Dealing with tax tends to be one of the dullest chores in a business owner’s life, but with more tools available than ever before, tax doesn’t have to be quite so taxing. So, what are the steps entrepreneurs can take to avoid penalties, sidestep the mayhem of the next deadline and strengthen their finances in the meantime Here are a few tips to making tax returns easy.
Business owners need a basic understanding of tax and how it will be affected by upcoming legislation or at least to hire someone who can take on this responsibility. This will go a long way in making tax returns easy. Small firms are subject to a wide array of taxes, with the main ones being corporation tax, VAT, National Insurance and PAYE. Of these, a couple are soon set to change.
Corporation Tax, applied on limited companies” taxable income or profits, is currently set at 20?per cent. But the government announced its plans in the 2016 Budget to cut the rate to 17?per cent by 2020.
In the 2016Autumn Statement, chancellor Philip Hammond also announced an increase in the VAT paid by labour-intensive businesses where very little is spent on goods. This may affect a great variety of small firms from hairdressers and handymen to IT contractors and consultants, so check which side of the two per centcapital expenditure threshold you’re on.
Let technology do the hard work
We may be years away from robots taking care of all life’s tricky tasks, but technology can be a big help when it comes to making tax returns easy that includes?bookkeeping. Shoeboxes full of receipts can be banished to the nightmares of the past with apps that store photographs of receipts and automatically sort them into records.
Cloud accounting tools can also take care of records, giving instant access to which payments are due, as well as what’s owed. There’s a cost involved with this technology, but it can be a big timesaver, so it’s about weighing up what you value, and what else can be done with the time saved.
Fundamental changes to the tax system are planned by 2020 with Making Tax Digital, being bought in for businesses, self-employed people and landlords between April 2018 and April 2020. As part of this legislation, companies will be expected to keep records of all income and expenditure digitally, and send quarterly summaries to HMRC. Views are divided on whether this will result in a greater burden, or save businesses time once the process is up and running, but either way getting used to digital bookkeeping may ease the transition.
Make good use of your personal allowances
In addition to the basics of tax returns, SME?owners need to?think about controlling how much tax they pay. For example, owners can withdraw money from their company as either dividends or salary and successfully balancing the two can make a big difference to the tax due.
Make yourself familiar with what personal allowances you’re entitled to, including the £5,000 tax-free dividend allowance which came in April 2016. The worst thing an entrepreneur can do is to withdraw the full profits without considering what needs to remain in the business. An owner that takes out ?80,000, for example, will be liable for 40?per cent income tax. If this leaves the business short and the owner ends up needing to put some of this money back next tax year they can find themselves overpaying tax for no reason. It’s worth noting profit left or reinvested in the company will incur corporation tax (not income tax), so extract all the profits as dividends or salary.
Every business is unique in its cash flow needs, but it’s often better to leave a good buffer in the business account, with the option to make investments through the year to help the enterprise grow it will definitely make tax returns easy.
Foundations for success
Getting on top of tax returns can be seen as just one part of efficient financial management something worth getting enthusiastic about, not only because it helps track a business” progress over time, but because getting the numbers right makes everything else possible.
To (heavily) paraphrase The Kinks, get your tax returns sorted and you?ll have a lot more than sunny afternoons ahead.
Bivek Sharma is head of KPMG Small Business Accounting.