There are many advantages to being a business owner. You are your own boss and, with that, comes the freedom to make decisions and run your enterprise your way.
But, despite the rewards that come with being a business owner, there may also be times when ploughing your own furrow can feel a little isolating and there may be pitfalls and tax traps along the way.
That’s why we have put together some of the most frequently asked questions that we are commonly asked by business owners to offer a little guidance – helping you save time and money.
How you are paid can have a significant impact on the amount of tax that you owe. That is why most business owners are paid via a regular salary, as well as dividends – an amount paid out from a company’s profits to shareholders.
Getting this balance right can sometimes be the difference between paying tax at the basic, higher and additional rate, as well as affecting other personal tax reliefs and National Insurance contributions.
A company car can be one way of reducing your annual tax bill but they are still taxed through Benefit-In-Kind (BIK).
This classes a company vehicle as an extra taxable benefit that falls outside of your regular salary.
The latest BIK rates follow the stricter European World Harmonised Light Vehicle Test Procedure (WLTP) emission and economy tests, which means that some cars on paper will have higher CO2 (carbon dioxide) emissions, resulting in a higher rate of tax.
Companies should use the latest car tax rates to reduce their BIK liabilities by selecting lower-emitting vehicles.
The Government has set up numerous tax incentives for company car users who use electric vehicles (EVs).
It is not surprising then that more businesses have either already made the switch to EVs or are giving serious consideration to doing so. Some of these incentives include the following:
Benefits in Kind – EVs attracted a 1% tax rate on Benefit in Kind (BIK) in 2021/22. This also applies to hybrid vehicles with emissions from 1 – 50g/km and a pure electric range of over 130 miles. This rate has increased to 2% in 2022/23, but it still makes electric and low emission cars very affordable in comparison to higher emission vehicles.
Capital allowance – Cars with CO2 emissions of less than 50g/km are eligible for 100% first-year capital allowances. This means that electric cars can deduct the full cost from your pre-tax profits. There may be Corporation Tax to pay when the car is later sold, so this needs to be considered.
Congestion charge exemptions – EVs are exempt from congestion charging and clean air zone (CAZ) charges. As well as London, five cities have been required by the Government to introduce a Clean Air Zone, including, Leeds, Birmingham, Nottingham, Derby and Southampton. If your company vehicle regularly travels into areas where clean air zones exist, there will be significant cost savings from switching.
Electric charge points – Any business that installs charging points for electric vehicles between now and 31 March 2023, can claim a 100% first-year allowance for these costs through the Workplace Charging Scheme worth up to £350 per charging point.
Electric vans – The taxable benefit for having the private use of a zero-emission van were reduced to nil from April 2021. The previous year, electric vans were taxed at 80% of the benefit for a normal van.
Leasing – Leasing a vehicle through a VAT registered company allows you to claim back 50% of the VAT on monthly payments and up to 100% of the VAT on the maintenance agreement, which you are not allowed to do when buying a vehicle outright. But be aware that a leased EV will not qualify for the Capital Allowances mentioned above.
Salary sacrifice – Where an electric car is provided under salary sacrifice, the optional remuneration rules do not apply.
Tax bands for low emission vehicles – 11 new tax bands for vehicles with emissions of 75g/km and below have been introduced. The Government has also announced the tax rate for the next three years, helping businesses to plan. Electric and hybrid vehicles pay no or very little vehicle excise duty.
A balance sheet provides a statement outlining the assets of the company owners, its liabilities, such as debts, and the value of its owner’s investment referred to as shareholders’ equity.
The first section of a balance sheet records a business’s fixed assets, such as buildings, land, machinery and equipment, and current assets, which includes cash, stock and accounts receivable that have a ‘lifespan’ of one year or less.
The next section records liabilities, including long-term liabilities like money owed by the company that aren’t due to be repaid within the year, current liabilities that must be paid sooner, such as money owed to HMRC that is paid with 12 months, and accounts payable, which includes salaries and interest on loans.
