Save Tax in a Self Employed Business
By Ian Marlow
Self-employed taxpayers are taxed on their profits, whether or not they take the
profits and spend them or plough them back into the business. Unlike a limited company, therefore, there are
fewer opportunities for tax planning, but that's not to say that tax savings are not possible. Here are some
1. 'Think Business' for Expenses.
Many self-employed business owners throw money away by not keeping enough receipts. It's not sophisticated tax
planning, but the more expenses you have, the lower your profits and the less tax you are liable to pay. You simply
need to train yourself to do two things every time you buy something. First you need to think whether what you are
spending is really a business expense. It is if it is 'wholly and exclusively in the course of your business'. What
that means depends upon the business you run. If you are a plumber, then a wrench would qualify; if a model,
lipstick for a fashion shoot; if a university lecturer, then books to research for a journal article. A legitimate
expense will therefore vary from business to business so it pays to stop and think whether what you are about to
purchase is directly related to your business. The problem when you start a business is that you may well already
be in the habit of buying such items. But you are the owner of a business now and you need to think like one.
Secondly, you need to ask for, and then, keep the receipt as evidence of the purchase. If you don't keep a record
you are likely to forget the purchase and consequently pay more tax. Training yourself to think and keep receipts
will always save you money in the end.
2. Make Sure You Use the Annual Investment Allowance.
Purchasing equipment is not dealt with in your accounts in the same way as buying other expenses. Equipment such
as a car or computer is depreciated according to the rules for capital allowances. So, instead of being simply
offset against the income in the year in which the expense is incurred, the cost is spread over the estimated life
of the asset. The rules for doing this tend to change quite regularly and it's easy to be caught out by changes
unless you have professional advice. Currently, it is possible to claim the first £100,000 of capital expenses
(apart from cars and buildings) as Annual Investment Allowance (AIA) and depreciate it all in the year of purchase,
any more than that being depreciated at 20% per year as a reducing balance. Next year the AIA reduces by half and
we don't yet know what will happen after that. So, if you are thinking of buying a large capital item, then this
year would be a good time to do it in order to reduce your tax liability.
3. Register for the Flat Rate VAT Scheme.
If you are VAT registered and have limited expenses on which to reclaim VAT, then it may be worth you
simplifying your VAT-related administration by registering for the VAT Flat Rate Scheme (FRS). Under the FRS you
simply pay a fixed percentage of your turnover to HMRC rather than calculating the difference between the output
and the input VAT. Each business category has a different percentage attached to it. You need to be clear though
that the percentage relates to the total invoicing; that is the amount you charge plus VAT at the appropriate rate.
As well as saving in administration, this can give rise to a tax gain if your expenses are particularly low. If you
end up paying less VAT using FRS than you would be liable otherwise, then you can keep the difference, though it
does becomes taxable as income. Any tax saving would probably not be the main motivation for registering for FRS
but it may be a welcome additional benefit.
4. Claim for Use of Home as an Office.
Many business owners start their business from a spare room and for some the business is able to grow without
needing to relocate to separate offices. If you do work from home you should definitely make a claim for the use of
your home as an office. Often people do not do this because they are not sure what constitutes an appropriate claim
and that is understandable because this can be a complex and confusing area. In general HMRC will allow an
allowance of £ per week for using your home as an office. This is an accepted amount to claim for employed workers
who are required to do some work from home and, for some types of self-employment where only incidental
administration is carried out at home, this may be all that is sensible to claim. On the other hand, if you use a
room mainly for business purposes, most days then it becomes reasonable to claim an appropriate percentage (by the
number of rooms used or by floor area) of home expenses as a business cost in order to reduce your profit. I do
recommend getting some professional advice on this as your advisor will have wide experience of how HMRC view
different situations and can advise you on the risks and benefits of different approaches. They will also be able
to warn you about the potential Capital Gains Tax traps so that you can avoid them.
These are by no means all of the ways in which the self-employed can reduce their tax liability, but hopefully
this article has begun to point you in the right direction and encouraged you to think harder about your situation
and encouraged you to do some more research.
Five Keys For New
By Ian Marlow
How can your business overcome its struggles and become more profitable. There are steps everyone can
take to ensure they get the maximum return from their business and you can start working on them straight away.
Indeed, you can start right from the beginning to get these things right. Here are five things you need to have to
1. A clear grasp of the financials.
If you don't understand the financials of the business you are flying blind. You may not
have accounting experience but there are key numbers you must understand - turnover, profit,
aged debtors and creditors, and above all cash. And you need to know these numbers for the
current month and not just the statutory accounts produced at the end of your accounting year.
In the end they only tell you what has happened and you need to know what is happening so that
you can make changes that improve the numbers you are looking at. Don't forget too to collect
all the money! Have a clear and consistent credit control policy with a system that happened
every week without fail.
2. Clear and specific aims and goals
If you aim at nothing you will certainly hit it, goes the saying. It's a common saying for a
reason. We all have a limited amount of time and need a clear sense of direction and purpose in
order to make sure we do the important things first in order to get us to where we want to end
up. But if we don't know where we are going, then we are inevitably going to waste a lot of
time on projects that take us no-where. So stop for a moment and think about what success looks
like and what has to change in order for you to get there. Time spent doing this will provide
excellent returns so don't procrastinate.
3. The ability to learn quickly as you go
You will make mistakes and they can be immensely valuable if you take time to reflect and
learn from them. Most people who appear wise and knowledgeable have made thousands of mistakes
but have used them to improve their businesses and their lives. The main requirement is the
humility to accept that you were wrong! If you are always right, you will never learn and are
doomed to continue in the same cycle. Face the facts quickly; accept responsibility; and
discover how to do it differently next time.
4. Finding good advisors
No-one knows everything about everything so you need to find capable people who have
strengths where you do not. You will need professional advisors such as a solicitor and
accountant, and it is usually a false economy to do it all yourself without any professional
advice. You may also benefit from business advice and there are government schemes to help you
out when you start. Depending on your current experience you will probably need IT, HR or other
advice, at least at the start of the business. As ever, the best way to find any advisor is
usually to find a recommendation from the friend.
5. Being able to maintain a business like attitude
What do I mean by that? Well many small business owners treat their business in the way they
would a family member. They are constantly available to everyone, always on duty and take every
criticism personally. Running a business like this ensures that you never make businesslike
decisions because you have lost the ability to see the broader business perspective. So make
sure to keep a clear separation between your business and the rest of your life, and limit your
availability to your customers by a clear sense of business priorities. Make sure your
customers are profitable or they are not good for the business no matter how much you like
them. Of course all successful business owners work hard and think about their business outside
business hours. It's getting lost in the details by being constantly available that becomes
draining and counterproductive, so please don't do it.
I am sure there are lots of other desirable qualities that make up a successful business
owner, but if you start by taking notice of these, you won't go far wrong.