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10 tax-saving ideas for small business owners

Small business tax is not straightforward. In fact, it can be a real minefield for the unwary. However, if you take a little time, and work with your accountant, it’s usually possible to find ways to save some tax.

To help you think about ways you and your business could pay less tax, we’ve asked Simon Cox of Forbes Watson Accountants to share 10 of the best ways small business owners can look to pay less tax.

These are designed to make you stop and think. Are you doing everything you can do to save tax? Is your advisor helping you to do so?

1. Know your industry

Keep engaged with your trade body or association, attend their events, and read the newsletters. Most industries have special dispensations and allowances approved by HMRC, such as uniform allowances. Your trade body or union are on your side. Use them.

2. Spend more time on your business

Are you really the best person to do your bookkeeping or VAT returns?

Your business will benefit from you spending time working on it, whilst letting the bookkeepers and accountants do what they do best. For what you may think you are saving in fees you are probably losing out by not claiming for everything you are entitled to.

3. Know your VAT

VAT is a common area where business owners are losing out. Are you paying the right amount? Have you looked at the Flat Rate Scheme?

Many businesses are unaware of the Flat Rate VAT scheme, but for the right business, it can be an unexpected source of profit.

In a nutshell, under the flat rate scheme, you pay a single, flat rate of VAT on your turnover.

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HMRC has a list of the flat VAT rates available for different industries. For example, for Estate agents and property managers, it is 12%, while it is 14.5% for computer and IT consultants.

You choose the VAT rate most applicable for your industry, apply the percentage to your gross turnover in the quarter and pay this to HMRC

You can’t usually reclaim the VAT on your purchases but you can keep the difference between the VAT you charge your customers (usually 20%). HMRC even allow you a 1% discount in your first 12 months of registration.

At Forbes Watson, we have helped lots of clients benefit from £2,000 to £8,000 per annum, just by using the Flat Rate Scheme, so it is well worth exploring.

4. Talk to your accountant

Business owners often complain about their accountant and how they have too much tax to pay.

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The truth is that the business owners who regard their accountant as trusted advisors and someone who can help them save tax are often the ones who are paying as little tax as possible. If you don’t talk to your accountant; change accountant.

5. Work from home

HMRC allow generous tax savings for self-employed businesses that spend time working from home. Make sure you are aware of them.

Most businesses claim a modest use of home charge of just £6 per week but HMRC actually allows you more than that. For sole traders who work from home, HMRC allows a much more scientific method for calculating what expenses you can deduct for the use of your home.

If you are a self-employed business owner, you can claim a proportion of the following home costs;

  • Council Tax,
  • Mortgage Interest,
  • Insurance,
  • Heat and light,
  • Water,
  • Landline and phone costs
  • General household repairs & maintenance

For businesses that use a dedicated room in the house for work, the ‘Use of Home’ claim can be very generous indeed. There are some handy examples of what can be claimed as use of home expenses on this page of the HMRC website.

6. Keep it in the family

The standard Personal Allowance is currently £12,570 of tax free income. By looking at your family situation it may be possible to utilise the personal allowances of family members who are able to carry out duties within your business.

7. Treat your staff

There are several tax free benefits that can be paid to staff to save both you and them tax.

It always surprises me how few businesses take advantages of these benefits, either for themselves or their staff.

The cycle to work scheme has been in operation for several years and can save up to 25% of the cost of a new bike, as well as making tax savings.

Large organisations such as the NHS are keen promoters of this scheme, but the uptake from smaller businesses hasn’t been as good.

Tax free childcare vouchers are also a great way to save tax, as well as being a tax free benefit to staff.

HMRC have reduced the amount of tax you can save by using childcare vouchers through a salary sacrifice scheme, however it is still worthwhile. Find out more here.

8. Pay yourself efficiently

The amount you pay yourself from your business obviously has an impact on the amount of tax you pay. How you pay yourself can also have a significant impact also.

Salary, dividends, benefits in kind, all need consideration on an ongoing basis.

A common benefit in kind is use of a company car. Each case needs to be considered on a case by case basis, but generally business owners can save tax by having a company car.

Care needs to be taken to ensure that HMRC are notified promptly when employees receive a Company car. This avoids a nasty tax bill at the end of the tax year.

Dividend payments need to be monitored on a monthly basis, and this can only really be achieved by keeping up to date records that are able to provide monthly management information.

Dividends can be a great method of paying key people within the business, but care needs to be taken so as not to fall foul of Company Law, and ultimately HMRC.

9. Be organised

Even if you don’t want to spend time doing bookkeeping yourself, you can help make sure you are claiming for everything you are entitled to by keeping copies of everything.

Even better, use accountancy software to make your life much easier! Read our latest guide here.

A common reason for HMRC to disallow expense claims or input VAT amounts is a failure of the business to keep proper supporting records. Don’t fall into that trap.

10. Surround yourself with a good team

Even a sole trader can have a good team to call on. Make sure you have a trusting, approachable accountant, as well as a good financial advisor.

Financial advice is sometimes confused with advice an accountant should give, but the two are not always the same. Having the right advice regarding possible investments and savings thresholds can also save tax.

This article has been written for ByteStart by Simon Cox FCCA, founder of and Forbes Watson Accountants & Auditors.

Simon is Past President of the Lancashire & Cumbria ACCA Network, as well as being former member of the ACCA Practitioners Panel in London.