The final part of the balance sheet is the shareholder equity, which will typically include:
Share capital – The funds given in exchange for shares.
Retained earnings – Profits earned once dividends or other distributions are paid out.
For a balance sheet to balance, total assets have to equal total liabilities plus shareholders’ equity. When combined with cash flow records and an income statement the balance sheet should form part of a business’s financial statement.
There are many different approaches to improve your balance sheet and boost cash flow. Here are four common steps that all businesses should consider:
Improving debt-to-equity ratio – Reducing your debts and increasing the cash coming into your business can only strengthen your operations. You need to increase your income and use this to pay down debts. If you can’t increase income, you may need to use assets to reduce debts.
Create a cash reserve – Monitor the amount of cash held and try to build a reserve for investment or emergencies. This can be achieved by disposing of assets, increasing turnover or reducing liabilities.
Reduce cash leaving the business – Cash flow is the lifeblood of your business. If your liabilities exceed the cash being received you cannot operate and you should find a way to manage liabilities.
Strengthen credit control – Many businesses struggle with debts and late payments. These can create a lot of issues with cash flow and balance sheets. Appoint a professional to manage credit control or invest in software that can help do it for you.
There are two main methods used to calculate depreciation:
Straight-line method – This is calculated by dividing the difference between an asset’s cost and its expected salvage value by its useful lifespan. This method is easy to calculate and understand but has some drawbacks.
Reducing balance method – This is calculated by applying a fixed percentage on the ‘book value’ of the asset each year so that the amount of depreciation each year is less than the amount provided for in the previous year. As the ‘book value’ of the asset is continually reduced from year to year it is possible to figure out the depreciation expense.
The structure of your business can have a big impact on how you and your new enterprise are taxed and the obligations that you face.
Sole traders – From a legal and tax perspective you and your business are considered a single entity.
As such, you are held personally responsible for the business and its debts.
Your profits are declared via a self-assessment tax return and classed as your annual income for that year, regardless of whether you receive this as a salary or it is held in your business’s bank account.
As a sole trader, you do not have to submit information to Companies House each year, it may be easier to take money out of the business and it can be easier to set up and close your business but remember you are personally liable for the debts of your business.
Partnership – Partnership are similar to sole traders but differ in that they have more than one owner.
Under a partnership arrangement, each partner owns a specified percentage of the profits but is also liable for these profits and must pay tax on them as they are treated as income.
Each partner must complete a self-assessment tax return to record and report their income to HM Revenue & Customs.
Depending on the type of partnership formed, partners may be held personally liable for debts and other obligations.
Limited liability partnerships share many of the same characteristics of a conventional partnership, such as the internal management, tax liability and the distribution of profits, but also provide the limited liability of an incorporated company, without the same obligations.
Limited Company – Incorporating a business is a popular choice for many business owners, as the business becomes a separate legal entity entirely.
The company will be owned and controlled by those who own its shares. These shares can be owned by a single person or multiple people and can be sold to raise money for the company.
Limited companies must be registered at Companies House and have to submit annual accounts and statements under Companies House rules. They will also have certain standard legal documents that govern what they can and can’t do.
Instead of partners or owners paying tax via their tax return, Limited Companies are subject to Corporation Tax and must submit an annual Corporation Tax return which records your company’s:
Income and expenditure
Details of any stock on hand at the end of your financial year.
Choosing to operate as a limited company comes with significant benefits for owners and shareholders, including improved tax efficiency and reduced risk from liabilities.
It is important to carefully consider which structure suits your business and how it may affect the tax that you owe and your legal obligations.
It is possible to change your business’s structure later in its life.
Operating as a company may also add a level of credibility that you may not associate with as a sole trader.
It was previously a contractor’s responsibility to determine their IR35 status while working in the private sector, regardless of whether they were operating as a limited company or through an agency.
However, since April 2021, the duty to make this determination has shifted from the contractor operating via a personal service company (PSC) to the end client, which will typically be the engager of a contractor’s services or the recruitment agency through which they are contracted.
