Planning for your taxes may not be a top priority but perhaps it should be. If you are not doing this with your accountant, you could be falling into the trap of making these mistakes with your taxes:
- Not having a tax plan
Unless you prepare and plan for taxes, it’s likely that you will pay more tax. Now here’s a thought. You do have some sort of a business plan even if it is only one page? Do you also have a tax plan? If not now is the time to get one written.
As part of your planning it is good to review your business structure. When you started, you were rightly advised to go for a sole trader, partnership or a limited company. However, the rules keep changing. When was the last time you reviewed and compared different tax structures? It may be time to make a change.
- Poor or no evidence to back up claims
The rules on what expenses can/cannot be claimed are not as straight forward as you may think. By not taking extra care or failing to appoint a good accountant or tax adviser, most entrepreneurs make this costly but avoidable mistake Here’s an example: a business owner who rented an accommodation in Scotland in order to avoid expensive hotel bills during a long business trip was denied tax relief because the evidence he submitted was not sufficient to meet the so called “wholly and exclusively for the purpose of trade” test.
Tip – When claiming or incurring expenses for business, ensure that the primary purpose is for the business and have all the supporting documents to back this up.
- Getting self-employment status wrong
This is a complex area and one which keeps changing. Whilst you may safely get your own status right as an entrepreneurial business owner, how confident are you that your freelance workers and associates are genuinely self-employed? HMRC is cracking down on the so called ‘gig economy’ and are putting the onus on entrepreneurs to get this right.
- Claiming too much use of home expenses
There is absolutely nothing wrong with claiming these expenses. The problem is that by over claiming them, you potentially end up paying a lot more tax in capital gains tax when you come to sell your property. Why? Because the value of your home would have gone up and you lose generous tax relief on the part of your home you turn into business.
- Not keeping proper records
For VAT registered business owners, not keeping and collating receipts is a common mistake akin to literally throwing away money.
The good news is that with so many apps on the market, the task of keeping proper tax records has become less taxing. With apps like Auto Entry, Expensify and Receipt Bank you can easily snap the receipts on the go and forget about them. The technology and your accountant would take care of the rest.
- Not taking advantage of tax breaks
There are more tax breaks within the law that most entrepreneurs miss out on but here are the most common ones
- Research and development
- Bad debt provision (make sure you have taken steps to recover the money)
- Capital allowances on equipment used for the business including fixtures which are part of the building you have bought
- Lease premiums
- Warranty provisions
- SEIS and EIS tax reliefs
- Entrepreneurs relief
- £40,000 lettings relief (this might be scrapped by HMRC)
The reason why most of these reliefs get missed is that you actually have to make a claim to get them.
- Not putting aside money for tax
Cashflow can be a huge problem but when it comes to VAT and PAYE, the taxman’s stance is simple; it’s not your money. For income and corporation taxes, waiting till December or January to find out that you have this huge tax bill but no funds put aside is a common mistake entrepreneurs make.
To avoid this problem, look at the business model, plan for taxes and open a separate bank account to put cash away for taxes.
- Accepting 30% more tax when selling your company
Perhaps you’re ready to sell the business but you’re dealing with a well-informed tax buyer who wants to pay more for the company’s assets but he or she is not interested in the shares. You’re tempted and you agree to sell the assets. You’ve potentially lost out on a 10% tax rate and are now looking at over 30% tax. Why 30%? So, the company sells the assets and it pays corporation tax at, say, 19%. You then need to extract the cash out and let’s be conservative and say you pay 20% income tax. That’s 39% potential tax.
- Wasting Business Property Relief
Your business has value. It’s your life’s work. A common mistake I see is lack of planning around how the business should be passed-on tax free when you’re not here. The rules, subject to some conditions, allows your life’s work to be enjoyed tax free by your loved ones. But if you do not have a Will or if in your Will you’ve passed the business to say your spouse, you’re wasting this generous tax relief.
- Buying the shares of your competitor
Instead of organic growth, you’ve decided to acquire your competitor. In your haste to get the deal done, you buy the shares of the company instead of the assets. This is a common tax mistake because whilst buying the shares is a good for the seller, you lose the tax reliefs associated with buying the assets.
Make sure you avoid these types of mistakes and get help from a reputable accountant if you need help. A tax plan is a great place to start.
ABOUT THE AUTHOR
Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.