What small businesses need to be aware of in order to avoid onerous tax bills.

by Alexander Beard, on Jan 29, 2019 6:42:09 AM

Corporation tax isn’t just the premise of large companies. All UK companies face a 19% tax on profits for the year 2018, including ‘small profit’ companies which make £300,000 or less in annual profits. However, there are a few things that you can do to reduce your taxable profits if you’re a small business owner:

Keep a clear record of your operating expenditure

The general rule is that anything that counts as operating expenditure – like investing in company equipment – can be deducted from profits before they are taxable. Depreciation charges, however, are not tax deductible. A clear view of your operating expenditure will reduce the proportion of your earnings that are liable for taxation.

Understand what your annual investment allowance is

Another thing that small business owners should be aware of is their annual investment allowance (AIA). This totals £200,000 for eligible business purchase. Remember, if a small business owner controls two businesses, the two businesses only get one AIA between them.

Your claims have to accurately reflect business usage. If you split a business item’s usage between your personal and business activity, you can only claim on it in proportion to its usage for business purposes.

To make this clearer, say you purchase an iPad which you use half the time at work and the other half at home, you can only claim for 50% of the iPad. Leased items cannot be claimed and offer no tax advantages.

See if there are any forms of tax reliefs available for your area of operations

The UK tax regime looks kindly at certain kinds of businesses, offering tax reliefs for R&D firms, companies which make profits from registered patents and those engaged in creative industries. What’s more, disincorporation and terminal capital and property income losses can be claimed under corporation tax allowances.

SME R&D relief applies to firms with less than 500 employees and a turnover of under €100m or balance sheet total under €86m. This lets firms take their eligible operating expenses and multiply them by 130% in addition to the normal 100% reduction, bringing the total allowance to 230%. If you own a small R&D company, you can also claim a tax credit of up to 14.5% of losses.

Be aware of changes to Entrepreneur’s Tax relief

Amendments to Entrepreneur’s Tax relief in the most recent Autumn Budget mean that owners of small businesses may also pay less Capital Gains Tax. The new rules introduced lifetime limits based on when an owner sells a business. The maximum relief is now set at £10,000,000 for sales made after 6 April 2011, while it is set at £5,000,000 for sales before this date.

The Financial Conduct Authority does not regulate tax advice.