Tax Mitigation Strategies: Exemptions and Techniques for Businesses
Mitigating tax where you can is an important step in developing a startup. There are a range of methods which may help legally reduce tax.
This article aims to provide insight into how companies can mitigate tax and the tax exemptions that business owners should be aware of. However, it is always recommended you seek professional tax advice to suit your specific business needs.
Accountants
Hiring an accountant and bookkeeper is vital for staying on top of your money. Having a chart of accounts and maintaining frequent communication with both your accountant and bookkeeper, helps to alleviate financial concerns that you may be experiencing, especially as a startup.
A bookkeeper's responsibility is to ensure that records are accurate; an accountant will analyse this data and advise you on how to keep costs or taxes low. Hiring an accountant to assist with taxes for example, by completing tax return documents that are in accordance with the relevant laws and regulations, is a simple approach to ensure that no payments are missed.
Incorporating your business
A business's incorporation is the process by which it becomes registered as a limited company. For more information on company law and steps to incorporation, check out our articles here.
Incorporating your business provides important tax benefits. For example, in contrast to filing your taxes as an individual, a business can spread out tax losses over time. This means, as the owner of a company, you can mitigate its tax liability. This is especially significant in the growing stages of the company, where every penny counts and cash flow is often an issue.
Furthermore, by incorporating your business, you will only be required to pay social security on the income that you personally earn which allows you to deduct these contributions from the business’s income.
Finally, if your incorporated business does not produce a profit, you can deduct the losses from your income tax, which is a beneficial step for startups.
Tax allowances
Tax allowances operate to reduce the amount of tax payable. Schemes that allow changes in tax rates are especially useful when funding for different purposes. The following are plausible options for startups, and should seriously be considered if it is applicable to your business, as it will reduce the financial onus on your company.
Employment allowance
Employment allowance is essentially a scheme within the UK allowing small businesses and startups to reduce their payment towards National Insurance (NI) by up to £5,000. This must be claimed yearly and to be eligible you must:
Be a registered employer;
Operate as a sole trader, limited company, charity or partnership with employees;
Be a limited company employing only directors; or
Employ a care or support worker.
Through a simple application to HMRC once a year, you can be set up to claim back up to £5,000. This is especially important when you have a small, interpersonal staff base, where a reduction in NI costs can go towards continually funding your business and helping it to grow.
Business rates
Charged on majority non-domestic properties such as offices and warehouses, business rates are charged by local councils to help fund services within your local authority. The rate in the 2022 to 2023 tax year remains at 51.2 pence (standard multiplier) and 49.9 pence (small business multiplier) in Greater London. For more information on business rates click here.
As a startup, your business may qualify for small business rate relief if 1) your property's rateable value is less than £15,000; and 2) this is your only property.
A charitable business may be eligible for relief up to 80%. There are many other methods to mitigate this rate, as it can be available for properties that have been kept empty or have been severely affected by local disruptions such as extreme weather. Further information on all these reliefs can be found and applied to via the relevant local authority.
Tax Reliefs
Tax reliefs are especially useful when legally reducing tax implications. Tax reliefs are considered as government funding for startups.
This scheme of funding includes research and development tax relief and patent box tax relief.
For more information on tax reliefs and whether they apply, stay tuned for next week’s article, which will discuss government funding for startups in greater depth.
Authors - Tanisha Shah, Rita Almazuri and Sofia Martiello -
Authors - Tanisha Shah, Rita Almazuri and Sofia Martiello -
In partnership with:
DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
The Federation of Small Business, ‘What Is the Employment Allowance and Am I Eligible?’ (www.fsb.org.uk 24 March 2022) <https://www.fsb.org.uk/resources-page/what-is-the-employment-allowance-and-am-i-eligible.html> accessed 11 June 2022
Corporate Direct, ‘Tax Advantages of Incorporating Your Business’ (Corporate Direct, Inc. 14 February 2022) <https://corporatedirect.com/blog/tax-advantages-of-incorporating-your-business/> accessed 11 June 2022
Green N, ‘Tax Efficiency for Small Businesses’ (unbiased.co.uk 31 May 2022) <https://www.unbiased.co.uk/life/small-business/how-to-make-your-small-business-tax-efficient> accessed 11 June 2022
Squareup, ‘What Are Business Rates?’ (Squareup 16 January 2022) <https://squareup.com/gb/en/townsquare/business-rates> accessed 11 June 2022
Stevens C, ‘Small Business Tax Advice’ (QAccounting 20 May 2022) <https://www.qaccounting.com/small-business-tax-advice/> accessed 11 June 2022
Wheelwright T, ‘7 Steps to Reduce Your Taxes by 10-40% Permanently’ (Entrepreneur 3 October 2019) <https://www.entrepreneur.com/article/339829> accessed 11 June 2022
Writing A, ‘What Are the Tax Benefits of Incorporating a Business?’ (Chron.com) <https://smallbusiness.chron.com/tax-benefits-incorporating-business-408.html> accessed 11 June 2022