MTD will be introduced in several different phases, as follows:
Making Tax Digital for VAT
If your business is VAT registered you will need to comply with Making Tax Digital (MTD) for VAT.
Under this system you must use HMRC approved software to keep your records digitally and submit VAT returns each quarter.
An initial soft-landing period for MTD for VAT has ended, which means that businesses face potential penalties if they do not use HMRC-compliant software or process to report their VAT affairs.
Making Tax Digital for Income Tax
MTD for Income Tax Self-Assessment. will require the self-employed and landlords with annual gross business or property income above £10,000 to comply with MTD from April 2024 by recording and reporting their income using HMRC compliant software every quarter. General partnerships will also have to abide by these rules from April 2025.
If this change affects you, you will need to complete four annual submissions, plus an annual return digitally.
The Government has announced a more favourable point’s system of penalties for the late filing and late payment of tax for MTD for Income Tax Self-Assessment.
This will come into force in the tax year beginning April 2024 for the self-employed and landlords, and April 2025 for all other ITSA taxpayers, such as general partnerships.
Making Tax Digital for Corporation Tax
HMRC intends to introduce its MTD initiative into the Corporation Tax regime once it has finished rolling out the system for Income Tax but it is yet to set a firm date for its implementation.
At the moment, not much has been confirmed about this phase of MTD, as the Government is still consulting with businesses and their agents to help design an effective MTD for Corporation Tax system.
The Government will also provide businesses with an opportunity to take part in a pilot for MTD for Corporation Tax before it becomes mandatory in the years ahead.
You must use HMRC approved cloud accounting software or a set of compatible software programs that can connect to HMRC systems via its Application Programming Interface (API). The software must be able to:
Keep records in a digital form
Preserve digital records in a digital form
Create a VAT or tax return from the digital records held in functional compatible software and provide HMRC with this information digitally
Provide HMRC with VAT and tax data voluntarily
Receive information from HMRC via the API platform that the business has complied.
We can help you find online cloud accounting software that is suited to you and your business’s needs.
If your limited company builds an office in a residential garden space owned by an employee or director it may not be eligible for capital allowances, such as the Structure & Building Allowance.
However, it might be possible to use capital allowances to reclaim some of the cost of installation for utilities, such as electrical wiring, plumbing or thermal insulations, via the Plant & Machinery Allowance.
In most cases, the main benefit is a cash one if the right circumstances can be met.
If the garden office is fixed down, then it forms part of your property. This may create Capital Gains Tax issues when you come to sell your home as it may affect how your property is classed. This may also create an issue with insurance and business rates as the office would constitute business premises.
If the garden office is not fixed down, then you could argue that if you were to move, you could take it with you, so the office does not form part of the premises. As such, you would be fine reclaiming the cost of the office from the limited company.
However, where this may fail is proving:
That it can be moved or dismantled without any hassle – even offices that aren’t fixed may require substantial work to be relocated.
It is 100 per cent for business use. This would mean using separate phone lines, internet and utilities that aren’t shared with a residential property. Separating the domestic and business items would then mean that the office is a business premise, which could lead to the same issues.
Where your garden office is purchased through your limited company, you should also consider personal usage, such as using it for storing personal items or even utilising the space for family activities.
Personal use of a garden office could restrict the allowances you can claim. It may also affect your ability to reclaim a portion of the VAT on a purchase.
The two most commonly used forms of VAT accounting are cash (based on bank receipts and payments) and accrual (based on invoices raised and received).
Why use cash accounting for VAT?
Using the cash accounting method, you calculate the VAT when your invoices are paid by your customers, not when they are initially raised – this ensures that you only pay VAT to HMRC once your customer has paid and settled their invoice.
However, this also means that you can only reclaim the VAT from HMRC on purchases where the supplier invoice has been paid.
This method is generally seen as an easier approach on cash flow, as cash reserves aren’t required to pay HMRC for sales not yet collected, making it ideal for smaller to medium-sized businesses.
