5 Tax Tips to Maximise your Businesses Profits
Running your own business is hard work, especially when you are a small business owner managing everything yourself or with a small team.
One of the most important aspects is ensuring your accounts are correct to make sure you do not pay more corporation tax than you have to.
The way HMRC calculates a limited companies tax bill is simple; the business pays 19% corporation tax on their total profits, minus any allowable business expenses.
All business should act within the law and pay their share in taxes, but there are several things you can do to maximise the net profit for your business without breaking any laws.
Here are our Five Top Tips:
- Claim every expense
The way corporation tax is calculated makes it very simple as the only way a business can pay less tax is by reducing their taxable profits.
This means claiming for all business costs (also known as expenses) which are then subtracted from your pre-tax profits.
A business expense is a cost that is “wholly, exclusively and necessary” for business purposes.
However, it gets slightly more complex because what one industry may deem as an allowable expense would not meet the criteria for other industries, so there is a degree of flexibility.
Broadly speaking, if the cost is necessary for the business then it can be deducted from the business’ pre-tax profits, therefore reducing the amount of Corporation Tax that a business must pay and increasing the net profit.
Some of the most commonly claimed deductible expenses include:
- Staff salaries
- Product costs
- Advertising and marketing costs
- Insurance costs
- Office equipment and supplies
- Office rental costs
- Utility bills for work premises
- Travel costs (although it depends on the circumstances, for more information check the Gov website)
- Staff training costs
This is a non-exhaustive list but covers some of the main costs that are associated with the general running of a business that should be claimed each year.
Aside from the main costs associated with running a business such as buying stock and paying staff salaries, there are several expenses which are often missed out, especially with smaller businesses.
The main one being mileage for business travel in a private car.
Any member of staff, including business directors, can claim 45p per mile for business travel in a private car, as long as it is not to their contracted place of work.
An employee can claim up to 10,000 miles, before it drops to 25p per mile. However, not only can the employee be reimbursed, but these costs are then deducted from the pre-tax profit to reduce the amount of corporation tax paid; A win-win for the employees and business.
- Make use of the Annual Investment Allowance
The annual investment allowance (AIA) is a tax relief available to all limited companies which allows them to deduct the total amount of qualifying capital expenditure up to a limit, from their pre-tax profits.
The AIA was introduced to encourage businesses to invest in plant and machinery and allows businesses to claim cost for the following categories:
- Office equipment (including computer hardware, furniture and certain software)
- Integral features of a building
- Kitchen and bathroom fittings
- Vehicles used for moving purposes
- Machines used for business purposes
- Machines used to provide entertainment
However, the AIA does not cover costs the cost of buildings, land and structures such as bridges, roads and docks, neither does it cover lease costs.
The amount you can claim through the AIA is set by HMRC and is currently £1,000,000 until 31st December 2020, at which point it is expected to be reduced to £200,000.
The AIA is therefore a good opportunity for businesses to invest in plant and machinery for the business whilst also being able to offset the cost against their company’s profit, thus reducing the amount of corporation tax the business would pay on their profits.
- Claim Research & Development Tax Relief
Research and Development (R&D) tax credits are often overlooked by many businesses who think they are not in a suitable industry to claim R&D, but in many cases, this is not true.
Any business that is working to solve an element of uncertainty, through creating a new product, process or service, or even improving and existing one, could be eligible for the tax relief.
If a business meets the eligibility criteria to claim the tax relief, not only could they reduce their corporation tax by claiming the tax-deductible expenses such as salaries, materials and software, but they could also receive a proportion of the R&D costs in the form of a tax credit, further reducing their tax liability.
The exact percentage they can receive depends on several factors such as the size of the company and whether they are making a profit or a loss.
For more information, see the government website where they explain R&D tax credits in more detail.
- Take a Directors Salary
It was alluded to earlier in this article that salaries can be deducted from a business’s pre-tax profit and this is true for a business director as well.
As a director of a business, there are two ways to receive money from a business; dividends and a salary.
Dividends are not tax deductible as they come out of a business’s net profit, meaning after they have paid corporation tax.
On the other hand, if a director takes a salary, it can be deducted from the pre-tax profits in the same way as other employees’ wages.
This means the director will still receive money from the business, but the money will come out of the pre-tax profits, so the business does not have to pay corporation tax on the director’s salary.
However, it is important to find the right balance between a salary and dividends because there are benefits to both.
Whilst a salary is tax deductible, it is also liable to personal income tax as well as National Insurance and pension contributions for both the employer and employee whereas dividends are taxed at a lower rate.
Ridgefield Consulting have written a useful article explaining the most efficient balance between a director’s salary and dividends.
- Throw a staff party
It may seem a little odd but throwing an annual staff party can be a simple way to reward your staff whilst also reducing the company’s corporation tax, therefore maximising the value of your post tax profits.
It does not matter if a business has one member of staff or two hundred, the rules are still the same.
As long as you follow the below criteria, you can host a staff party to reward employees for their hard work and reduce your corporation tax bill at the same time.
For a staff party to be eligible for tax reductions, the event must meet the following criteria:
- Be an annual event (e.g. a Christmas party)
- Every employee must be invited
- The maximum budget is £150 per person per year
- Only employees can attend (no partners, subcontractors or suppliers)
It may seem counter intuitive that spending money can save a business money, but by holding an annual party you can invest the pre-tax profit in your staff by rewarding them, rather than paying a higher proportion of corporation tax.
Not only that, but a staff party does not need to be reported as a benefit in kind for your employees and you can also claim back the VAT on any costs associated with the event.
Another little trick worth noting is that even if a company’s only employee is the director running the business, they can still have a celebratory event so long as they meet the above criteria!
In summary, corporation tax is an essential part of being a legitimate business in the UK and not one that can be avoided.
However, with some simple planning it is possible to maximise the value a business gets out of their pre-tax profit by following these five tips to maximise post tax profit whilst also satisfying the needs of the business’ stake holders.