September 23, 2020
It is a very common perception among the new entrepreneurs that the vast and sometimes ambiguous UK Tax rules are one of the reasons that impedes their growth. And sometimes it can even be a real problem for your business if you are unwary.
In this article we have tried to cover the common Tax traps that you need to avoid when starting a business. Remember you need to be Tax Savvy to find ways to minimise tax bills legally.
Before we run through the different tax traps, one very important advice – Know your Business and Industry. You need to be proactive not reactive. You must be in touch with the trade bodies and communicate with people to be on top of everything that is happening. Particularly to know about new changes and allowances from HMRC.
Now, here are the common Tax Traps –
1. You cannot be an employee of your business
If you are a sole trader that means you are self-employed. In this case you are not an employee of your business. As in the eyes of the law you and your business are one Entity. The money that you take out of your business is treated as Drawings. So, you cannot deduct the money that you take as expense from your profits. Unless, you employ any employee, you are not required to run any Payroll as well.
2. When you become an Employee?
If you are running your business as a Limited Company then things change totally. You and your Company becomes legally two separate persons. So, there are certain things that you need to know before taking out money from the company. There are restrictions and thresholds that decide how much money you can take and what taxes you incur.
The company can pay you money in the form of
a. Salary as an employee.
b. Dividend based on your shareholding in the company and available profits/reserves.
c. The company can reimburse the money that you paid on behalf of the company.
It is important to note that if you take out money more than the tax free thresholds then you will pay taxes and in certain circumstance the company will also may have to pay additional corporation tax.
3. Use the right VAT scheme for your business
This is one area where many business owners are losing out monies unknowingly. Many of you may have adopted the Flat Rate VAT scheme due to its simplicity and it saves your time. But the very first thing that you need to do is that you must apply for it and implement this only after HMRC has accepted your request and not before that.
And further it is not like that every time Flat Rat Scheme is the best for you to reduce your VAT bills. You must see that out of the different VAT schemes, which one is the most tax efficient for you. And accordingly decide by taking expert advice.
4. Claiming Motoring Expenses
You need to take a very informed decision here. Because when you claim relief on business travelling in your car using the rate prescribed by HMRC, you cannot claim certain costs like petrol or repairs. Note that you cannot claim capital allowance as well. So, here you must see whether by claiming mileage rates you are saving tax or paying extra.
5. Using your Home as an Office
If you are working from home then you can claim certain percentage of your home expenses in your business accounts. But while claiming the expense you need to consider what HMRC has allowed and what not. One very common expense that normally you cannot include that is your water bills unless your business activities (like laundry) include heavy water usage and you have a separate supply from your domestic use.
For new business owners these tax traps can be fiddly. Therefore, it is advisable that you take expert advice and help in tax matters. Here, in Doshi we have ample experience of providing Accounting and Tax services to new business start-ups. We take care of your VAT returns and ensure that you pay the correct legal minimum tax. We handle all your tax matters in order you focus mainly on your business activities and build your business.