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How to reduce your small business tax bill

Small and medium-sized business in the UK lose a huge £7.15bn in unnecessary tax payments – an average of £1,589 per business by failing to take advantage of reliefs, allowances and tax efficient support schemes on offer. Though there is no way of claiming money back, find out what you can do in this tax year to ensure you don't lose out in the future.

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Business status

Research from Unbiased.co.uk found that the biggest area of tax waste for small businesses was caused by not incorporating the business by becoming a limited company or limited liability partnership, accounting for £4.2bn of wastage.

Of course, you should decide whether incorporated status is right for your business, something your accountant should be able to advise you on. But if your profits exceed the basic rate tax band you should consider it as an option to save on income tax and National Insurance contributions.

Capital allowances

Make sure you claim capital allowances on any assets purchased, such as vehicles, plant and machinery. Capital allowances give tax relief for the reduction in value of qualifying business assets by letting you write off their cost against the taxable income of your business.

Energy saving equipment

You can also claim enhanced capital allowances for energy saving plant and machinery and very low emission cars. Annual Investment Allowance Businesses can also claim an annual investment allowance (AIA) of £50,000 for capital expenditure incurred on most items of plant and machinery (not including cars). It can be used for expenditure on Corporation Tax and Income Tax.

Research and development (R&D) relief

In the 2015/16 tax year, research and development expenditure carries a 230% deduction against profits (essentially more than halving a business's taxable income). However, currently only 12% of eligible businesses make use of R&D relief.

Use self-employed contractors

Companies could make more use of self-employed contractors to fill skills shortages rather than taking on new employees, as you usually don't have to make tax and National Insurance contributions.

Though it could be tempting to allow an employee to move into a self-employed contractor role to take advantage of this, do be careful. Using 'disguised employees' – those that leave a company to become self-employed but continue working more or less full time – is in fact an illegal practice, so seek legal advice first. Forum members can call our helpline on 0845 130 1722.

Avoid penalties

And last, but not least, one way you can easily save money on your taxes is by filing and paying them on time. Penalties are cumulative, so the longer you take to file your returns and pay bills and fines, the more money you'll waste.

If you know you’re going to have trouble paying your tax bill online, you can let HMRC know in advance and try to come to some arrangement via the Business Payment Support Service.

Navigating tax matters can be confusing and these are just a few ways you can reduce your tax bill. You should seek the advice of your accountant or an independent financial adviser for a solution that is right for your business.

Source: Small Business Tax Action Report, Unbiased.co.uk, 2012

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