1 Be a dragonA tax-efficient way to invest your hard-earned cash is to plough money into an up-and-coming business. Tony Hayday, CEO of The Software Bureau, says he takes advantage of the government’s Enterprise Investment Scheme.
“If you’re a UK resident and you’re prepared to invest in a UK business, you will not pay tax on any capital gain as long as you keep investing in it for three years,” he says. “The scheme encourages people to recommit their earnings into the future of Britain.”
2 Defer your incomeData management firm The Read Group sells a lot of licences, so CEO Mark Roy decided to defer the income gained from selling them instead of taking all the revenue into one month.
“Hypothetically, if you sell a £120,000 licence in December, you defer £110,000 of that to the following year, thereby lowering your tax bill,” he says. “This strategy is also recommended by the International Accounting Standards. Taking all the revenue may look good on your profit and loss account, but it’s not so great on your tax bill.”
3 Beware “income shifting”The government is introducing new rules from April 2008 to catch “income shifting”. Basically, that’s when you pass income from a higher-rate taxpayer to a lower-rate taxpayer. It tends to be associated with husband and wife family businesses, although it goes far wider than that. Francesca Lagerberg, chairman of the technical committee at the Institute of Chartered Accountants in England and Wales (ICAEW), says: “Certain business arrangements may cease to be as tax effective from April because income that goes to a lower-rate tax payer, who is not actively involved in the business, may be reallocated to the higher-rate tax payer and extra tax becomes due.”
4 Sell your business to yourselfThe controversial new capital gains tax regime comes into effect in April 2008. From then, capital gains below a £1m lifetime limit will attract a tax rate of ten per cent, but gains above the limit will be taxed at 18 per cent. Taper relief will be replaced by a flat rate of 18 per cent.
But Mark Simpson, director of tax savings at accountancy firm Simpson Burgess Nash, says there’s a way of getting around the new regime. “You can actually engineer a disposal by using a particular type of trust, or selling your business to another company that you also own. This means you can crystallise your liability at ten per cent and increase your cost base for capital gains tax for a future sale.” 5 Introduce childcare vouchersIf you offer your staff childcare vouchers to be used for registered childcare, you are exempt from paying employers’ National Insurance contributions on that amount, while your employee is exempt from income tax and National Insurance contributions.
Stephen Clarke says his company, Truancy Call, has introduced this benefit. “This has particularly benefited me as I also have a daughter who attends childcare. I don’t get taxed at a higher rate on the fees I pay to the childminder, saving me hundreds of pounds.”
6 Consider other remuneration solutionsAs well as childcare vouchers, consider similar arrangements, such as salary sacrifice initiatives, share schemes and incentive schemes. “Many of these options have tax breaks and may encourage better staff to join the business,” says Francesca Lagerberg from the ICAEW.
“With salary sacrifice, employees forgo extra cash in return for certain benefits. They reduce their salary, which means there’s less tax to pay and, if done properly, it’s also HM Revenue & Customs-approved.”
7 Don’t forget R&D…R&D is an area rich in tax benefits for companies. PricewaterhouseCoopers tax director Richard Farnsworth says: “In certain circumstances, companies can get a refund of their PAYE and National Insurance bill when they spend money on R&D. You’re effectively allowed to offset R&D costs against the PAYE bill.”
8 … but think creativelySome companies only offset the salaries of employees involved in the R&D project against their tax bill. But Ann Jones, the managing director of operational cost reduction specialists Lowendal Masai, says other costs can be figured into the total R&D spend, which will increase the resultant tax credit.
“We’re involved in a project at the moment for a big beverage company. When they do R&D on a new drink, they shut down their whole plant. The cost of doing that is part of R&D. Developing a new IT program is also considered R&D.”
9 Act before MarchHave you had any R&D activity during the past six years” It pays to check, as changes to the R&D tax credit system will occur in March 2008. “Before this date, you can claim tax credits going back six years. After March 2008, you’ll be limited to only two years,” says Jones.
10 Choose your company structure carefullyThere’s always plenty of talk on the Real Business forum about what is the best and most tax-efficient way to structure a business. Basically, it depends on the circumstances – how much money you expect to earn and the type of business you’re in. It pays to give it some thought at the outset as to what is the best structure for you, be it sole trader, limited company, limited liability partnership or partnership.
11 Employ a “consultant”, not an “employee”Thinking about employing extra staff Francesca Lagerberg at the ICAEW says think about what you really need before you step into the recruitment market. It may be more tax efficient to employ a consultant rather than an employee.
“Employees need to be put on the PAYE system, and you need to pay National Insurance contributions for them. Hiring a consultant instead for specific projects can take some of the tax burden away from the company.” But, she warns, you must be able to prove the role is in a consulting capacity.
12 Invest in foreign funds“If you invest in an overseas fund that’s managed by a UK company, you normally pay less tax on your investment,” advises The Software Bureau’s Tony Hayday. “For example, Coutts private banking tends to have its funds managed and run in Northern Ireland as there are special tax advantages there.”
