When you’re setting up a business, it’s incredible how quickly costs can mount up. Often these come at a time before you've even started to record any turnover, let alone profit.
We've created a quick-fire list of ways to reduce your tax bill as a small business start-up. Of course, it’s vital that you ensure you’re paying the right amount of tax, so always do your own research. This post aims to highlight some of the options and advice open to you.
1. Plan effectively
According to Tax Donut, effective planning is the key to minimising your tax bills and reducing your tax liabilities.
The first port of call is to think about the legal structure of your new business, as a start-up business has several options here. Tax Donut recommends that “the simplest business to set up is as a sole trader, while other options include formation as a partnership, Limited Liability Company or Limited Liability Partnership (LLP)”.
There will be a variety of tax consequences dependent on the company structure you choose. These include the scope of liability you will have for business debts, for example, so it’s important to contact HMRC to set yourself on the right path from the outset.
2. Withdraw profits from your business in a tax-efficient manner
Depending on your business set up, you’ll want to identify the most tax-efficient way to withdraw profits, say Tax Donut. For example, you may want to consider paying dividends, or reap the benefits of making tax-efficient pension contributions.
A business start-up may also want to consider tax-efficient ways of rewarding and incentivising employees. One such way is by offering a benefit in kind – sometimes called ‘perks’ or ‘fringe benefits’. These include things like company cars, private medical insurance and cheap or free loans. Some benefits in kind will not be taxed. Find out more about benefit in kind and tax free incentives here.
3. Get childcare credits
If you’re a small business owner and have a young child, then it may be an unavoidable expense to pay for child care during working hours. That’s where tax credits for childcare come in.
4. Reclaim VAT for business purchases
Reclaiming VAT on your business purchases is a great tax benefit, ensuring that you don’t pay VAT on items that are crucial to the set up and running of your business.
VAT relief falls under the umbrella of HMRC’s ‘capital allowance schemes’, which were introduced to encourage investment in particular assets or by specific types of businesses, including small and medium-sized enterprises.
The HMRC capital allowances investment schemes page provides a brief description of each scheme and links to more detailed guidance.
5. Claim research and development (R&D) relief for corporation tax
If your company pays corporation tax, then you may be eligible for research and development tax relief, which you may also be able to claim as a tax credit. You can find out more here.