Essential tax advice for Entrepreneurs and their businesses

We give lots of tax advice to entrepreneurs so we’ve listed below 9 important areas in which they should seek tax advice if they are not doing so already. We regularly encounter entrepreneurs who aren’t aware of some or all of the following areas which can save tens of thousands of pounds in tax.

Generally, any entrepreneur should have a tax strategy to enable them to achieve their personal and business goals as tax efficiently as possible. This strategy should be reviewed regularly because changes to legislation, their circumstances and the economy can all result in a strategy becoming outdated.

Check now whether you can claim R&D tax reliefs

R&D tax reliefs are the most generous tax relief available to many companies. They are broadly available to any company paying technical specialists to solve technical problems and can result in tax savings of up to £25,000 for every £100,000 spent on R&D. However, statistics show that less than 20% of all eligible businesses are claiming.

Pay a lower rate of corporate tax on profits derived from patents

Patent Box is the name for legislation introduced by the UK Government to encourage the retention of intellectual property and the valuable jobs and activities that come with it in the UK. It offers companies involved in developing patentable technology a tax rate of just 10% which is nearly half the normal tax rate. Worldwide profits generated by UK companies from the sale of products that incorporate patented items, and other income arising from patents, can be subject to this reduced rate of corporation tax. We see an increasing number of companies claiming this tax relief and also considering whether they have patentable technology which may also have non-tax benefits.

Reward and retain your key staff tax efficiently

The recruitment, retention and motivation of staff is vital for the long-term success and growth of any business. There are many tax efficient ways that this can be achieved, using equity awards, share options and other tax efficient benefits. We see many companies using Enterprise Management Incentive (EMI) share schemes in this regard. These HMRC approved share option schemes provide tax advantages for independent trading companies. They give employees an option, or right to acquire shares in the future, at today's value. There are no income tax or NIC's on the grant, or on exercise, of the options, and the shares will be subject to CGT on sale potentially affording options holders a tax rate of just 10%.

Protect your property assets

Many companies own the premises from which they trade and many have investment property with no connection to the trade. Owners of businesses may wish to separate property assets from the trade for a number of reasons. For example, to make a trade more attractive to potential buyers, to ring-fence assets (arising from concerns over the future of the trade) or to transfer the property into a pension scheme.

Maximise tax relief on property and other capital projects

Tax relief on property, fixtures and plant and machinery is obtained through the capital allowances system instead of tax relief being available on depreciation charges in the business’s accounts. The capital allowances system is very complex and we see businesses underclaiming capital allowances because all the expenditure eligible for tax relief has not been identified. This occurs, for example, when second hand buildings are acquired and no apportionment is made of the price paid between the various types of asset contained within the property. It is beyond the ability of many traditional accountants to undertake such a detailed exercise – a capital allowances specialist should be used. Very significant tax savings can be obtained from such a review.

Don’t turn your back on pensions

Although the often-predicted further restrictions to pension tax relief have not yet occurred, significant reforms are still on the agenda and current generous tax reliefs should be used whilst they are still available. Many people still perceive that pensions unduly restrict access to their cash due to the annuity system but recent legislative changes mean that pension holders can access their cash much easier than they might imagine.

Ensure you have an up to date Will

The number of wealthy entrepreneurs we encounter who either do not have a Will at all or one that has not been checked for a while is staggering. Focussing purely on your business and neglecting your personal affairs can mean a significant % of your lifetime’s work could be lost in inheritance tax. A Will, together with tax planning using Trusts, can help to ensure that entrepreneurs pass on wealth in a tax efficient manner, and provide them with a degree of control over their assets even after death.

Ensure you understand how Trusts can help you to pass on your assets tax efficiently

As with Wills, many wealthy entrepreneurs haven’t heard of, or have misconceptions about, Trusts. Trusts can be used to pass on the beneficial ownership of assets in a tax efficient manner whilst retaining control of who receives those assets and how they are used. A trust can also be set up for a specific person or persons, so excluding certain family members is possible. They can be particularly useful in allowing family members to share in the profits of a company whilst allowing the entrepreneur to retain overall control.

Trusts can offer a number of advantages which include flexibility as to who can benefit from your estate, control over assets for a greater period of time, tax benefits, possible protection from care home fees, spendthrift beneficiaries, bankruptcy and/or divorce.

Plan well in advance for a company sale

There are many tax implications of selling a business including some of the topics mentioned above. The tax system is designed on purpose to help entrepreneurs grow and sell businesses tax efficiently. For example, a trading company can be sold with CGT payable on any gains arising at a rate of just 10% if Entrepreneurs’ Relief (ER) is available.

However, you need to plan well in advance to benefit from these tax efficiencies. Matters that should be considered in advance to allow adequate tax planning to occur include locking in key staff, ensuring the availability of ER and planning for the tax efficient investment of any sale proceeds received perhaps using pensions. Inheritance tax (IHT) planning may also become relevant at this stage and steps can often be taken before a sale to mitigate any potential IHT liabilities.

For further tax advice on any of the above points, please click here to request a free intial consultation with one of our team.