13 Forget about MonacoWe’ve all heard of people who move their operations to places like Monaco or Jersey to avoid the tax man. But Mark Simpson of Simpson Burgess Nash tells us it’s only for the very rich. “Offshoring isn’t cheap, and you need to create a situation where the business activity is genuinely managed in that offshore location,” he says. “That’s a problem if you’re sitting in the UK.
"You either need to have employees who are based in that location to whom you can trust the management of the business, or you have to pay a merchant bank to manage your business.” You also need to have a non-UK element to your business.
14 Check your foreign VAT…Research by Lowendal Masai found that €5bn of foreign VAT isn’t being recovered. Some of that could be yours. If you’re looking to cut your tax bill, check your foreign VAT.
15 … And your domestic VATThere’s also a chance you’re not recovering as much domestic VAT as you could be. Lowendal Masai’s Ann Jones says millions of pounds of VAT is left unrecovered because there is miscoding on domestic VAT returns. You could also be missing out if you use a procurement card. “Clients are not recovering the VAT on some procurement purchases because these don’t go through the normal accounts payable system. A procurement card means they pay the account there and then; it doesn’t get lodged in the ledgers and the VAT doesn’t get paid out,” Jones says.
16 Look at capital expenditure…“Depending on the different types of expenditure, you get various capital allowances,” advises Richard Farnsworth of PricewaterhouseCoopers. You can also save tax if you embark on capital expenditure towards the end of the year. Farnsworth explains: “If you’re going to make £100 in the year but at some point you’re going to spend £400 on a new machine, buy that new machine in the last month of your accounting period. That way you get a full 25 per cent capital allowance on it. You’ll get £100 of tax allowances, which will wipe out your profit for the year.”
17 …but only spend money when you need toFarnsworth warns against capital expenditure for the sake of reducing your tax bill. “There needs to be a good commercial reason for doing it. The most extreme case I’ve seen involved a football club that would buy players just before the end of their financial year. You’d get towards the end of the accounting period and the manager would be told “go out and spend this much on a new player because we don’t want to pay tax”. It came back to bite them because they ended up buying rubbish players!”
18 Say “no” to global invoicesIf your contractors give you global invoices, you could be missing out on capital allowances. Lowendal Masai’s Ann Jones advises asking your contractor to break down your invoice so that you can “record each item separately in your ledgers and then pick up tax credits accordingly from there”.
19 Extricate everything from expensesIf you run your business from your living room, you may be able to claim back some of your household expenses. This can include heating, lighting, telephone calls, even water in some cases. You won’t be able to claim it all, but you can get a proportion of what was spent. This depends on how many rooms in the house you use for business and the percentage of time the rooms are used for your commercial endeavours.
20 Pay more into your pensionTax relief is available on pension contributions up to 100 per cent of your annual earnings. There is an annual allowance of £225,000 in 2007-08. If you’re lucky enough to invest more than this in a tax year, you may incur a tax charge. For everyone, the HMRC website adds: “You can put in up to £2,808 in any one tax year and the government will top this up with another £792, giving you total pension savings with tax relief of £3,600 per year.”
21 Go greenSelecting low-emission vehicles for your company car scheme or making your business carbon neutral will give you generous tax breaks. You’ll also get 100 per cent capital allowance on expenditure that’s considered environmentally friendly. “If a carbon-neutral property costs less than half a million pounds to the purchaser, they don’t have to pay any stamp duty land tax,” says Mark Simpson of Simpson Burgess Nash. “If it costs more than half a million, £15,000 is knocked off stamp duty.”
22 Save energyYou can get tax breaks when you save energy, too. “There is also a VAT relief on the installation of various energy-efficient items, such as solar panels,” Simpson adds. How much relief “Normally you’d pay 17.5 per cent on installing something like that, but where the item is energy friendly, you’ll only pay five per cent VAT.”
23 Create an eco-friendly property portfolioDraught-proofing your property and installing insulation will give you an upfront tax relief for the entire cost of expenditure of £1,500 per property. “If you’re a landlord who has bought a block of flats, you can get £1,500 per flat,” says Simpson. “And if a company buys a Brownfield site that is contaminated – it’s an old coal mine, for example – it can get 150 per cent tax relief on the cost of cleaning up that contamination.”
24 Direct some bonuses to year-end accountsSome companies have wisened up to including directors’ bonuses in year-end accounts. As long as they’re paid within nine months of the year-end, it has the effect of reducing the tax bill.
25 Investigate IT solutionsIf you’re completing your tax return yourself, certain software packages may make the task a little easier. There are a number of products on the market. One such product is Legatio’s Ftax. In partnership with HMRC, Legatio has created an interactive PDF of the self-assessment form, which contains more than 700 checks and calculations.
26 Speak to a tax adviserIt’s tempting to try to save even more money by doing your tax yourself, but sometimes you can’t beat the experience and know-how of a qualified tax adviser, especially if your business is a little complex. To find one such beast, contact the Chartered Institute of Taxation (www.ciot.org).
27 Don’t cheat the tax man!Make sure your tax planning doesn’t become tax avoidance. If you get caught, the tax man will make you pay through the nose and you could end up in jail. As The Software Bureau’s Tony Hayday says: “Don’t try to cheat the tax man. Work with him because he’ll always get you in the end.”