The end of the tax year is creeping up on us, although for many people finishing, or at least paying for, the previous tax year is still a current memory. This time of year there are often articles in the newspapers about saving tax, but often it seems these articles don’t bear much relationship to day to day businesses and taxes!
So, here are our practical Ten Top Tips for the end of the tax year. They are not only about saving tax – important as that is – but saving time, and sleepless nights as well.
1 – Get Your Business Structure Right
Sole Trader? Partnership? Limited Company? They all have pros and cons – the tax differential between Sole Trader and Limited company isn’t what it was; generally its still worthwhile, but you need to factor in complexity and admin costs.
Then there are other less common structures to think about like LLPs, CICs and CIOs.
As business evolves it’s worth having a periodic check to make sure you are using the right structure.
2 – Get the VAT Right
VAT is simple – 20% yes? Well, not so much.
First, the VAT registration threshold of £85,000 often trips people up as it gets missed, or incorrectly assumed to relate to tax years – its actually a rolling 12 monthly look back.
Second, the choice of Flat Rate VAT or Normal VAT can be perplexing, especially with the Low Cost Trader Rules. But there are opportunities for savings if you make the right call.
Third, situations like buying commercial property or trading abroad can cause unexpected headaches – get advice in advance.
A VAT error can easily rack up substantial arrears – for example accidentally going over the VAT threshold, which is a so called “cliff edge” could result in a £14,000 bill.
On a more positive note, some businesses can benefit from a restructuring into two or more divisions to save VAT.
Keep an eye on VAT, especially the threshold if you are not VAT registered. Always think VAT if your business is changing.
3- Check Your Expenses
The rules on deducting expenses for tax can be complicated and somewhat illogical.
Use a checklist like this one on our Website to benchmark what you are doing, checking you are neither missing out nor storing up trouble for the future.
4 – Make sure Your Income is Complete
If HMRC decide to audit your taxes, income is where they will probably start, and if your income recording is not watertight, they will focus a lot of attention on it. If your income records aren’t complete, HMRC will often try and reconstruct the picture, and although they should use “best judgement”, more often than not their figures will overstate the position, leading to a tricky negotiation.
Make sure you have good systems for recording cash income, and for following jobs through to invoice and payment.
5 – Know What Your Spouse Earns
What your spouse earns is important for your taxes. For example, if you are Self Employed is it worth paying them a salary from your business? If you run a company, how is it best to allocate shares between you?
High Income Child Benefit charge is worked out on the highest income of the two of you, which needs care. At the other end of the spectrum, married tax payers can transfer allowances between them, from a non tax paying spouse to a tax paying one (look up Marriage Allowance)
6 – Plan Ahead for 5 Years and 25 Years
Planning ahead is important. For example, are you planning a substantial period off of work in the next few years? In which case can some income be deferred? – generally this is only an option for Company Shareholders.
Likewise, if you are going to be disposing of assets, such as a property, in future years, plan your income so you can potentially get a lower tax rate in the year of disposal.
Longer term, what will your retirement income look like? That may influence how you structure investments now.
Plans are good, but don’t let them be too rigid, and review them every few years.
7 – Get your Taxes Done Early
Getting your taxes done early is a no brainer. You don’t end up paying your taxes any earlier, but you get time to review them at your leisure, and plan for payment.
When taxes are left late it becomes a rush – errors can creep in; an unexpectedly large tax bill can create sleepless nights without time to rustle funds up; information like tax certificates and HMRC references can be missing.
Also, when taxes are left to the last minute, your accountant often doesn’t have the time to run through the figures fully with you, meaning you don’t get best value from your accounting fees.
8 – Automate your Taxes
There are really good packages to help you automate your taxes these days.
Apps like FreeAgent help keep you on top of tax during the year – you probably won’t save much time or cost, but it makes the bookkeeping process less tedious – they often link direct to your business bank account as well.
Programmes like ReceiptBank make some of the paper flows easier – or if you don’t want to go that far, a scanner and a Dropbox account saves your filing cabinet from overflowing with receipts and invoices.
Feature bank accounts that combine bookkeeping and banking are evolving all the time. Contenders include Starling and Coconut, although the latter needs a bit more development until it is suitable for all but the smallest businesses.
9 – Don’t Let the Tail Wag the Dog
A frequent question we get in the office at this time of year goes along the lines of “Should I change my van / upgrade my computer / get my shop front redone / buy a new widget to save some tax?”
These are commercial decisions first and foremost – if a car, van or computer needs changing and its the right time, then do it – you will get a reduction in your taxes, but you still need to spend some money! For example if you are a 40% tax payer then spending £10,000 on a new van saves you £4,000 but you still have to spend £6,000 net! If you don’t need to spend the £10,000 then its better to pay the £4,000 tax, and have £6,000 in the bank.
So put simply, don’t let the Tax Tail Wag the Financial Dog – If you need to change a van or upgrade a computer, then certainly its worth doing it just before your tax year end to get the tax relief a year earlier, but its not worth doing it for the sake of it.
10 – Be Ethical
No one likes paying tax, but its part of the price of a civilised society with roads, hospitals, etc.
Being ethical, as well as a civic duty, lets you sleep easily without worrying about “what ifs”.
Our view is there are plenty of opportunities for people to structure their finances and taxes for optimal benefit within the law, and without resorting to dodgy schemes and dubious planning.