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How Can I Avoid Paying Business Taxes

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  • 12-07-2022
How Can I Avoid Paying Business Taxes

Find out how you can avoid paying business taxes in the UK. We look at the top ways to reduce your corporation tax bill legally.

How to make your small business tax-efficient

To ensure your small business is running in a financially beneficial way, you want to make sure your operations are arranged in the most tax-efficient way. 

This means finding legal and legitimate ways to reduce the small business tax you pay to HMRC. You will want to do this as a small business owner as it can help you create a more effective business model, expand your margins and boost your cash flow.

Naturally, the easiest way to do this is by ensuring you know what taxes you have to pay as a small business and ensure that you don't pay tax over your legal requirements. 

Again, we want to stress the "legal and legitimate" point regarding being a tax-efficient small business. Tax avoidance schemes should be avoided at all costs. 

They are typically complicated and convoluted methods for individuals or small businesses to lower their tax obligations or avoid them altogether.

While these arrangements and individual mechanisms may be technically legal in the UK, many tax avoidance schemes are extremely frowned upon by HMRC, given that their only purpose is for people to avoid paying tax. 

Most of these schemes are marketed as investment opportunities, legitimate tax planning methods or wealth management systems. 

However, we suggest you stay well away from anything claiming to keep your taxes down that does not feel legitimate or seems like tax evasion.

Ultimately these schemes will end up costing you more in the long run than you'd otherwise pay through your tax contributions. One of the safest ways to find legitimate ways of improving your company's tax savings is to seek professional advice from a professional accountant. 

Deductible expenses

The easiest way to legitimately pay less tax through your small business is by claiming legitimate deductible business expenses. Declaring these to HMRC will help reduce your tax burden, allowing you to improve your cash flow and grow your business.

Some examples of legitimate tax deduction expenses any small business might be able to claim include:

Travel costs - including things like fuel, parking and train or bus fairs.

Staffing costs - including any subcontractors you hire and your employees' salaries.

Office costs - including anything from phone bills to stationary.

Premises operations - including lighting, heating and business rates.

Clothing - for example, if your employees wear uniforms specifically to carry out their work.

Financial outlay - including insurance premiums, bank charges or other financial obligations.

Raw materials or stock - including applicable purchasing, storage and sales costs.

Marketing costs - including things like advertising or the costs of running and maintaining a website. 

Top Ways To Reduce Corporation Tax Bills Legally

You'll struggle to find a small business owner that wants to pay more tax than they are legally required to. In fact, most SMEs are actively looking for ways to reduce their corporation tax bill legally.

However, while this may sound like a complex arrangement to try and work out, there's no great secret to lowering your corporation tax obligations as a small business owner.

In order to reduce your business's corporation tax bill, you need a working knowledge of how the UK tax system works, a little financial organisation and the time and patience to work through it all. Of course, you could always outsource this task to a professional accountant, but there's no reason you can't do this yourself. And it's well worth the effort!

So if you want to save money while staying on the right side of the UK Government and HMRC, here are a few tips.

Again, claiming as many business expenses as possible is the most crucial part of having a tax-efficient business. If you aren't declaring all your expenses, you're practically throwing money away that could be better used on improving your business.

Not only this, but you're failing to claim tax reliefs gained by claiming these expenses, essentially paying more on your corporation tax for the business expenses you would otherwise declare. 

For example, let's say you spend thousands of pounds on a new piece of machinery or technology for your small business. If you fail to claim your entitled capital allowances, in HMRC's eyes, your taxable profits will appear to be significantly overinflated.

Therefore, when you come to pay your corporation tax, you will be paying that much more because you forgot to declare your expenses. So while it may feel like a waste of time counting every £1 notepad or set of pens you order, over the years, the amount of money you'll save on corporation tax is well worth the effort.

To keep track of your expenses even easier, you can use accounting apps like Xero to simplify the process and ensure your records are accurate from the start. Business expenses claims are something of a grey area when it comes to taxes, with no hard and fast rules about what is and isn't an expense.

