1. Think about how you should start your business – as a sole trader, partnership or limited company. Companies still have tax advantages (see Tip 20) but generally only when the business has started to make a profit. With a new venture, you might expect to make losses in the very early years. As a sole trader or partnership, your losses in the initial years can be set against your other income in those years, or carried back to set against your income in the three years before you started the business.
2. Incorporation can still be worthwhile. Although corporation tax rates for smaller companies have increased recently, a business with profits of £50,000 can still save tax and NICs of approximately £3,500 if you trade through a company, compared to operating as a sole trader, provided you take most of your earnings as dividends.
3. Do not delay telling HMRC about your new business. Sometimes it is difficult to know exactly when a business starts or when a hobby turns into a business. Selling items through online auctions can be fun, but as soon as you start buying items specifically to sell you are deemed to be trading and you will need to register your business with HMRC on the form in leaflet SE1. Alternatively you can register online.
4. Switch to the flat rate VAT scheme for small businesses if your business has few costs and overheads. The VAT you pay is calculated by multiplying your gross sales by a flat rate determined by the business sector you work in. Purchases are ignored, so the scheme is very simple to use. However, your turnover must be less than £150,000 a year and there are complications if you let property in the same name that you trade under. When you use the flat rate VAT scheme in your first year of VAT registration, the applicable flat rate is reduced by a further 1% for that year, so the savings are even greater.
5. Choose the right company car and reduce your tax. You can set the full cost of buying a new company car against your company’s profits in the year of purchase, if you choose one with an official CO2 emissions rating of 110 g/km or less. And, as the car driver, you will also benefit from a lower income tax charge. In addition, if you provide your employees with fuel for their company cars, the amount of VAT that can be recovered is based on the CO2 emissions of the car. This is another reason to buy low emission vehicles.
6. Plan the timing of purchases of new plant and machinery in order to maximise the benefit of the Annual Investment Allowance (AIA). All businesses can offset against taxable profits the full cost of the first £50,000 spent on plant and machinery (other than cars) each year. Where businesses spend more than £50,000 in an accounting period, the excess will attract writing down allowances, at 20% or 10%. So it may be more tax-efficient to keep your expenditure to within the £50,000 limit for each year. However, plant and machinery purchased in the year ending 31 March 2010 may qualify for a 40% first year allowance.
7. Claim a tax rebate for any losses you make. Losses made by companies in periods ending in the two years to 23 November 2010 can be set against profits made in the previous three years, using profits of later years first. Tax paid for those earlier years can be reclaimed, although the amount of loss carried back more than one year is capped at £50,000. Losses made by unincorporated businesses in the accounting periods ending in the tax years 2008/09 and 2009/10 can also be carried back up to three years.Last Updated
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