Would you pay more for a simpler tax system? According to a recent poll of small businesses, over half would. But, given that’s not going to happen anytime soon, Ray Abercromby, partner at BTG Tax, gives his top tips for cutting through some of the red tape.
The cheerful reassurance that ‘tax doesn’t have to be taxing’ couldn’t be further from the truth for some business owners. With the VAT change to 20% putting one fifth of turnover at risk if VAT accounting is not correct, business owners in the printing sector face significant losses if they fail to get their heads around tax regulation.
A recent survey conducted by the Forum of Private Businesses suggested that some small business owners are so frustrated with the complexity of the UK tax system that they would rather pay more just to see it simplified. Of the business owners surveyed, 57% said they would be willing to pay more tax in exchange for a simplified system – providing that it led to greater rewards. Meanwhile, 45% of business owners on the Forum’s Tax and Budget member panel said they would tolerate a higher tax bill under a simplified system if it were accompanied by a general reduction in legislative red tape.
This may be more than a simple pipe dream if we believe the Government’s rhetoric about streamlining administration and red tape for small businesses but in the absence of specific proposals to change the system, you can follow the steps below to guide you through the tax maze.
1 - Being brought to account
The VAT change means that one fifth of turnover is potentially now at risk if VAT accounting is not correct. You will have to be aware of the VAT accounting rules in light of this increased risk. VAT registered businesses must pay attention to basic VAT planning in order to stay VAT neutral e.g. by issuing invoices on the first day of the VAT quarter rather than the last and claiming VAT back on business purchases at the earliest opportunity.
You should also maintain your focus on the accuracy of your VAT returns since, as it currently stands, HMRC doesn’t take into account any innocent mistakes made when it determines whether a penalty is to be applied to an error on a VAT return. The higher rate of VAT could consequently mean higher penalties so you will need to ensure your VAT returns are spot on first time around to avoid being fined.
Those of you with a business approaching the VAT registration threshold (currently £70,000) should consider applying for registration at the earliest possible opportunity since there is a current delay in processing these applications.
The higher VAT rate gives a further incentive to take advantage of various HMRC schemes that simplify VAT accounting and help improve cashflow, such as the Flat Rate Scheme and Cash Accounting.
2 - Don’t be named and shamed
If you are a business owner or director you will benefit from considering your own personal accounts and tax efficiency drives as well as that of your businesses; if these measures are found to constitute tax avoidance by HMRC then it could affect the business itself.
HMRC has been cracking down on individuals who keep offshore bank accounts for tax purposes and the increase in the number of criminal tax investigations being opened means those with offshore bank accounts that generate income which has not been declared for tax purposes are at risk. The implications of a prosecution include HMRC securing its share of your offshore funds and a potential prison sentence of 18 months to two years. A prosecution could likewise lead to you being publicly named and shamed on the HMRC website for a year – with details of your tax failings made accessible to all of your personal and business contacts.
However, the Liechtenstein Disclosure Facility (LDF) offers a reprieve for directors or business owners who have offshore funds. It is open to all with an offshore asset (i.e. not opened through a UK branch or agency), as long as a Liechtenstein asset is acquired immediately and LDF registration follows suit. That asset can either be a bank account or a basic foundation with a minimum £10,000-20,000 investment. All undeclared tax issues overseas and onshore can be swept up in the facility, penalties are restricted to 10% of the tax and both prosecution and naming and shaming can be avoided so long as a full disclosure is made.
3 - Tax sheltering?
Whilst at one time, companies and individuals alike dedicated energy to tax saving measures, the Disclosure of Anti Avoidance Regulations means that HMRC could be cracking down on those sheltering their businesses from paying tax in a legitimate manner. HMRC is moving towards a purposive approach to tax avoidance; if the sole or main benefit of a strategy is to avoid or substantially reduce the amount of tax due then HMRC may ignore the statutory outcome and deny any tax saving that may be generated.
You need to be wary of this attitude and ensure that your own strategies – or those of your tax planners – will have a commercial purpose and that any tax saving can only be viewed as an incidental to the main aim that should be to make a profit. This ‘business first, tax saving second’ approach is proving the clever way to go about tax planning in today’s climate.
4 - Corporation Tax
When you are running a business and juggling various elements such as employees, expenses and equipment, HMRC will be looking to secure its share of the spoils every month and quarter in the form of VAT, PAYE and NIC. At the end of each year, payment of Corporation or Income Tax will also be required. This can put a burden on cashflow and if the business gets it wrong then it could face getting dragged into a vicious spiral that leads towards insolvency.
In order to get it right, you need to review and manage your tax payments regularly to ensure the business is being run in its most tax effective form. Both personal and business tax positions should be reviewed on an annual basis – and importantly, provisions should be made off the back of these reviews to stand the business in good stead for the year ahead. Turning a blind eye to the taxman could lead to unwanted attention from HMRC, which may take both time and money to remedy. These are resources you want to plough into the business itself so swift action is likely to serve you better in the long run.
5 - Income Tax
If you have a sole trade or unincorporated partnership, you could be facing a 50% income tax charge on your profits. This can be galling, especially if an element of these profits are reinvested or are not required to meet the costs of living. For many printing businesses, it is possible to incorporate the sole trade or partnership in a manner which can result in being able to pay the lower capital gains tax (CGT) rates on the disposal value of the business, then having the company pay for the trade over a number of years - in effect, replicating the income that would otherwise be required.
In this manner, the advance payment of CGT on the business transfer allows the owner to receive cash by way of loan repayment from the company instead of taking a dividend. The tax rate is reduced significantly as a result, and ongoing retained profits are taxed at 28% (reducing to 24%) at most - a healthy improvement on the 50% tax rate.