Most entrepreneurs shudder at the thought of dealing with their taxes. With their eye firmly on growing their business and forging ahead the idea of meticulously tracking and recording every aspect of their business is at the very back of their minds. But if anything is going to take the wind out of a business’ sails it’s not keeping everything in order.
Here are five of the most common things that tend to trip up entrepreneurs. Make sure you avoid them this year.
1. Claim Your Legitimate Expenses
Make sure that you claim for every item to which you are entitled. All those business lunches, or snacks and coffees bought en route to meetings all add up over the course of a year. So keep every relevant receipt and store them in a file in chronological order, especially VAT-able items. That way you can claim what you’re due back on expenses, and have everything neatly on hand when you do so (or if the tax man comes knocking).
2. Don’t Make Business Personal
You must keep your personal and business expenditure totally separate. This will avoid any possibly costly repercussions further down the line. The best and simplest way to start is to maintain different bank accounts from the outset.
If you are trading as a limited company, you should be aware that this is a separate legal entity altogether from you as an individual. It’s staggering just how many people fail to realise this and get into all sorts of problems further down the road and not just with regard to their tax liabilities.
3. Claim A Percentage Of Your Domestic Costs
A lot of entrepreneurs and sole traders will operate a portion of their business from their home. If this applies to you, you should be able to claim for a percentage of your domestic expenses like gas, electricity and broadband, although not, for some reason, water.
Also, be sure to ask your accountant if claiming these domestic expenses would have any future implications for Capital Gains Tax on your main residence.
4. Applying for Flat Rate VAT
If you are VAT registered and have an annual turnover of under £150,000, then you could save a lot of time and effort by applying to HMRC to see if you can use a flat rate of tax on your turnover. This is available to many smaller businesses, like individual IT contractors or small retailers, and enables you to pay a fixed agreed percentage of your VAT inclusive turnover instead of accounting for each individual item. The rate depends on what sector you operate in and takes account of VAT likely to be paid on your supplies. It ranges, for example, from 4% on food retailing to 12 % on estate agency.
5. Don’t Pay Yourself Too High A Salary!
If you are running a profitable limited company you probably want to reap some of the rewards but you need to check with your accountant that you are not paying yourself too high a salary. Remember that tax you pay on dividends that you withdraw from the company is half the basic Income Tax rate and substantially lower than any higher rate taxes that you might be paying on your salaried income. So it might make sense to take a lower salary and draw a dividend. In the tax year just started, you would pay only 10% on up to £31,865 of dividend income.
Of course, these are only five areas that you need to check on at the start of a new financial year but, as always, it is no use shutting the stable door after the horse has bolted, and you should ask your accountant early on about every measure you can take to avoid paying too much tax. Once the tax year has passed, it is often difficult or even impossible to alter things retroactively.
If you want more advice on how to successfully manage your tax affairs Baker Tilly can help. Click here for more information: http://www.bakertilly.co.uk/services/tax/services-to-private-clients.aspx
photo credit: kenteegardin