For example, something that is a frivolous luxury for one company might be an absolute necessity for another. However, to remain innocent in the eyes of HMRC, stick to their "wholly and exclusively" rules about only claiming items solely for use in your business.

All modern businesses require mobile phones to ensure smooth operations, and it's an expense that not a lot of people remember to claim.

So long as your work mobile is used solely for work, you can declare it in the name of your business to HMRC. Once you've done this, any expenses incurred using your work mobile become tax-deductible.

For greater tax efficiency, small business owners might also consider running their own vehicle to claim back the mileage they cover through HMRC's official mileage rate while travelling to and from work.

Claiming your mileage in your company tax return is also a way for owners of limited companies to pay lower tax rates on any company cars they own.

If certain aspects of your work require technical manuals or books to carry them out, these can also be claimed as a business expense in your self-assessment tax returns. Naturally, these books or manuals must be directly relevant to your work rather than for personal consumption.

Any magazines or books that will help your business, such as teaching you or your employees new skills or working methods, are considered tax-deductible as an expense.

Parties are another great way for a limited company to claim a little money back through expenses. Throwing an annual bash for your employees (besides the obvious staff Christmas party) can help you reclaim up to £150 per guest, including VAT payments.

Since these expense claims are limited by the number of guests you invite, you can even take your partner out for a night on the town tax-free.

However, be careful not to invite all your friends and family to every party you throw. While HMRC are happy to deduct some taxes from parties for employees, if the only guests are direct relations, they're sure to see through it. But, so long as you're careful, you can even apply for Corporation Tax relief on the entire cost of a staff party without suffering a "benefit-in-kind" charge.

This is a fairly obvious tip that many small business owners should aim for. If you have the money to pay your corporation tax bill earlier than the mandatory deadline, you should always do so.

This will put you in good stead with the fine people at HMRC, who may decide to reward you with a little interest, tax-free allowances or allowing you to claim tax credits for settling your taxes with an early payment.

Another obvious way to reduce your corporation tax bill that many business owners, self-employed people and sole traders might overlook is paying yourself, as the owner of the company, a salary. This will help bring your company's profits increase down, therefore reducing the amount of corporation tax you have to pay.

However, this all depends on how your business is structured, and it may not be the ideal solution for every owner. Suppose you have secondary taxable incomes from sources other than your business. In that case, especially if you receive personal allowances for them, it may not be too helpful, but it's always a good tactic to keep in your back pocket.

Contributing to your retirement by paying into a pension each month is an incredibly tax-efficient way to look after your business's finances.

Not all business owners make the most of their pension contributions, meaning they will be paying a heftier corporation tax bill. They also won't be benefiting from a healthy pension pot when the time comes to retire, so a bit of forethought can benefit you in the near future and the distant.

Income protection insurance is one of the most sensible things any small business owner can invest in. If the worst should happen and you're unable to continue working, your payment protection insurance will keep you ticking over while you convalesce. It's also a brilliant way to reduce your corporation tax bill.

Paying your insurance premiums out of your company rather than your personal income (from which you need to pay income tax, national insurance contributions and other personal taxes) will reduce your profits and, therefore, your corporation tax.

The final tip on creating a truly tax-efficient company is to hire a good accountant. Whether reducing corporation tax or VAT or ensuring your bookkeeping and payroll are accurate and up-to-date, good accountants are invaluable to small businesses.

They also relieve a lot of the burden of sorting out your company's finances, so you as the owner can focus on making your business a success. While they will charge a fee for their services (they have to make money just like you do), the thousands they'll save you in tax efficiency will more than cover whatever they charge in the long run.

They can also help you make appropriate arrangements for National Insurance contributions, Income Tax, Annual Investment Allowances and Capital Gains Tax on business assets to assist with every financial aspect of your business.

Are you looking for a tax accountant in Wakefield and west Yorkshire? Follow the link below to contact our tax advisors.