5 Tax Returns Tips for Small Business Owners

Inability to pay tax bills is one of the most common reasons small businesses fail in the UK, along with bad cash flow management and lack of a well-considered business plan. Accurately understanding, calculating and optimising tax liability are important financial aspects to the success of a small business. Yet, not many business owners take the time to give tax planning and tax returns the attention they deserve.  

This usually happens because other activities, such as releasing a new product to market or getting new clients, always take priority for many startups and new business owners. There are also many cases in which professionals starting their own business don't have the required skills or find it difficult to juggle with the many aspects of running a business on their own, such as sales, invoicing and chasing payments, IT maintenance, filing tax returns and keeping on top of statutory obligations. Considering all this, there is no surprise that almost half of small businesses in the UK worry about applying tax rules incorrectly, according to a February 2013 research from the Office for Tax Simplification (OTS).

The good news is, no matter how dull or complicated they might seem, tax returns are not that difficult to understand. Here is some key tax advice to take into consideration in order to properly manage your tax obligations.

Tax planning is essential

Efficient tax planning is vital for keeping your tax bill to a minimum, allowing your business to use the maximum of cash flow available to grow. Planning your tax liability is not some complex scientific process, but rather a way to be aware of the different tax obligations you have and know your options, depending on where you want to take your small business in the future. The key is finding the right balance between corporation, shareholder (owner) and employee taxation.

A tax efficient business structure

The structure you choose when setting-up your small business has consequences on your tax liability as a business owner. As an example, the higher income tax rate for self-employed business owners is set at 40% in 2013-14, with an additional rate of 45% for earnings exceeding the £150,000 threshold, while main corporation tax rates for limited companies is set at 21% for 2014. Depending on the net profit you are predicting for your small business, it is usually more tax efficient to operate as a limited company rather than in a partnership or as a sole trader.

The most tax efficient way to pay yourself

It is a commonly asked question among small business owners which of the two is the most tax-efficient way of releasing cash from their business: dividends or payments under the form of salary. In terms of both personal and company tax liability, dividends are always more tax efficient than salaries, no matter how much salaries would reduce your company’s corporation tax. On the other hand, salaries do have the advantage of providing national insurance contribution which give entitlement to a state pension and might be preferred by some business owners for quicker access to profits.

In most cases, a mix of low-salary (limited to the tax-free personal allowance of £9,440) and dividends proves to offer significant savings compared with an all-salaries scenario (up to 15% in tax savings, taking into account both personal and company taxation). This way you maintain benefits of both systems, while ensuring your business has enough cash flow to develop throughout the year.   

Make the most out of tax deductions and allowances

It is as simple as that: the more tax deductible expenses your business has, the less corporation tax you pay. In order for tax deductions to apply, expenses need to be made exclusively in the course of business and recorded properly in your books. Here we can include pension contributions, travel expenses and mileage, telephone expenses and office equipment purchases, use of home as office, subscriptions to professional publications, journals and training.  

Another way to look at reducing your tax bill is offering tax-free benefits to your employees, instead of offering increased salaries as incentives. Again, pension contributions, mobile phones, travel expenses and eye tests for your employees are completely tax deductible. Under certain conditions, you can also provide refreshments in the office, meal tickets, childcare vouchers or annual company parties with certain tax reliefs.    

Take advice from a professional tax accountant

If you have any difficulty in calculating your tax liability or are in need of more technical tax advice,  you can always go directly to the HMRC, ask your accountant or find a tax consultant that can answer all your tax-related questions. Tax accountants specialising in working with small businesses provide valuable tax advice in the sector and are also in a position to keep you up to date with the latest tax legislation and help you with your tax administration.  There is no need to struggle with your tax returns all by yourself.

Why you should use professional accounting services for your small business

Accounting plays an important role in the success of any small business; this is why asking for help from a professional accountant is always advisable. Contracting specialised accounting services will help any business owner save time, have full visibility and better control over their business financials, avoid making costly accounting mistakes and draw valuable business insights from the company accounts.

Many small business owners prefer doing their own accounting, thinking they can save money and have good control over their business’s financial aspects at the same time. While basic bookkeeping may seem relatively easy to do, there are many reasons why small business owners are better off engaging the services of accounting and bookkeeping firms. Here are the most important benefits business owners can gain from choosing professional accounting services for their small businesses:  

1. Avoiding accounting mistakes that impact your bottom line

When starting your small business, it might take a while to understand and become familiar with the rules and legislation regarding accounting and tax in the UK. This is why it is always a good idea to seek professional accounting advice from the outset. Mistakes such as misclassifying expenses, not keeping a good record of receipts or not reconciling your books with your bank statements can cost your business significantly by the end of the financial year, and it can all be avoided with the help of an accountant.    