Businesses should be aware, however, that this method of accounting is only available if taxable turnover is less than £1.35 million in the next 12 months. You must leave the scheme if your VAT taxable turnover is more than £1.6 million.
You are also not allowed to use this method of accounting if:
You use the VAT Flat Rate Scheme – instead, the Flat Rate Scheme has its own cash-based turnover method.
You are not up to date with your VAT Returns or payments.
You have committed a VAT offence in the last 12 months, for example, VAT evasion.
Certain transactions are also not permissible under this method, such as where the payment terms of a VAT invoice are six months or more.
Businesses with long payment terms on their sales invoices, credit control issues or businesses, such as consultants with no real significant expenses each quarter, may benefit from using the cash basis for VAT.
Why use accrual accounting for VAT?
This is the default option for VAT. If you use the accrual accounting method you must calculate VAT based on when the invoice was either received or issued.
This method of accounting is not concerned with when payments were received or made, which is why it is the preferred (and often required) form of accounting for larger businesses with a higher turnover.
If you intend to use this method of accounting, you should make sure that you have sufficient cash reserves to cover VAT payments to HMRC on unpaid invoices.
Businesses that typically have a VAT repayment each VAT period may wish to use the accrual-based scheme to reclaim the VAT refund more quickly.
VAT payments are typically due around five weeks after the end of the VAT quarter, so if your customers tend to pay you within two to three weeks of invoicing, the accruals scheme could be more appropriate.
Businesses need to consider which form of accounting is most suited to their business and seek advice from a qualified professional before adopting one or the other.
Directors, as well as other employees, should be able to claim tax relief for additional household costs if they are required to work from home regularly.
You may be able to claim tax relief for:
Gas and electricity
Business phone calls, including dial-up internet access.
However, you are not permitted to claim for the whole bill, just the part that relates to your work. You also cannot claim tax relief if you choose to work from home.
Under the rules, you can either claim tax relief on:
The exact amount of extra costs you have incurred above the weekly amount with evidence, such as receipts, bills or contracts; or
At a flat rate of up to £6 a week without evidence.
You will receive tax relief according to your marginal tax rate. For example, if you pay the basic rate of tax and claim tax relief on £6 a week, you would get £1.20 per week in tax relief (i.e., 20 per cent of £6).
You are required to register for VAT in the UK if:
You expect your VAT taxable turnover to be more than £85,000 in the next 30-day period; or
Your business had a VAT taxable turnover of more than £85,000 over the last 12 months.
VAT taxable turnover is the total of everything sold that is not VAT exempt.
You might also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.
If neither you nor your business is UK-based you must register for VAT as soon as you supply any goods and services to the UK, regardless of whether you meet the VAT threshold.
You can also apply for voluntarily if your business turnover is below £85,000. This can bring several advantages, including the ability to reclaim VAT on certain supplies. However, you must pay HMRC any VAT you owe from the date you are registered.
Most businesses can register for VAT online. This will grant you a VAT number and create a VAT online account, which will allow you to submit your VAT Returns to HM Revenue and Customs (HMRC).
You can also appoint an accountant to submit your VAT Returns and deal with HMRC on your behalf.
You should get a VAT registration certificate within 30 working days of making your submission, though it can take longer.
Your registration date is known as your ‘effective date of registration’ and you will have to pay HMRC any VAT due from this date.
The team at Knights Lowe are here to help.
Just because you are ‘going it alone’ doesn’t mean you are completely on your own.
We provide a listening ear and practical advice to business owners. When there are difficult or unclear decisions that need to be taken, feel free to use us as a sounding board.
We have helped countless other business owners who, at one time or another, have been in your shoes. We will work with you to weigh up your options, suggest the best and most appropriate route forward and help keep you on the right track.
We’re always here to provide you with support and the good news is that it’s all part of the service so you won’t get an invoice every time you pick up the phone to us.
And remember, there’s no such thing as an ‘unnecessary question’ – so if it’s something that’s bothering you, get in touch and we’ll provide the answer.