Tax doesn’t have to be taxing” was the slogan HMRC used to promote self-assessment when it was introduced back in the late 90s. The move to allow sole traders and small businesses to assess and submit their own tax was a seismic shift in the accountancy world.
Before the advent of self-assessment, tax and accountancy seemed like a world full of complicated rules, confusing paperwork and envelopes stuffed with dusty receipts. Self-assessment was the government’s attempt to both modernise and democratise the process.
And it has largely worked. Tax is a more open system now and small business owners can deal with everything themselves. However, it’s fair to say that for many small businesses (especially new businesses) – tax is still taxing.
We spoke with the team here at Cloud360 to get some tips for any small business – especially new or young businesses – who need help in making their tax easier to manage.
1. Get your head right.
A recurring theme from our team’s advice centred on the business owner’s attitude to tax. So our first tip is to change your thinking.
There are only two things that are inevitable in this life. Death and taxes. The sooner you truly accept both of these facts, the happier you will be!
Tax isn’t something that can be avoided (legally anyway!) but you are only taxed on your profits (over your tax-free allowance – currently £12,570 for a sole trader).
Logically, any business owner is aiming to run a profitable business and mostly to earn more profit than their minimum allowance. Paying tax is a legal requirement but it is also a sign of business success, so accept it and see it as a sign of success.
Secondly, accurate accounting is a tool for better understanding and improving your business. Few activities allow business owners to spend time analysing the reality of their business’ income and outgoings. So doing your taxes is an opportunity for business improvement.
Finally, keeping accurate and truthful tax records is essential if part of your longer-term business plan is to sell your company. The prospective buyer of your business will need to perform due diligence on your company but they’ll also want to see healthy profits.
2. Plan for it
As a new business, it’s difficult to put aside money when you’re just starting out. There are set up costs, day to day expenses and your own wages to consider. And as soon as your business is at a stage where you have a surplus at the end of the month, there are marketing and business improvement strategies that require your attention and investment. Putting money away to never be touched seems counter-intuitive to a new business owner.
However, not putting some money away is building up a problem that is difficult to overcome when you are more established. If you submit a tax return and have a large bill to pay and don’t have the money saved to pay it, you’ll need to enter an agreement with HMRC. These agreements will usually take money each month from your business to pay your arrears, which further reduces your ability to save for your next tax bill. It’s a vicious cycle and can endanger the future of your business.
The right thing to do is make a plan, get professional tax advice to minimise your exposure to tax and set aside the money. It’s only REALLY profit after you’ve accounted for tax.
3. Claim every expense
Tax is only levied on the profit your business makes, so to be more tax-efficient be sure you are keeping records and submitting every cost associated with running your business.
There is a lot of contradictory information online and we’ve all heard some real gems from friends and family about what someone they know claimed as an expense for their business.
We’d always advise taking professional advice on what legitimately can and cannot be claimed as an expense as every business is different. Perhaps that friend of your brother-in-laws’ mate’s cousin was able to claim his dog grooming costs as an expense for his business but that isn’t to say that you can too. Each business is different and what is a reasonable expense for one company will not be acceptable for another.
Cloud accounting tools such as XERO allow you to photograph receipts and file them instantly which massively reduces the burden of keeping track of small expenses. Fuel, subsistence and travel costs are often easy to lose track of but can add up to thousands of pounds – if you do not have valid receipts it means you will be paying tax on this despite it being a cost to your business.
Tax is only difficult and stressful if you think of it in this way. We often hear people talk about their ‘tax burden’ and, of course, thinking of something as a burden sets you off in a negative frame of mind which will impact your actions and your results. If you start off thinking of the positive aspects of tax, you alter the potential outcomes, take positive action and will inevitably have a different result at the end.
Tax might be inevitable but not managing it properly is completely within your control.
If you’d like some help with your tax affairs we offer a number of different levels of service from annual tax return guidance to fully outsourced financial management for your business. Get in touch with us today to find out how we can help.