Accounting professionals can help you save both time and money by keeping accurate and consistent records of your expenses and transactions, correctly inputting and keeping track of all invoices and bills in affordable accounting software, advising on deductible costs and expense claims available to small businesses in the UK and keeping a tidy paper trail of your accounting documents.

2. Timely and efficient bookkeeping and statutory accounts

Keeping timely, accurate bookkeeping records for your small business is not only mandatory but makes a sound business practice, allowing any owner to have visibility over their business’s profit and cash. Having your accounts updated on a monthly or quarterly basis is the best way to achieve this kind of visibility and keeps all your paperwork in good order, before it turns into an accounting nightmare.  

This is where making use of professional accounting services proves to be extremely valuable, as they ensure your business’s bookkeeping is done efficiently and in a timely manner. Most small business accounting specialists will assist you in collecting all your business’s bookkeeping records on a monthly basis and quickly produce the yearly statutory accounts, including calculations of your corporation tax liability, at the end of the financial year. This timely accounting procedure will allow you to efficiently plan next year’s budget and cashflow forecasts.      

3. Saving precious time that you can use to focus on your core business

Done properly, bookkeeping can be quite a time-consuming activity. It accounts for up to 20% of the working hours in the case of a small business owner, and this percentage can go up if you take into consideration other related tasks such as filing tax returns and payroll.

Contracting the services of accounting companies has the benefit of alleviating small business owners of this somewhat distracting admin work, allowing them to spend more time on growing their business operations, meeting more clients or marketing their business. Even when bookkeeping records are kept in-house, small business accounting companies often offer valuable support by providing templates that help business owners organise their day to day finances, access to streamlined online accounts portals and accounting advice in real time.    

4. Drawing business advice from your statutory accounts

But maybe the most important reason why you should hire external accounting services for your small business is the wealth of financial knowhow and business advice you will have access to.

Top accounting companies in the UK provide more than just bookkeeping and admin support for keeping your paperwork in good order. Accounting specialists can help you understand the difference between cash flow and profits and how to read your statutory accounts in a way that helps you better prepare your small business for future growth; they are able to closely monitor key indicators in your business’s financial activity such as trade debtors, trade creditors, payments and cash flow, and advise on the best strategies to secure the financial health of your small business on the medium and long term.

Why seek employment law advice for your small business ?

While it is perfectly normal for a business owner to want to focus on the most essential processes that contribute to the success and growth of its small business or startup, paying attention to the legal aspects of running a business is also very important. Statutory compliance, staff employment, terms of service and supplier contracts are the areas where professional legal advice services can help secure your business and save money in the long term.

According to a recent report published by the UK Legal Services Board, called In Need of Advice? and based on a YouGov survey of over 9000 British small businesses, 38% of surveyed small businesses experienced one or more legal problems in the past year, out of which employment law issues were second most common situations business owners had to face, right after issues concerning trading. While 45% of surveyed small business owners considered that legal problems have a tangible impact on their business operations and growth, in the majority of cases they dealt with problems entirely on their own (52%), with only 16% of legal problems being solved through professional legal services.

Prepare your small business for future employment law situations

As businesses grow, it’s almost inevitable that small business owners will have to deal with the occasional difficult employment scenario, the most common issues revolving around employee gross misconduct, unfair dismissal and redundancy. These employment issues can have a negative impact on the overall performance of the business and can quickly escalate and generate loss if the correct legal steps are not followed. This is why seeking employment law advice from the outset helps a small business be prepared to handle any employment situation correctly .

Employment law advice directly from the experts

It is good business practice to seek employment legal advice not only when employee grievances arise or legal action is required, but from the very beginning of your business setup.     

Other than offering employment law advice and support in cases of gross misconduct, redundancy and dismissals, an employment law solicitor can play a preventive role, by helping small business owners set up the correct employment contracts, prepare employee handbooks and other essential employment procedures and keep the business up to date on employment legislation.

Affordable employment legal advice

There are many ways in which small businesses that cannot afford a dedicated HR and employment service can still benefit from expert employment legal advice. While engaging a high street employment firm of solicitors on matters requiring legal action in court can prove to be an expensive exercise, small business owners can seek employment law advice with local professional associations and groups, which offer a series of online legal advice resources that any small business can easily access. Another route to take is to engage independent accounting and tax consultants that often include employment solicitors and offer employment law advice and guidance on a retainer arrangement, which is usually the most cost-effective solution for small businesses.