How to be a tax efficient small business

Dan Martin
Former editor
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Many tax reliefs are yours if you want them but, if you don't ask, you won't get. Neil Sevitt, head of SME at RSM Tenon, looks at ways to reduce tax liabilities for your company. This article is part of the Finance Masterclass.

Tax is always in the news but with Members of Parliament attacking the likes of Starbucks and Amazon, it seems that anyone looking to plan their tax affairs properly can expect to face scrutiny from the tax man. That does not mean that planning is outlawed. It does however, mean that correct documentation is needed.
Although smaller companies may not have formal board meetings, HM Revenue & Customs will expect there to be a certain level of paperwork in place, especially when it comes to director loan accounts and dividends. With this in mind, it is always a good idea to have a record, even if it is only an email, to support the planning that you have done.
With that said, I will now look at how SMEs can legitimately save money by reducing their company tax liabilities.
A low level of salary is a great place to start because a certain level of National Insurance contributions is needed to attract state benefits. Dividends, however, are often more tax efficient and they do not attract National Insurance contributions either.
Incidentally, if you are a business owner who employs a family member, you need to make sure you can justify the amount paid on commercial lines. It is also worth considering giving shares to your spouse or civil partner; such gifts are usually tax free and your company will then be able to pay dividends to both of you, using two lots of basic rate tax; effectively this is around £40,000 tax free. You could also think about the 10% entrepreneurs’ relief rate, applied to capital gains when selling the company. This is only a benefit to your spouse or partner if they are a director or employee.
While looking at the subject of dividends, if you are also in a position to be able pay a dividend of over £150,000, it is worth thinking about delaying until after the 5th April as the top rate of tax falls from 42.5% to 37.5% from 6th April 2013.
Rates of capital allowances on equipment, such as a new plant and or machinery, are also falling. On the other hand, the annual investment allowance (AIA) has increased to £250,000 for a two year period. Therefore, spending up to that amount on a new plant, for example, will give companies, like manufacturers, a 100% allowance. Be aware however, that the AIA does not apply to cars and the rates of capital allowances on cars have been falling too. At the same time, the taxable benefit on private use cars is increasing. As a result, it could be better to own a car outside a company and claim business mileage instead - it is well worth doing the numbers to work out what’s best for you.
While looking at capital allowances, it is also worth giving a thought to claiming allowances for items, such as a plant, that are contained within the fabric of the company premises. For instance, lighting, cabling, lift and door mechanisms will have been included in the price paid. If you are able to, you should claim capital allowances on these items too.
The next question to ask yourself is whether you should incur any costs on trying to improve your systems and processes. Research and development (R&D) allowances are available for any company that carries out activities to resolve technological uncertainties or to make advances. Smaller companies may think that they are not able to claim this extra allowance, and this was the case until last year when the minimum spend of £10,000 was abolished. Now, for every £1 a company spends on qualifying R&D, it will be given another £1.25 of tax relief.
Many small companies also benefit from the technological talent of its owner. For example, companies will be able to obtain a lower level of corporation tax if they earn profits from a patent. Depending on your industry, it is definitely worth considering this avenue and for every new invention ask yourself if it is patented and patented in the name of the company, before the knowledge enters the public domain.
The final question to ask yourself is if you have key people you want to bring into the business and do you want to let them share in the success of the business. An enterprise management incentive (EMI) scheme is a tax efficient way of giving people share options and, if you do it correctly, the reward for their commitment to the business will be paid by the person who buys your company and not you.
As businesses will discover, by considering all of the above, there are many options available and many different routes to take in order to manage tax liabilities efficiently. Doing it right and legitimately is key, but more importantly, it is about being aware of what is available and maximising these opportunities wherever possible. 
For more expert advice on business finance, click here for the BusinessZone Finance Masterclass.

About Dan Martin

About Dan Martin

Dan Martin has 10 years experience as a journalist writing about entrepreneurs and the issues that affect them.

After three years working as a researcher for Sky News, he joined as a reporter. This was followed by two years working as news editor for during which time Dan also contributed to Growing Business magazine. In 2006, he joined Sift Media as business editor before being promoted to editor of He also has responsibility for UK Business Forums, the UK’s most active online forums for small business entrepreneurs. In addition, Dan founded The Pitch,'s nationwide competition for small business owners. He host the grand finals in 2009 and 2010 in front of an audience of 300. 

As well as interviewing many entrepreneurs, Dan has written content for leading business organisations such as the Department for Business, Enterprise and Regulatory Reform, British Chambers of Commerce, Forum of Private Business, Investors in People and Business Link for London. Among the publications that have quoted Dan are The Times, Mail On Sunday, Financial Times, Personnel Today and Bristol Evening Post. His articles have also been published by publications including eGov Monitor, Virgin Express in-flight magazine and Personal Success.

Dan regularly speaks at events about small business and social media issues. Among the events he has presented at are the National Federation of Enterprise Agencies' annual conference, Learning Technologies, Publishing Expo and World of Learning. He has also chaired high profile debates featuring senior representatives from Business Link and the Federation of Small Businesses and Dragons' Den judge James Caan.

Dan was named the 10th most influential political blogger on Twitter by the Independent and won the public award for best B2B tweeter at the Golden Twits 2010. He also organised the Bristol Twestival, part of a global Twitter driven charity initiative, in February 2009 and March 2010. Volunteers from 175 cities around the world organised events using the social network. In total, $350,000 was raised for charity: water in 2009 and $500,000 for Concern in 2010. In Bristol, £1,500 and £5,600 was raised.


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