Running your business profitably means keeping a close eye on your outgoings. One of the major and regular payments your enterprise will have to make is of course tax. Every business will pay a wide variety of taxes depending on its business format and the sector it is operating within. The good news is that there is nothing stopping you organising your business to minimise the amount of business taxes you have to pay.
It is important before looking at strategies you could use in your business to reduce the amount of tax you have to pay, to understand the key differences between tax avoidance and tax evasion. The former is a completely legal and legitimate set of tools you can use to reduce the amount of tax liability within your business. Using these techniques is completely legal as all you are doing is using the law as it stands and modifying your business so that it legally avoids paying some taxes, or reduces its overall liability with others.
In contrast, tax evasion is completely illegal. The techniques that are used to perpetrate tax evasion could see your business fined large amounts of money, or even find yourself sent to jail. All tax evasion techniques are illegal. It is vitally important to understand and double-check that any techniques your business is using to reduce its tax bill are legal and acceptable under tax avoidance laws and regulations.
It is important to understand how your business handles taxes such as VAT and customs duty as it is very easy to confuse tax avoidance with tax evasion with some techniques that can seem to radically reduce your liability for these taxes. Always take professional advice before making any fundamental changes to your business’s tax regimes. Any mistakes that the HMRC later discover will mean you have to pay the back taxes your business owes and also a fine that could be substantial in addition to interest on the outstanding tax.
Tax Avoidance Strategies
The type and number of taxes your business may be liable to pay will depend on the market sector your enterprise is operating within. However, you can take some general steps to ensure your business pays the absolute legal minimum in taxes. Some of the techniques you can use are outlined below:
One of the most effective tax avoidance techniques is to ensure your business keeps up-to-date and accurate accounts. If you don’t know precisely the amounts of money that are moving into and out of your business you can’t accurately calculate your tax liability. Look closely at your accounting systems. Could they be improved?
Use Tax Reliefs
If your business trades in specific areas and also has an international component, you may be able to claim tax relief. One example is inward processing relief. If your business imports components into the UK that you will use to manufacture new goods that will subsequently be exported, you can gain tax relief (VAT) on the duty you would normally have to pay. There are a whole range of tax reliefs your business may be able to claim. Consult the HMRC website for further details.
Your business will from time-to-time have to invest in new plant and machinery. When you buy these goods can have an impact on the taxes you pay. Consult your financial advisers before making any major purchases as tax relief may be possible on some or all of the items value.
Allowances and Claims
From an income tax point of view, one tax avoidance strategy that all businesses should adopt is to ensure they are claiming every allowance they can. From sole traders to limited companies, you tax bill can be reduced by claiming legitimate business expenses. As with all allowances it is important to ensure the allowance is recognised by the HMRC as legal. If in doubt always check as tax evasion by claiming allowances your business isn’t entitled to is illegal.